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  • HOLDING ON TO GAINS By WSS Research Team 0 comments
    May 16, 2013 1:57 PM

    By Carlos Guillen

    It is simply incredible that equity markets have continued to climb to record highs for the past two trading sessions on very little economic data to support the strong bullish sentiment other than more impetus for continuing the Fed's monetary easing plans. Investors appear to be ready to jump into stocks on any bit of good economic indications. Ironically, however, "good" for investors sometimes is not good for the general economy, and this has served to lift the Dow Jones Industrial Average to its second consecutive record-high closing level this week, finishing yesterday's session at 15,275.69. More encouraging is that despite concerns that late entrants may increase volatility in equity markets, stocks are holding on pretty well.

    Clearly disappointing today was data that showed the number of people filing for unemployment benefits for the first time suddenly spiked higher, putting an end to the rather encouraging trend we witnessed in the prior three weeks. According to the Department of Labor, initial claims during the week ended May 11 totaled 360,000, increasing from the 328,000 revised figure reported for the prior week and landing above the Street's estimate of 330,000. The result suddenly broke above the 350,000 level, which economists say is consistent with moderate labor market growth of about 150,000 net new jobs a month. This unexpected reversal in the data may serve to shatter the hope for an improving jobs market. The initial claims' four-week moving average was 339,250, increasing from the prior week's average of 338,000. On the plus side, a deteriorating jobs market will certainly give the Fed the green light it need to continue pumping money into the system.

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    Perhaps encouraging for investors as well was that increases in the cost of living appeared to decline for a second consecutive month in April, mostly as gasoline prices continued receding. According to the Department of Labor, the Consumer Price Index (CPI-U) in April decreased month-over-month by 0.4 percent; this compares with the Street's consensus estimate calling for a 0.2 percent decline. Excluding food and energy contributions to the price index, core CPI increased month-over-month by 0.1 percent, while economists' average forecast called for a 0.2 percent rise. From a longer term perspective prices increased 1.1 percent over the trailing twelve months, which was a smaller rate than that reached in the year ago period of 2.3 percent, perhaps showing some disinflation action. The fact that inflation is running below expectations coupled with slowing economic growth so far into the year may actually serve to give the Fed more reasons to maintain its current path of very easy monetary policy, despite talks of bringing the policy to an end. Of course, stocks markets do love easy money from the Fed, which is the main reason they have been up over the last couple of trading session.

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    In the Housing front, there were some mixed data point but still signaled a slowly improving housing market. According to the U.S. Census Bureau, building permits during April increased year-over-year by 35.8 percent and increased month-over-month by 14.3 percent to 1,017,000, landing higher than the Street's consensus estimate of 950,000. Concurrently, housing starts climbed year-over-year by 13.1 percent and fell month-over-month by 16.5 percent to 853,000, coming below the Street's consensus estimate of 970,000. So the combination of strong building permit growth, which is a proxy for future construction, combined with worse than expected housing starts is not really good but at least it gives an indication of an improving backdrop in the near term.

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    Another bit of discouraging data today was that manufacturing in the Philadelphia region contracted this month. According to the Federal Reserve Bank of Philadelphia, its diffusion index of current activity May result landed at -5.2, lower than the Street's consensus estimate of 2.5, decreasing from the 1.3 reached in April. Given that a level above zero indicates an economic expansion, this represents the first time in three months of contraction in the region covering eastern Pennsylvania, southern New Jersey, and Delaware. Yesterday, manufacturing data from the New York region also showed contraction as the general business conditions index May result landed at -1.4, lower than the Street's consensus estimate of 3.5. The combination of these data points is indicating that there may be weaker than expected growth in the economy in the second quarter. Ironically, this deterioration in manufacturing is also giving the Fed the green light it needs to continue pumping liquidity as planned.

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    As we have mentioned before, the combination of poor economic data being presented this week is actually giving Fed policy makers the impetus it needs to maintain record monetary stimulus as they try to bolster the expansion, and this is serving keep stocks in the green today.


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