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First-Quarter GDP Contracts Due to Sharp Drop in Inventories


Today's financial recap and tomorrow's financial outlook.

An agreement between the Russian Federation, Kazakhstan, and Belarus to form a trading bloc comes only a week after a $28 billion deal with Russia and China for natural gas exports. Kyrgyzstan and Armenia are the next former Soviet republics to join the bloc that would challenge the dominance of the US and eurozone. Russian stocks rallied, although most markets were closed for Ascension Day. Many commentators believed this was another step toward the USSR reforming.

The second estimate of US first-quarter GDP declined to a -1.0% quarterly annualized rate, down from the first estimate of +0.1%. Economists had been expecting GDP to drop to -0.5%. The change from the first to second estimate was almost entirely due to a negative inventory adjustment, which came in March. Another culprit was a small drop in net exports. Domestic final sales were actually revised up to +1.6% from +1.5%. The market (both equities and Treasuries) did not seem to react to the news. It did react to the pending home sales report, however.

Because of recently strong earnings from Toll Brothers (NYSE:TOL) and new home sales contracts today's pending home sales garnered a much higher level of attention than normal. Sales rose 0.4% month-on-month (versus the +1.0% expected), causing Treasuries to rally and equities to experience some mild selling.

The major indices were bailed out late in the day with news from the Department of Energy (DOE) that it was proposing a revision to liquid natural-gas exports to countries that aren't in accordance with the Free Trade Agreement (FTA). Liquid natural-gas producers and exporters all rallied strongly. As a result, the oil and gas sector of the S&P 500 (INDEXSP:.INX) was the second-best-performing sector in the index today.

The S&P 500 finished the day up 0.54%, with small-cap and tech performance stocks in line with the benchmark index's increase. Telecom stocks were the only sector of the S&P 500 to finish negative.

Tomorrow's Financial Outlook

Tomorrow morning's April personal spending and income report will garner much more attention than normal because of today's poor GDP figure. If the spending report is below the expected gain of 0.2% and wages don't see any upward push, market participants will need to bring down their growth expectations for the rest of the year. That would be a positive for interest rates and a negative for growth-related equities. The first major manufacturing report for the month of May (Chicago's) is scheduled to be reported. The final estimate of the May University of Michigan/Reuters consumer confidence index is also scheduled.

The major catalyst for risk assets overnight is Japan's employment and consumer price data. Prices are expected to continue to remain high following the government's April sales tax increase. The Japanese yen remains perilously close to its long-term moving averages versus the US dollar and euro. Additionally, Japanese equities have rallied for almost two weeks straight. Any large variance in the data overnight could cause a change in those trends.

There are no earnings reports scheduled for tomorrow.

Twitter: @Minyanville

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