Stocks turned positive this week following the European Central Bank’s decision to use negative interest rates for funds on deposit with them. Mario Draghi believes this will spur lending in the Eurozone and help head off the potential for deflation there. In addition, a good May jobs number encouraged the markets that the US is recovering from its winter slowdown. Treasury bonds fell this week as yields rose from their year to date low last week. While economic signs are encouraging I am only cautiously optimistic as stock valuations remain high. Second quarter earnings beginning in July will be telling as it typically gets harder for companies to increase earnings after several years of expansion. Most notably this week:
- US Auto Sales rose sharply in May recovering from the winter slowdown. Toyota sales were up 17%, Chrysler up 17%, GM up 13% , Ford up 3% and Honda up 9%.
- US Productivity fell 3.2% in the first quarter. Severe winter weather was partly to blame as was an ongoing slowdown in efficiency gains.
- The US trade gap grew 6.9% to a seasonally adjusted $47.24 BN in April. From the previous year exports were up 3.0% and imports were up 5.4%.
- The Institute for Supply Management reported that manufacturing activity rose to 55.4 in May from 54.9 in April. Also ISM reported that nonmanufacturing activity rose to 56.3 in May from 55.2 in April better than expectations of 55.2.
- The European Central Bank moved to stimulate the European economy moving its main lending rate to .15% from .25%. It also lowered the interest rate on its deposit facility from 0% to -0.1% with the goal of getting banks to lend out their excess reserves.
- US Retail Sales increased 4.4% in May this was largely believed to be a recovery from the winter slowdown.
- 1st Time Claims for unemployment rose to 312,000 in the previous week. This was slightly worse than expectations. The four week moving average of claims fell to 310,250 the lowest since June 2007.
- The Department of Labor reported that the US created 217,000 jobs in May, close to forecasts. This is down from April’s gain, revised to 282,000. The unemployment rate remained unchanged at 6.3%. The total number of employed people finally surpasses the 2007 peak. However, the composition of employment has shifted many to lower paying jobs than before the financial crisis.