FYI | Jun 01 2007
By Greg Peel
Wall Street rallied strongly on Wednesday night, despite a brief Chinese correction scare, based on Fed comments that the US economy was "accelerating". While the Fed may be hopeful going forward, looking back proved a sobering exercise on the Street last night. M&A activity was again prevalent, but the market largely took a breather.
Last month’s early estimate of first quarter GDP growth, made by government statisticians, was 1.3%. Last night the official figure was more than halved to 0.6%. The reasons given for the off-the-mark estimate were a first quarter blow-out in the ever-growing US current account deficit – more than expected – and a reduction in business inventories. That reduction was put down to caution over the US housing slump and its affect on consumer spending.
Well, businesses may have read the market wrongly there because in contrast to economic growth, consumer spending for the first quarter put in its best performance for a year at 4.4%. This removed some of the concern about the housing slump flow-on. First quarter home building investment was down 15.4% annualised, but, while scary, it was less than the 17% anticipated and less than the 19.8% fall last quarter.
Further upbeat news was provided by April jobless claims, which fell, and the Chicago purchasing managers index for May which leapt to 61.7, up from April’s 52.9. (This is one of many indices where +/-50 equates to good/bad). Construction spending only managed to edge up 0.1% in April, compared to 0.6% the previous month, but this was actually better than expected as well.
So what’s a poor trader to think? A drop to 0.6% growth in the first quarter does not stack up well against the 2006 average of 2.5%. But it may be a case of the worst is now behind us. At least that seems to be the Fed’s thinking. Consumer spending provided a nice fillip, but there are concerns this will prove short lived given the record gasoline prices recently experienced this quarter. And besides, if consumers are spending a lot on imported goods, there goes that deficit number again.
The general feeling is that the US won’t slip into recession. But if it’s a touch and go call, should the Dow be up 9% for the year? M&A activity has been the major driver, along with recently renewed hopes that the next move in interest rates will be down. The latter is also balanced out by perennial Fed warnings of inflation risk.
Last night’s GDP figure at least proved a saviour for gold. The US dollar slipped against the euro for the first time in a while, and gold managed a healthy 1% rally away from the brink and back to US$660.20/oz. Gold traders are not calling an end to break-down concerns just yet though, and the feeling is the metal may hang in a range for a while. And when talking of range-bound, the oil price rallied another US50-odd cents overnight just to confuse everyone who believes that it, too, is staring at a major downward correction.
It will be another big night of data in the US tonight, when all the employment numbers for April are released. Another biggie is the ISM manufacturing index for May, which is considered a sound barometer of economic health. The Chicago PMI, noted above, is usually a lead indicator for the ISM figure, so the market will be looking for something solid.