Market Commentary

The list of negatives appears endless
June 02, 2010

The list of negatives appears endless. The European debt crisis and strikes protesting budget cuts required to restore fiscal health.  A slowing Chinese economy and a possibility its real estate bubble might be popping.  Increased saber rattling between the two Koreas and a flare up of Middle East tensions.  The possibility of financial regulation over kill legislated in Congress.  And then the worst man made ecological catastrophe in history in the making as it appears there is no solution to the oil well explosion in the Gulf.

Against this backdrop domestic equities have been hurt yet the economy and consumer confidence has not.  As written yesterday this week’s economic calendar is heavy which can either validate or nullify my view strengthening domestic economic activity could potentially overshadow the list of well known negatives.

Yesterday’s release of the ISM Manufacturing data and construction spending were encouraging.  The ISM factory report for May was solid.  The headline index slipped less than a point to 59.7, a level that remains quite high from a historical perspective. 

The nominal drop from April’s 60.4 reading was completely accounted for by the inventory component, which bodes well for future strength in orders and production.  This sub index remains at extremely high levels in the mid 60s, the highest level since January 2004.  In my view and more importantly the employment index kept rising, adding 1.3 points to a six year high of 59.8. The export sector climbed to the highest level in two decades suggesting European woes are not yet affecting trade.   [Note:  Any number over 50 denotes an expanding sector]

Regarding construction spending, spending rose by 2.7%, the greatest amount since 2000.  While I will acknowledge this strength is probably unsustainable, the result of the ending of the home buyers tax credit, I think it offers evidence the worst in construction has passed.

Friday the all inclusive BLS employment report is released.  How will this data correlate back to tomorrow’s ADP private employment survey, today’s Challenger job cuts data and yesterday’s ISM employment index?  The consensus gain for nonfarm payrolls is 511,000, the largest increase since at least 1997.  Wow! 

While a large portion of this gain is probably attributed to the hiring of census workers, private sector jobs are expected to rise for the fifth consecutive month creating over 225,000 positions.  This is the greatest period of private sector job creation since 2005.

Stocks reversed an early morning decline because of the stronger than expected but eventually ended lower on a late afternoon bout of selling.

Last night the foreign markets were down.  London was down 0.95%, Paris down 1.16% and Frankfurt down 0.63%.  Japan was down 1.12% and Hang Sang down 0.13%.

The Dow should open moderately higher on optimism that the data will continue to surprise on the upside.  The 10-year is off 7/32 to yield 3.29%.