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After a New Record High, US Stocks Have a Choppy Day


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

German unemployment rose by 25,000 in May, which was higher than what was expected and attributed to underperformance in German equities. The Italian FTSEMIB (INDEXBIT:FTSEMIB) was the strongest index in Europe today as investors continued to expect the ECB to ease monetary conditions at its meeting next Thursday. Reports from China indicated that the government was prepared to lower its reserve-rate ratio and ease its loan-to-deposit ratio, both of which would stimulate lending activity in the country.

The major US indices had a very choppy trading session and hugged the flat line for most of the day. Higher-beta tech and small-cap stocks both underperformed the S&P 500 (INDEXSP:.INX), which was only down 0.11% after a last minute selloff.

Utilities continued to perform strongly due to yesterday's power auction results, as well as industrials. Home builders also did well following the results from Toll Brothers (NYSE:TOL) earnings in the pre-market. The company expects to see significant price increases for its new home constructions this year and next. As a result, that will improve its gross margins and profits. Bank stocks were mixed after Royal Bank of Scotland (NYSE:RBS) said that it was cutting its total assets and exiting the mortgage trading business to avoid being designated as a systemically important financial institution (SIFI) in impending Dodd-Frank regulation.

US Treasuries had a very strong day, led by a number of different factors, including: the ECB lowering its deposit rate into the negative next week; comments from the Chinese government indicating further easing was on the horizon, which drove a sell-off in the renminbi; a strong rally in agency MBS; and short covering. The JPMorgan client survey of Treasury positioning showed the second-largest amount of shorts in the past year. The 10-year yield finished near its low of the day, down eight basis points to 2.43%, eclipsing its lowest level since last July. The Treasury sold $35 billion of five-year notes at a high yield of 1.507% that was met by strong demand despite the day's rally.

Tomorrow's Financial Outlook

The second estimate of first-quarter GDP is scheduled to be released tomorrow. Because of recent releases of March's trade balance and inventories, as well as revisions to retail sales, economists have revised down the expected growth to -0.5% at a quarterly annualized rate. The first estimate from the government saw a rise of only 0.1%. Also scheduled to be released are weekly jobless claims and April pending home sales.

Only two reports are scheduled for tomorrow. One is the Canadian current account balance from the first quarter. The second, which is more important, is Japan's retail sales for April. That report is expected to show an extreme decrease of -11.7% month-on-month after the government enacted a 3% sales tax increase at the start of the month, which boosted sales in that month to a gain of 6.3%.

Notable earnings reports scheduled for tomorrow include Costco (NASDAQ:COST), Abercrombie & Fitch (NYSE:ANF), Lions Gate (NYSE:LGF), Express (NYSE:EXPR), and Splunk (NASDAQ:SPLK).

Twitter: @Minyanville

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