Daily State of the Markets
Good Morning. It was a busy afternoon on the telephone yesterday as friends, colleagues, and acquaintances wanted to know why the stock market was suddenly and seemingly without warning, worried about the economy. A couple people even cited my own very-unscientific review of May's economic reports (according to my count, 28 of the 35 reports in May had come in below consensus expectations) as evidence that weak data should not be news to Wall Streeters. To which, I responded repeatedly with a Wall Street-ism of my own, "Things don't matter to the stock market until they do... And then they matter a lot!"
To be sure, the stock market game hasn't been easy for the past three months and it has been espectially tough since the most recent peak seen on April 29th. I've been of the mind that the "correlation trade" between Euros, Dollars, and stocks was to blame for the difficulty we've experienced since early May. In short, the primary driver of the action for much of the past month has been the movement in the Euro, which, of course, would set off corresponding trades in the dollar and the stock market.
I know I've made a big deal of this and I apologize for 'beating a dead horse' on the subject. However, if you didn't know that it was "the trade" driving the action day after day, you might be truly perplexed as to why traders had all but ignored 28 negative economic reports. You might be tempted to come to the conclusion that the reports weren't negative enough to warrant a reaction in the market. Or you might come to believe that May's 2% decline was "good enough" to discount the "soft patch" the economy seems to have encountered. Or maybe, worse yet, you might have convinced yourself that since stocks held up so nicely during the recent stretch of bad data, there wasn't anything to worry about because better days were ahead.
In reality though, it is my humble opinion that traders suddenly had a reason to invoke the second part of my little phrase yesterday. As I explained to a colleague, when you get the PMI's from China, the Eurozone, Germany, France, and the UK, as well as the ISM Manufacturing and ADP Private Payrolls numbers ALL coming in below expectations - and not by small amounts - traders were forced to shift their focus.
In short, this batch of data, when placed on top of May's string of less-than stellar numbers, probably caused more than a couple people to say, "Hey, wait a minute - we might have a problem here."
As you may know, I like to keep things relatively simple in my analysis of both the economy and the markets. And in my little world, there are four levels of economic difficulty. First, there is a "speed bump" which can be caused by Mother Nature (think hurricanes, earthquakes, fires etc.). These are usually short lived and relatively minor interruptions to economic growth. Next is what Ben Bernanke calls a "soft patch." As the name implies, this is a period of weakness that may show up in the data and start to threaten the recovery. Next is an all-out "slowdown," which I'll define as a single quarter of negative economic growth. And finally, there is the "R word." Most textbooks require a recession to involve at least two consecutive quarters of negative GDP growth.
As you may have noticed over the past month, I first began referring to the weak data seen in April as a "speed bump" caused by the natural disasters in Japan and the troubles in the Middle East. I, like most people, expected this difficulty to pass quickly. But unfortunately, the weakness has persisted, which has caused me (along with many others) to downgrade the state of the economy to the "soft patch" category. And the bottom line is that while a speed bump can be ignored, a soft patch cannot.
So, while the data in May didn't matter for a long time, for Wednesday at least, it appeared to matter a lot. Stay tuned though because we've got some monster data to review before Friday's closing bell.
Turning to this morning... ECB President Jean-Claude Trichet is calling for tougher fiscal reforms in the Eurozone and the creation of a Finance Ministry that would wield veto power over major spending and policy decisions of bailed-out countries.
On the Economic front... Initial Claims for Unemployment Insurance for the week ending 5/28 fell by 6K to 422K. This was above the consensus estimate for 417K but below last week’s total of 428K. Continuing Claims for the week ending 5/21 came in at 3.711M vs. 3.679M and last week’s 3.712M.
Next up, the government reported U.S. Nonfarm Productivity in the first quarter rose by +1.8%, which was above the estimates for reading of +1.7%. On the inflation front, Unit Labor Costs were reported to have risen +0.7% versus the expectations for +0.8%.
Finally, we'll get reports on Bloomberg Consumer Comfort and April Factory Orders at 9:45 am and 10:00 am eastern respectively.
Thought for the day... Try embracing an "attitude of gratitude" today...
Here are the Pre-Market indicators we review each morning before the opening bell...
Wall Street Research Summary