EmailIt wasn't exactly a mayday call on May Day, yet the stock market took a nosedive yesterday in a spate of broad-based profit taking that was hastened by growth concerns following some disappointing PMI readings out of China and the US.
The decision by the FOMC to stay its current policy course had little influence over yesterday's proceedings as the market essentially went out at its lows for the day. The FOMC decision, however, wasn't really pertinent for the market yesterday so much as it was pertinent for the market in the coming weeks.
The recognition that the Fed isn't changing its policy approach should continue to put a floor of support under the market, assuming two things hold true: (1) the market does not lose faith in the Fed and (2) there isn't an exogenous shock outside the Fed's control.
Thus far, the market has embraced the idiom that you "don't fight the Fed," yet the fact of the matter is that the real economy keeps punching back with disappointing data points and reports of weak revenue growth. Those counterpunches have the potential to score a technical knockout of the Fed the longer this fight drags out.
On a related note, the ECB announced what it was told by the market -- er, the data -- to do. It cut its main refinancing rate by 25 bps to 0.50%. In addition, the ECB lowered the interest rate on its marginal lending facility by 50 bps to 1.00%.
The ECB news, which was expected, gave a bit of a relief boost to the S&P futures on the basis that it showed the ECB wasn't so dumb as to completely ignore the economic weakness around it that is threatening price stability. The market will now be keen to hear in Mario Draghi's press conference if any other unconventional measures are going to be employed to help turn the tide of disinflation in the eurozone.
Since yesterday's close, it has been a very busy period of earnings reporting. Per usual, most companies, including General Motors (GM), Visa (V), Allstate (ALL), and Cardinal Health (CAH), have beaten consensus earnings estimates. Facebook (FB) was a notable exception. It came up a penny shy of the Capital IQ consensus estimate, but in a twist on the normal course of things this reporting period, it actually beat on its revenue estimate.
There are too many reports to go into here, so we would encourage readers to visit our Earnings Calendar page. Generally speaking, though, there haven't been any true market-moving reports.
This has also been a busy morning for economic data.
The good news is that initial claims for the week ending April 27 fell to their lowest level since January 2008 at just 324,000. That was down 18,000 from the prior week and well below the Briefing.com consensus estimate of 346,000. There weren't any special factors behind the drop in claims either, which goes to show the pace of layoffs is slowing even if the pace of hiring is not accelerating. We will get more insight on the hiring side of things with tomorrow's release of nonfarm payrolls.
Continuing claims for the week ending April 20 rose by 12,000 to 3.019 mln, which was also better than the Briefing.com consensus estimate of 3.050 mln.
First quarter productivity increased 0.7% (Briefing.com consensus +1.2) after declining 1.7% in the fourth quarter. Unit labor costs, meanwhile, rose just 0.5% (Briefing.com consensus +1.6%) after increasing 4.4% in the fourth quarter.
Finally, the trade balance report for March also produced a notable headline surprise as the trade deficit dropped to $38.8 bln from an upwardly revised $43.6 bln. This improvement is expected to lead to an upward revision to first quarter GDP growth when the second estimate is released.
The trade figure, however, doesn't necessarily paint a picture of improved demand. On the contrary, both imports and exports declined from February levels. The big drop in the trade deficit is due to imports falling more than exports. Specifically, imports decreased by $6.4 bln, with a good chunk of that coming from weaker demand for consumer goods and computers, while exports decreased by $1.8 bln due principally to declines in food and petroleum-based products.
The market, however, looks undeterred by the soft picture below the trade deficit headline. The S&P futures are sitting near their highs of the morning and are suggesting the cash market will start the day about 0.5% higher.
