Yesterday it was a decline in jobless claims – back to the 360,000 level, a position that suggests mild job gains may be on the horizon – and same-store retail sales growth that came in at double the rate expected.
Energy, financials, basic materials and information technology shares led the advance, but all 10 major industry groups closed higher. Energy stocks exploded to the upside, rising 4.39% yesterday as crude broke its downtrend thanks to a mindboggling statement from European Central Bank (ECB) president Trichet who pulled the rug from under Bernanke.
Bernanke, finally, made mention of the dollar a couple of days back – stating the FOMC was concerned over the dollar’s decline and the effect that has on oil prices and thus inflation. We had been waiting for such statements and finally the Fedhead delivered. The comments sent the dollar into rally mode and oil lower as a result.
Then yesterday, as the ECB decided to keep their benchmark interest rate unchanged – OK, fine; no problem there it was expected – Trichet (the equivalent of our Bernanke) mad the flat out dumb comment that they may just raise rates in the near term. (This flies in the face of what Bernanke had said on Tuesday and shows either a misunderstanding of the relationship between the greenback and oil or a level of thoughtlessness that’s stunning.)
For Trichet to mention they may raise rates changes expectations regarding interest-rate differentials between the U.S. and EU and drives the euro higher and dollar lower – a situation that neither economy desires. A sky-high euro hurts European export activity and a lower dollar – since oil is priced in dollars -- drives oil higher.
I realize that Trichet has to deal with pathetic productivity levels and a unionized environment that can on a annual basis push 8-10% wage increases through the system. (That obviously doesn’t occur every year, but it is a possibility as I believe it’s true to say most of their labor force is unionized). These are reasons why Eurozone inflation sits at 3.6% on a year-over-year basis even though their currency is so strong – a strong currency ought to bring inflation rates much lower, but with labor regulations that cap weekly hours worked at 30-35 they don’t have healthy productivity rates to help out.
But regarding his statements, why make them now? The oil/dollar trend had just started to move to a desired direction. Why not wait until they were closer to the next meeting. Does this guy think that higher crude prices will make his job any easier? These statements almost assure that he will have to raise rates; if oil goes higher it will affect EU inflation rates. He’s either trying to stab Bernanke in the back or is disturbingly out of touch with reality.
On the economic front, the Labor Department reported that initial jobless claims dropped 18,000 in the week ended May 31, keeping the trend well-below the 400,000 level. Anything below this level, and certainly below 380,000, means that any job losses should remain mild. If we can build on this latest drop and trend back to the 350,000 we’ll have a great shot of mild job gains over the next several months.
I don’t expect a lot of improvement just yet, but do believe we’ll remain below a level that spells meaningful job-market trouble. On the graph below, notice how we remain below the mid-business cycle slowdown of the mid-1990s, and well-below recessionary levels. (Most of you have become quite familiar with this graph since we’ve posted it every Thursday for two months now, but it’s important to see updated versions and new readers may find it especially helpful.)
In other news, the International Council of Shopping Centers (ICSC) reported the second-straight month of solid same-store retail sales gains as the May figure rose 3.0% and followed a 3.5% rise in April. Things became soft in December, and we endured four months of weakness, but have bounced back nicely.
Total sales, which count new store openings – the same-store figure measures only locations that have been open for at least one year --, jumped 9.1% in May.
A couple of important points related to this data:
One, furniture chains saw a 6.3% decline in May, which followed a 2.7% drop in April and a 9.8% decline in March. Furniture sales continue to weigh on the overall retail number and we’d probably be seeing quite robust growth if not for this factor. This is the housing effect on retail sales.
Two, the press harped on how the retail sales data showed that consumers have been forced to do their buying at discounts stores, as if in the aggregate the U.S. consumer is so down and out they are forced to shop at the discounters and it’s not by choice. But I guess they missed the luxury store figure within the report. Luxury same-store sales actually rose at a higher level than did discount stores. Luxury sales rose 4.1% in May vs. a 3.0% rise at discounters – that was the second month of this occurrence after four months of discount growth whipping the luxury side of things. Again, these are levels above the year-ago period.
This morning we get the May jobs report, big news and almost always a market mover.
Today marks the 64th anniversary of the D-Day invasions. We can never repay the debt owed to those who mustered the courage and selflessness to fight and win that war for posterity. What we can do is learn from the lessons of the 1930s and when a dictator states, and follows with action, that he is hell-bent on taking over the world, we don’t meet that threat with a negotiation style that pretends this despot will live up to his end of the bargain (ala the Munich Agreement), but rather with resolve and strength.
Have a great weekend!
Brent Vondera, Senior Analyst
