Stock-index futures were nicely above fair value in pre-market trading and the momentum continued into the trading session after the Commerce Department showed retail sales for May easily beat estimates. But a weaker-than-expected jobless claims number, sky-high import prices and a management shakeup at Lehman Bros. were likely the culprits that took some steam out of the rally.
Six of the 10 major industry groups closed higher, with financials and information technology shares leading the way. Energy shares led the laggards lower even as crude prices shook off morning session weakness to close higher.
On the economic front, it was a mixed bag.
On the positive side:
The Commerce Department reported May retail sales jumped 1.0% and the April figure was revised up to show a 0.4% gain after the initial estimate stated sales fell 0.2%. Excluding auto sales, the retail figure rose 1.2% and the April reading was revised to show double the increase that was previously estimated, up 1.0%.
Even when excluding gas station receipts, sales were very solid, rising 0.9%. A number of people have attempted to suggest the rise in retail sales of the past few months has come from gas stations receipts as pump prices accelerate. But excluding gas station and auto sales, retail activity is up a powerful 10% at an annual rate over the past three months. Great news!
Commerce also reported that business inventories rose 0.5% in April and, importantly, business sales jumped 1.4% which followed a strong 1.2% rise the month prior.
The trend in business sales looks very good and has driven the inventory-to-sales ratio very near the all-time low hit in January 2006. The importance of this, as most readers know, is the production needed to rebuild stockpiles will not only keep the economy from contracting, but will lead to acceleration in the back-half of 2008.
On the negative side:The Labor Department reported import price jumped 2.3% in May and 17.8% from the year-ago period – no, unfortunately this is not a typo. This move is a result of the declining dollar, at least prior to the greenback stabilizing over the past couple of weeks. A little Fed tightening will fix this problem – if they would only get to it.
In a separate report, Labor also reported that jobless claims for the week ended June 7 rose 25,000 to 384,000. That’s the highest level we’ve seen of late outside of the blip above 400,000 back in March. But we do remain below that 400,000 level and so long as we hold here it will suggest labor market weakness will remain mild.
This recent jump does have me a bit concerned, but we’ll really have to wait to see what occurs over the next couple of weeks – the May 26 Memorial Day holiday does make seasonal adjustments difficult, so the prior week’s decline and this latest jump may be a result of the problems related to adjusting for the holiday.In a week we’ll have a better sense of what is occurring. I suspect claims will trend around this 370,000 level and we’ll get a scare sometime in the near future that we’ll push above 400,000 but won’t actually occur. The trend in business sales is way too strong and this will help growth accelerate and the job figures, which do work with a lag, will slowly strengthen a few months down the road.
Have a great weekend!
Brent Vondera, Senior Analyst
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