Market Commentary

Stocks rocked on stronger than expected economic data.
May 04, 2010

Stocks rocked on stronger than expected economic data.  Personal consumption rose more than expected in March while personal income was about as expected. Construction spending also surprisingly rose in March.  In my view however the six year high in the national ISM manufacturing survey was the most significant statistic of the day.

The composite index reading was 60.4, a reading that would have been considerably higher if it were not for a 6 point drop in inventories.  What was even more significant the employment sub component rose 3 points to 58.5, the highest reading since early 2005.  Any reading over 50 suggests expansion. 

Will Friday’s employment data also surprise on the upside?  As noted above, consumption was stronger than expected in March.  Consumer credit on the other hand is contracting.  Is hiring occurring at pace greater than previously thought, a rational conclusion to draw based upon consumption indicators?

As noted several weeks ago the labor participation rate has risen four consecutive months and now stands at the highest level since mid 2007.  The data is clearly indicating that many who lost their jobs have created sole proprietorships or have become consultants. Will tomorrow’s release of the ADP Private Employment survey offer any insight?

There is a growing chorus of economists the recovery is now “V” shaped.  While I am not in that camp, I reiterate my long held view the economy would and is recovering at a pace greater than the consensus view.  The basic premise…conditions were so dour any uptick will be huge amplified by an extremely steep yield curve and record amounts of excess bank reserves.

Speaking of bank lending, the Federal Reserve stated yesterday the smallest proportion of banks in two years increased lending standards during the first quarter.  Is bank lending finally thawing? 

I have written many times the massive amounts of excess bank reserves—now over $1.4 trillion versus the historical amount of $1 to $2 billion—it is not if but rather when lending will occur, suggesting lending could begin sometime late first/early second quarter as most become convinced event risk is no longer the major issue.

What will happen today?  Factory orders and pending home sales are released.

Last night the foreign markets were down.  London was down 1.50%, Paris down 1.94%  and Frankfurt down 1.26%.  Japan was closed for a holiday and Hang Sang down 0.23%.

The Dow should open moderately lower as a slowdown in Chinese manufacturing and concerns regarding the BP oil disaster will hamper the recovery. And then there is the European debt crisis.  Did last weekend’s resolve the issues at hand?   The 10-year is up 10/32 to yield 3.64%.