Our QE-world financial markets got a little more bizarre yesterday as the yield on the 10-year Treasury slid to 3.05% even as stocks rallied – and the equity-market rally came out of the blue at 10CDT after beginning the session lower on another day of weak economic data.  

I ran a chart that overlays the S&P 500 and the 10-yr yield going back to 1998; the last time there was this much divergence between stocks and bonds (stocks saying things are fine, bonds say there’ll be hell to pay) was October 2007 – but then such analysis comes into question when the markets are this manipulated.

Consumer discretionary, telecoms and tech led the broad market higher.  Health care and utilities were the losers, but even these sectors closed higher. 

The CRB Index inched lower, which is rare for this environment as there’s a high correlation between stocks and commodities when monetary policy is ultra aggressive. A drop in the prices of cotton, crude and natural gas offset increases in wheat, gasoline and aluminum. 

Market Activity for May 26, 2011

Sector Activity for May 26, 2011

On the EU front, the market got that warm and fuzzy feeling inside, a respite from European debt-related concerns, on another report that China will buy EU government debt.  Such a development may help ease the euro-zone debt worries in the short term, but I don’t know is it really a positive to be in China’s back pocket?  We shall see.   But that feel good feeling disappeared after Luxembourg’s Jean-Claude Juncker (president of the Eurogroup) stated the IMF may not release its next tranche of bailout funds to Greece without a guarantee the troubled country will expand its budget cuts – let the next round of Greek protests begin. 

And speaking of debt issues, the G-8 wrapped up their latest meeting by issuing a 98-page communiqué, of which two whole pages covered the debt problems that developed economies face (I’m relying on reports as I haven’t rushed to read the 98-pages of brilliance).  The group assured the world that they’re dealing with the debt situation (aren’t you overcome with reassurance?) and that the global economy has become self-sustaining and thus the growth will reduce sovereign debts.

Self-sustaining, eh?  With the Fed engaging in ZIRP/QE, bailouts and backstops running wild, the ECB continuing to accept junk-status debt as collateral and several iterations of short-term fiscal stimulus that continue to this day, I’m not sure one can take the self-sustaining comment very seriously.  And in the meantime we watch growth in the U.S. weaken, the UK on the verge of recession and several economies within the eurozone remain in a serious funk.  This is some kind of comedy. 

GDP Revision

Well, the first revision to Q1 GDP came in unchanged instead of the upward print that was expected.  As was initially reported last month, the economy grew at a real annual rate of 1.8% (expected to be revised up to 2.2%), which means economic growth came in at 2.3% over the past year (3.2% is the long term average) – even as the Fed is unprecedentedly easy and we’ve seen several iterations of fiscal stimulus.  Am I repeating myself? 

Even though the headline number was unchanged, some of the components were revised.  Personal consumption rose at a 2.2% real annual rate, not the 2.7% rate initially reported – so this contributed less to growth.  Gross private investment contributed a bit more than previously reported – business spending on equipment and software was unchanged at 11.6% at an annual rate; the change came as investment on commercial structures slid less than previously reported as it fell 16.8% at an annual rate instead of the -21.7% initially reported. 

Also, inventories added a little more than previously reported, which means the real final sales figure (GDP minus inventories) was even weaker as it came in at a real annual rate of 0.6% instead of the 0.8% previously reported. 

Jobless Claims

The Labor Department reported that initial jobless claims rose 10,000 to 424,000 (expected to fall to 404K) from the upwardly revised 414,000 in the week prior (initially reported at 409K).  This marks the seventh-straight week above 400K.

The four-week moving average slipped 1,750 to 438,500.

Continuing claims fell as the improvement (unless this is all about benefits expiring without people finding jobs) continues as the standard issue (covering the first 26 weeks of joblessness) declined 46K to 3.690 million and the emergency level of claims (which extend benefits out to 99 weeks) fell 63K to 4.044 million. 

The reality that initial claims remain above 400K seems to be a problem to me as it suggests there’s no chance monthly payroll growth is going to accelerate to the 300K level we need to get the unemployment rate lower.  I’m sure some of this is due to plant shutdowns in the auto sector (a result of supply issues from Japan), but we were hovering at 400K before the quake/tsunami hit and began to jump above 400K again before any supply issues had a chance to create problems.  Thus, the argument that this is all about the supply problems is Japan is weak.

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Have a great Memorial Day weekend!

Brent Vondera, Senior Analyst

Phone: 636-449-4900