U.S. stocks rallied to recoup much of the most recent losses on good news out of Asia, the day’s domestic economic reports certainly weren’t market inspiring even if the financial press appeared to suggest that was the case. There was certainly no bifurcation between morning and afternoon sessions yesterday; the market rallied at the open and held those gains throughout the day, even building momentum in the final hour.

Energy shares led the way by a long shot, up nearly 5%.  Industrials and basic material shares – totally dependent on good news out of Asia these days – were next best performing groups.  Health-care and consumer staples, naturally, were the laggards.  Even these groups rose though as all major industry groups gained ground

Stocks gained as traders returned to that story in Asia, still talking about the 48.5% rise in Chinese exports during May.  The latest data from Japan, reporting that their economy grew at a 5% annual rate in the first quarter, also incited the risk trade. 

I’ve got my questions about Asian growth as this stage, assuming China continues to rein in its stimulus measures in their attempt to stave off further inflating their very likely housing bubble.  Without that massive stimulus the Japanese economy would still be mired in their multi-year malaise, which we’ll see is the case a couple of quarters hence, in my view.  But it was also reported that stocks caught their bid on the jobless claims data and the ECB’s increased forecast for 2010 euro-zone growth.  That’s a ridiculous claim and if stocks trade higher because initial claims fell a paltry 3K and remained above 450K or because the ECB believes euro-zone growth will be 1.0% instead of 0.8%, prices will yet again reverse course with stunning speed.  “Hey look kids, there’s Big Ben, Parliament.” 

Market Activity for June 10, 2010

Jobless Claims

The Labor Department reported that initial jobless claims fell 3,000 to 456,000 in the week ended June 5 from an upwardly revised reading in the prior week.  The consensus estimate expected a 3,000 decline in initial claims from what was believed to be 453K in the previous week, the upward revision shows initials came in at 459K. 

The four week average rose 2,500 to 463,000.

Continuing claims fell as the standard issue of claims (those lasting 26 weeks) plunged 255,000 to 4.46 million.  Emergency claims, known as EUC – those extensions to the standard 26 weeks of benefits that extend out to as long as 99 weeks, rose 70,000 to 5.39 million. 

So, initial claims continue to be stuck at that 450K level, which is too high to offer any conviction the labor market will begin producing substantial job growth in a durable manner.  It also suggests that the 255K in standard continuing claims resulted from benefit exhaustion rather than job growth – and the chart below bears that out.

I heard CNBC’s economic commentator Steve Liesman state directly after the number was released that economists are beginning to give up on initial claims with regard to their job growth forecasts.  Give up on initial claims?  It is only about the most accurate indicator for near-term job growth we have.  What, it doesn’t jibe with their forecast so just ditch it?  That’s a peach of an idea.

Beginning in October, we started talking about the presence of monthly job growth by March/April.  That forecast proved largely correct, monthly job gains actually began in January, but nothing meaningful occurred until March.  However, we also stated that payroll increases would be both muted and short-lived (lasting maybe nine months), not likely to bring the unemployment rate lower in a reasonable amount of time.  This is what initials are portending.  If economists abandon the initial claims data it will surely imperil their forecasts.

Trade Balance

The trade deficit widened a bit in April rising to $40.285 billion from $40.047 billion in March, but it wasn’t because trade was robust during the month.  Both export and import activity fell but imports declined less than exports – hence the widening in the deficit.

Exports fell 0.7% in April, and even more in real terms (adjusted for price changes) as the figure declined 2.5%.  The business and commercial figures actually looked pretty good, it was the consumer end that was weak.  Capital goods exports were flat, but this followed a robust 2.8% increase in March. 

Imports fell 0.4% (down 0.7% excluding petroleum), down 1.5% in real terms, and again the decline was driven by the consumer.  Capital goods imports rose a strong 4.2% as semiconductors imports jumped 10.4%, computer accessories rose 1.6% and telecom equipment was up 3.4%.  Consumer goods imports fell a large 4.4%.

This trade data may show the cracks on the consumer side of things, weakness that I believe will show up over the next several quarter as a number of short-term factors have been supporting personal consumption.  But as we always talk about, you can’t go on one month’s worth of data, so we’ll wait for subsequent monthly readings on consumer imports to offer more evidence. 

Rational thought would lead one to believe that the large jump in Chinese exports for May should show up in U.S. import data for that month. Unless, the big increase was due to a last hoorah of European buying – demand in the pipeline that was in play prior to the debt contagion, which has begun to show up in EU credit spreads and interbank funding rates.

On the trade deficit in general, it will jump over the next few months as Washington has place a six month moratorium on deep-water drilling in the Gulf.  Oil imports are the largest contributor to the trade deficit – and this will weigh on third and fourth quarter GDP. 

Have a great weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900