Corporate earnings reports and economic indicators were strong this week, but the capital markets were focused elsewhere. Nor were the capital markets focused on the FOMC statement, which highlighted improvements in the U.S. economy, but promised to keep interest rates low for an extended period. Instead, the capital markets were held captive by the events unfolding in the Gulf of Mexico, Euro-zone and Washington.

The expansion of the BP oil spill and the pending carnage it is likely to do to wildlife and the economy of the Gulf states held the nation captive. Drill, baby, drill is dead, baby, dead.

Furthermore the extensive testimony of Goldman Sachs before Congress has ignited outrage at Goldman and its Wall Street siblings; criminal inquiries are likely to follow and other Wall Street firms could be swept up in the cry for blood. The uncertainty of the Greek bail-out and the S&P downgrade of Greece, Portugal and Spain weighed heavily on the euro and prospects for the region; the dollar rallied against the euro and pound. With both the energy and financial sectors under siege, equities declined and government bond markets rallied. Financial conditions weakened a bit; corporate spreads remained tight, but backed up a bit this week. Oil prices increased a dollar to over $86 per barrel on the week.

Perspective

The first week of the month provides the initial insight to the economic activity of the previous month. This is such a week for April. The U.S. Employment Report and the Purchasing Managers Indices from across the globe will provide important insights for economic activity. The U.S. employment report has a lot of emotional and political clout associated with it. The Bloomberg Survey of economists estimates that 200,000 new jobs were created in April. This follows a 162,00 increase reported in March; the unemployment rate is estimated to have remained unchanged at 9.7 percent. If these numbers are reported, it is good news for the 200,000 who got jobs, but is hardly making a dent in the 8 million who lost their jobs during the Great Recession. The PMIs are likely to remain well into the expansion zone for both manufacturing and services. Yet, as it was this week, events outside economic reporting are likely to continue driving capital markets next week.

On a personal note, next weekend we will be attending graduation ceremonies for our youngest (of five). We are proud of each of our kids, but our youngest has made her mark as a go-getter and someone who cares about others. These characteristics propelled her to be president of her sorority. If next week’s comments are delayed or not up to standards, it is because honoring our daughter’s achievements has a greater priority. I know that you will understand.


Economic releases

The Chinese raised the reserve requirements for its banks for the third time this year in order to stem inflationary pressures.

In Germany the unemployment rate decreased two ticks to 7.8 percent. Consumer confidence and the IFO indices increased in April while consumer prices decreased -0.1 percent.

In the United States, the 5 point increase in the Chicago Purchasing Managers’ Index suggests more strong reports from the ISM Purchasing Managers Indices to be released next week. Consumer confidence increased in April according to both the University of Michigan and Conference Board’s Indices. The weekly initial jobless claims decreased to 448,000 while continued claims also inched lower to 4.645 million.

The chart below shows that U.S. GPD increased 3.2 percent in the first quarter of 2010; this was the third consecutive quarter of positive GDP growth. The rate is off of the 5.6 percent spurt in the fourth quarter of last year and a tick less than the Bloomberg survey of economists had projected, but the components exhibited durability. Personal consumption rose +3.6 percent. Employment cost rose +0.6 percent.


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While the U.S. economy is well into recovery mode, the housing market has yet to join in. The chart below of the Case Shiller Composite Home Prices displays a flat to slightly upward trajectory since home prices bottomed a year ago. Over the last 12 months home prices have increased +0.65 percent; the one month change was minus 10 basis points. The stabilization was welcome, but full recovery will require participation in housing as well as employment.

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Sources: Bloomberg LP

Equities markets

Even though over 77 percent of the reporting companies in the S&P 500 reported positive surprises and 13.5 percent reported negative surprises, equities fell across the globe with problems emerging for energy and financial companies in the United States.

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Bond markets

Bond yields fell in a search for a safe (and unpolluted) harbor across the globe.


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Currencies

The U.S. dollar rallied against the euro, pound and looney this week.

 


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Sources: Bloomberg LP

 

Economic sectors

Goldman’s problems spread throughout the financial companies and small cap value sectors this week. Utilities and large cap value sectors lost the least.

 

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John W. Davidson of Camden is managing director of Strategic Asset Alliance. He has more than 30 years of investment industry experience and holds an MBA in finance and a master’s in mathematics from Boston College, as well as a bachelor’s in economics from Amherst College.