An unexpected slowdown in US consumer spending and regional activity may have scuppered Wall Street's three-day rally.
Stocks struggled to move into positive terrain at the open after figures released from the Commerce Department showed that US consumers spent less despite incomes rising in April.
This suggests that consumers are opting to save, perhaps because they are feeling more uncertain about the future of the US economic recovery amidst Europe's woes, or because they aren't feeling the full effect of the US economic recovery yet.
After all the latest Labour Department report showed the US unemployment rate creeping back toward 10%, despite the nonfarm data showing job creation.
Today's report showed US consumer spending unchanged in April, the first time that there has been no increase since September, following a 0.6% gain in March. The latest data trailed the 0.3% median-increase shown in a Bloomberg survey of estimates.
Personal income grew 0.4% in April, in line with expectations, following an upwardly revised gain of 0.4% in March. In addition, the savings rate rose to 3.6%, the first increase in four months, from 3.1% in March.
Inflation was also flat. The inflationary gauge tied to spending patterns rose to 2% from April 2009, unchanged from the prior month's reading. However, the core measure of inflation, which excludes food and fuel, rose 0.1% over the month of April, taking the annual rate up by 1.2%.
That compares with a 1.3% gain in the year-on-year core measure of inflation for April, suggesting price pressures are receding.
Meanwhile, a separate report released today indicates that manufacturing expansion in the Chicago area slowed from April's five-year high.
The Institute for Supply Management's business barometer for Chicago fell more than expected to 59.7 in May from 63.8 the prior month. Bloomberg's median estimates pointed to a drop to 61. Figures above 50 signal an expansion.
'Clearly the factory sector continues to move ahead at a very healthy clip though it's slowed somewhat from the torrid April pace,' said Richard DeKaser, chief economist at Woodley Park Research.' We’re coming down to a more sustainable pace.’ [1]
Today's data, which follows a downward revision in the second estimate for US first-quarter GDP yesterday, encouraged investors to lock in profits ahead of the long weekend.
By 3:50pm (London time) the Dow Jones Industrial Average was trading at 10195.73, representing a 63.26-point (-0.62%) decline from yesterday's close.
The broader S&P 500 Index slid 7.51 points (-0.68%) to 1095.55 and the tech-heavy Nasdaq 100 retreated 8.55 points (-0.46%) to 1854.16.
The weaker data encouraged investors to rush back to the safety of the US Dollar, however, which in turn exerted pressure on metal and oil prices; July high-grade copper futures retreated 0.02% to $3.158 per pound and July silver fell 0.8% to $18.32. July light sweet crude oil (WTI) dropped 0.4% to $74.22 a barrel.
Unsurprisingly, the drop in commodity prices and weaker outlook left resource shares vulnerable to selling pressures this afternoon. Freeport-McMoRan Copper & Gold declined 1.3% to $70.12, Newmont Mining lost 2% to $53.85 and Barrick Gold slid 1.3% to $41.89.
US banks were also in the red, with sector losses ranging between 0.5% and 3% so far.
Elsewhere, clothing retail chain J Crew, managed to buck the negative trend and rally 4.15% to $45.68, after raising its full-year earnings forecast. The company now expects to earn at least $2.35 per share, up from its previous estimate of at least $2.20 per share.
Toys 'R' Us also made the headlines. The retailer, which was acquired by private equity groups KKR and Bain Capital in 2005, announced plans to raise as much as $800 million via an initial public offering, when the company floats its shares on the stock market for the first time.
Separately, CNBC last night provided an interesting analysis of US stock market performance over the summer months.
The show indicated that the Nasdaq returned an average of 2.43% over the summer months between 2000 and 2009, while the S&P and Dow Jones Industrial Average were essentially flat.
The programme also found that shares of Intuitive Surgical, Sandisk and Titanium Metals have historically performed well over the summer period. Meanwhile, certain analysts recommended looking at shares that stand to benefit from 'back to school' demand.
Source: [1] Bloomberg News (28 May 2010)
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'Spread Betting News 28 May 2010', Article by IG Index, last update: 28-May-10
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