U.S. stocks once again dismissed poor economic data to push higher – even the day’s best economic release showed consumer confidence remains stuck at a low level.  For the week, the broad market posted its fourth-straight weekly decline; although, the bounce since Wednesday kept the losses to a minimum. 

Basic materials, financials and tech led the broad market higher.  Health care and utilities were the losers for a second-straight session, but even these groups managed to close higher. 

The CRB Index rallied as 14 of its 19 components rose in price.  Gains in natural gas, sugar, silver, copper and cotton led the rally.  The overall index closed just 4% below the post-crisis high hit on April 29.  This morning commodity prices are up again, led by crude (back to $103/bbl) as traders are talking more QE even before the current round has expired. 

The Dollar Index slipped for a second-straight session.  The old greenback has been crushed by Bernanke but remains meaningfully above the recent low of 72.93 hit on…you guessed it, April 29 (same as the CRB’s cycle peak).  The all-time low of 71.35 was hit in April 2008 – the Dollar Index began in 1967.

Market Activity for May 27, 2011

Sector Activity for May 27, 2011

 Personal Income and Spending

The Commerce Department reported that personal income rose 0.4% in April (matching the expectation) and spending advanced by the same 0.4% (a bit shy of the 0.5% expected). 

Those are the nominal figures.  The inflation adjusted real income and spending figures were weak again as both were up just 0.1% -- and income was flat when excluding government transfer payments; that figure hasn’t advanced for three months.  Inflation-adjusted disposable income (after-tax income) was flat for April and hasn’t advanced for four months. 

The way things are going it will get very interesting as we enter year end and the two-percentage point payroll tax (social security part of the FICA tax) cut approaches expiration.  That payroll tax cut has certainly kept after-tax incomes from looking even worse, but it is digging a deeper social security funding hole.  Such is the folly of short-term Keynesian stimulus.

The same was true for spending as the increase over the past two months is nearly all due to higher prices – a situation that has been in play for four of the past five months.  If this doesn’t turn around, those expecting 3.5% GDP growth for 2011 are going to find a number closer to 2.0% is the reality. 

Surely the Fed is going to look at the decline in commodity prices as something that will benefit the economy, and give the FOMC breathing room to roll out another round of QE.  But it’s hardly favorable that this decline in commodity prices has come alongside weakening economic readings.  And consumers must still contend with food and energy prices that are substantially higher than they were a year ago – so oil is down from $114/bbl; it still stands at $103, which is 40% higher than it was in May 2010. 

U of M Consumer Confidence

The final print on the University of Michigan/Reuters’ Survey of Consumer Confidence for May (we received the preliminary number two weeks back) was revised up nearly two points to 74.3. 

The increase was driven largely by improvement in the expectation (outlook a year out) reading, but the current conditions figures also contributed.  This gets the U of M confidence reading back to where it was in January, but still shy of the February reading – which was the highest level since the financial crisis took hold. 

Pending Home Sales

The National Association of Realtors (NAR) reported that pending sales of previously-owned homes slid 11.6% in April (expected to fall just 1.0%) off of a downwardly revised 3.5% increase in March (previously reported as a 5.1% increase).  Over the past year, pending sales have plunged 26.8% as sales in April 2010 were boosted by the home-buyers tax credit. 

Since these pending sales measure activity when the contract is signed, it is a very good indication of the following reporting month’s sales figure as existing home sales are officially counted when the contract closes.  Hence, the decline suggests that the May home sales figure is going to fall big time.  A reality that shouldn’t be all that surprising as the tax credit scheme merely pulled sales forward. 

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Have a great day!

Brent Vondera, Senior Analyst