US Equities Get a Boost

Posted on | June 18, 2009 |

The release of better-than-expected US macroeconomic data helped provide a much needed shot of adrenaline to US equities this afternoon.

In a sudden turn of events, the US Labor Department today unveiled that the total number of Americans claiming unemployment benefits for more than a week (continuing jobless claims) tumbled by 148,000 from the week before, bringing the tally to 6.69 million. This is the biggest drop since November 2001 and substantially better than Bloomberg’s expectations for an increase to 6.840 million, from an upwardly revised 6.835 million the week before.

Although the US labour market remains considerably weak, today’s data provides a sigh of relief as it indicates that demand for labour has picked up – a much-needed phenomenon for mopping up the excess supply of labour.

The weekly report homed in on the supply side as well, showing the number of Americans claiming first-time unemployment benefits (initial jobless claims) rising by only 3000 to 608,000 in the week ending June 13. This was marginally higher than Bloomberg’s median estimate for a rise to 604,000 from an unrevised 601,000 the week before. The four-week moving average of initial jobless claims, a less volatile measure, fell by 7000 to 615,750 on the week, however, the lowest level since February this year.

‘The labour market remains weak but it’s starting to stabilise,’ said Maxwell Clarke of IDEAglobal. ‘An improvement in employment conditions and improvement in confidence go hand in hand with an improvement in consumer spending.’ [1]

The upbeat labour market data helped Wall Street open only marginally higher today, but gains were relinquished almost immediately as investors remained cautious ahead of the leading indicators index and the Philadelphia Fed manufacturing survey, which turned out to be substantially better than anticipated. With today’s US macroeconomic data still pointing to some sort of recovery, opportunistic investors have re-entered the stock market in search of bargains, helping Wall Street snap a three-day losing streak.

By 3.30pm (London time) the Dow Jones Industrial Average was up by 79.51 points (+0.94%) to 8576.69, while the broader S&P 500 had advanced 7.65 points (+0.84%) to 918.38. The Nasdaq was also higher, up 0.42 points (+0.03%) to 1456.31.

Investors cheered today after the Conference Board’s index of US leading economic indicators jumped by 1.2% in May following a revised 1.1% rise in April. This is the biggest back-to-back gain since the second half of 2001. In the meantime, the reading for the Philadelphia Fed manufacturing survey came in at -2.2 in June from -22.6 in May, the slowest contraction in activity in nine months as orders and sales improved.

‘The bulk of the downturn is behind us but we still haven’t crossed that threshold toward expanding the industrial sector,’ Sal Guatieri of BMO Capital Markets said before the report. ‘It looks like most of the inventory liquidation is over and that means we’ll see manufacturers boost production in the second half of the year.’ [2]

US banks traded higher this afternoon, with Citigroup advancing 0.65% to $3.10, Bank of America up 4.2% to $12.82 and Wells Fargo up 2.2% to $23.59. It is worth noting that Treasury Secretary Timothy Geithner is due to testify before the Senate Banking Committee and House Financial Services Committee to discuss financial sector regulatory reforms, so it remains to be seen whether banks will manage to maintain the gains made so far.

Back home, meanwhile, there was some upbeat news for Royal Bank of Scotland (RBS). Sir Fred Goodwin, former chief executive of the bank, has agreed to hand back around half of his £703,000 annual pension to the bank, reducing it to £342,500. Shares in RBS traded 2.2% higher at 37.8p this afternoon. Lloyds Banking Group was also in positive terrain, up 1.7% to 68.25p, but Barclays and HSBC underperformed the sector, edging down 0.74% to 268p and 0.38% to 524.5p respectively.

[1] Source: Bloomberg News (18 June 2009)
[2] Source: Bloomberg News (18 June 2009)

By Anthony Grech, Research Analyst, IG Index.

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