The Overnight Report: US Economy Not Playing Ball

This story features WOOLWORTHS GROUP LIMITED. For more info SHARE ANALYSIS: WOW

By Greg Peel

The Dow closed down 68 points or 0.5% to once again fall below 13,000 while the S&P lost 0.6% to 1376 and the Nasdaq fell 0.8% to just a tad above 3,000.

The world held its breath last night as Spain stepped up to auction E2.5bn of a range of bonds, including two and ten years. Despite grave fears, the tens received bids for almost twice the amount on offer. The settlement yield of 5.74% was higher than the 5.40% achieved a month ago, but surprisingly the twos settled at 3.46% having last month cost 3.49%.

The world sighed, and Europe lived to play another day. The relief was nevertheless short lived when rumours began to spread that France was about to receive a credit rating downgrade. The French ten-year yield pushed up 6 basis points to 3.07%, while over in the US the equivalent yield fell 3bps to 1.95%.

With the latest round of euro-fear balanced, Wall Street was able to focus its attention domestically and there the news was not all that flash.

The earnings season theme continues, with the majority of results beating expectations but not by enough to provide stock markets with its next shot of adrenalin. On Wednesday night's earnings “beat” but weaker guidance, Qualcomm shares fell 6.6%, although EBay bucked the trend with a sterling 13% gain. And for reasons not particularly clear, Apple chose last night to fall 4%.

An interesting point to note about Apple is that having reached a market cap of over 25% of the Nasdaq 100, the stock has also breached 5% of the S&P 500 at prices above US$600ps. Many portfolio managers set a weighting limit in their portfolios of 5% for any individual stock, so when Apple reaches that level a lot of positions have to be trimmed. And right now it seems that where goes Apple, goes Wall Street.

Earnings aside, Wall Street is now becoming increasingly worried that economic data are tipping to the downside after a positive run through the March quarter.

Last week's new jobless claims showed the second consecutive spike up. The Philadelphia Fed manufacturing index fell back to 8.5 from 12.5 in March. And most disappointingly, existing home sales fell 2.6% in March when economists were expecting a gain.

It was the third sales retreat in four months, but the news is not all bad. Sales are up 5.2% year-on-year and this number has been positive now for nine months in a row. The pace of sales is actually the best it's been in five years. But again, Wall Street wants more. It wants numbers that provide a solid upside catalyst. And each day opinions become more fearful of the likely “front-loading” effect of positive seasonal data due to the unusually mild winter. Concerns are growing for retail sales figures, and why they might have seemed so strong last quarter.

Mild winter or not, the scene is all a bit familiar. US economic data start the year looking encouraging and then fizzle out in the June quarter. In contrast to the past two years, we're unlikely to hear talk of a “double dip”. What we will surely hear very soon is a lot more expectation of that elusive QE3.

As far as other markets were concerned last night, it was as if no one had bothered. The US dollar index was flat at 79.55, the Aussie was off a tad to US$1.0334, and gold was almost unchanged at US$1642.60/oz. Base metal moves were positive but minimal and both oils were steady.

The SPI Overnight was off 4 points.

Focus tonight will be on the German IFO activity survey before the EU finance ministers and central bank chiefs gather in Washington for another chat. Locally today, Woolworths ((WOW)) will release quarterly sales figures.

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