July 27, 2012
For the first time since early May, the Dow closed above 13,000 today. This is the second straight day that the index has gained in the triple digits and a big catalyst was comments from European Central Bank (ECB) President Mario Draghi.
In a nutshell, Draghi pledges to have the ECB stand at the ready to save the euro. Shortly afterwards, German Chancellor Angela Merkel and French President Francois Hollande echoed Draghi's statements and also vowed to defend the eurozone and its currency.
While I'll happily take this two-day rally and the renewed optimism in Europe, I want to hear more concrete details about the ECB's plan before drawing any sweeping conclusions. So I'm going to leave Europe alone for now and instead focus my attention on what I consider to be the oasis in the global economic slowdown—the United States. So let's take a moment to get up to speed on the latest U.S. economic reports.
After jumping to a two-year high in May, new home sales consolidated to a five-month low in June. The Commerce Department announced that June sales fell to an annual rate of 350,000 while economists called for 375,000. At the current sales pace, the U.S. has about 4.9 months' worth of new homes on the market. But the major indices weren't phased by this report, and here's why: New home sales account for only 20% of the housing market. While the 8.4% drop certainly isn't ideal, it is somewhat expected after May's surge.
Jobless claims continued to bounce around last week, this time plunging 35,000 to an annual rate of 353,000. Meanwhile, economists expected the measure to rise to 385,000. The more consistent four-week moving average also shed 8.750 to 367,250; this represents the lowest level since March. While I like the look of this news, I think we need to wait for a few weeks longer before we can nail down a trend on jobless claims. The fact is that July is a volatile month for the jobs market due to the retooling underway at automobile factories, so jumps like this are to be expected.
Orders for durable goods rose 1.6% in June. This came above economists' estimates of a 1% rise. The jump was driven by a 14.3% surge in aircraft orders (military aircraft orders alone skyrocketed 23.9%). However, excluding transportation the measure fell 1.1%—steeper than the 0.3% drop expected by economists. Orders for core capital goods, which are an indicator of investment plans, fell 1.4%. In June orders for industrial machinery, automobiles and computers fell. June's durable goods report demonstrated that while there are pockets of strength in the manufacturing sector, demand is not necessarily rising across the board.
Second-quarter GDP rose at an annual pace of 1.5%, down from the first quarter. The main drivers last quarter were consumer spending on services and a smaller drag from the public sector. Total consumer spending slowed to a rate of 1.5%, down from 2.4% in the first quarter. However, second-quarter growth still topped economist's expectations of a 1.3% annual pace. Additionally, analysts upped their first-quarter GDP estimates from 1.9% to 2.0% growth.
Next week, we'll receive data on personal income, consumer confidence, construction spending, factory goods order and the Unemployment Rate for July. With these reports and earnings season in full swing, you better bet that I'll have plenty of updates in this daily blog.
Have a great weekend,
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