The term "underemployment" was ignored with the Friday jobs report, as 165,000 jobs were created and the unemployment rate fell to 7.5%. The 324,000 first-time unemployed reported on Thursday was mostly overlooked by the media. Once again, the monthly gain of 165,000 against the weekly loss of 324,000 eludes those reporting on the labor situation. A worker filing for unemployment has lost a job. However, with the jobs creation in an apparent "uptrend," the markets on Friday reflected an almost gleeful response. The creation of doubtful quality jobs and the underemployment factor remain worrisome as far as an overall economic trend is concerned. We would emphasize as strongly as possible the need for a conservative approach to investment management. Another factor that must be considered is the renewed hostilities in the Middle East.
Now for some actual information...
Interest Rates: The June U.S. treasury bond closed at 147 down 2 and 6/32nds as yields rose after the Friday jobs report showing a larger than expected jobs "creation" figure of 165,000. An expansion of the country’s services industry at a weaker than expected 53.1% and the March factory orders reported decline of 4% were mostly overlooked as the jobs data played a more important role in the trading of bonds and equities. We have long established the fact that the U.S. labor situation was the determining factor for the economy and that an "unemployed consumer does not consume" making the jobs data the most critical element for economic growth determination. On May 1st policy makers at the central bank contended that "fiscal policy is restraining economic growth." The Federal Reserves option to increase purchases indicated their concern that economic growth is slowing and was in contrast to the Fed’s March meeting where a reduction in the pace of buying was considered. The U.S. central bank has been purchasing on the order of $85 billion of bonds each months since the beginning of the year with $45 billion in treasuries and $40 billion of mortgage debt in order to keep borrowing costs down to provide for economic stimulus. We continue to view treasury bonds as in a trading range and our previous expectation of that range in the 144 to 152 area remains unchanged.
Stock Indices: The Dow Jones industrials closed Friday at 14,973.73, up 141.23 points after the better than expected non farm payrolls data released by the U.S. Labor Department. That was higher than economists had forecast of 135,000 jobs created. That initially pushed the Dow to all time highs over 15,000 and the S&P 500 over 1,600. Records for those two indices. The Nasdaq gained but is still only at 60% of it’s all time high over 5,000 closing at 3,378.63, up 38.01 points. The S&P 500 closed at 1,614.30, up 16.71. The "enthusiasm" tied to the jobs data as well as to the decline in the U.S. dollar was confusing to say the least since the weak dollar is usually tied to lower interest rates. The gain in yields on Friday was against the traditional relationship of the dollar to yields and should correct early in the new week. For the week the Dow gained 1.78%, the S&P 500 2.02% and the Nasdaq 3.02%. As far as the equity markets go, we expect the "overbought" condition to correct itself in the coming days and weeks and continue to "insist" that holders of large equity positions implement risk hedging strategies which we can provide assistance with.
Currencies: The June U.S. dollar index closed at 82.165 , down 11.7 points but other currencies were mixed. The June Euro gained 58 points to close at $1.3119, the British pound gained 32 points to $1.5560, and the Australian dollar 66 points to $1.0287. Others were weaker against the dollar with the Swiss Franc losing 9 points to $1.0689, the Japanese 110 points to 0.10100, and the Canadian dollar 2 points to 99.12c. The European Central Bank cut its key interest rate to a new record low by policy makers at Bratislava on Friday to 0.5% from 0.75%. 45 out of the 70 economists that had been polled by the Bloomberg News agency had expected the move. They left the deposit rate at zero and reduced their marginal lending rate to 1% from 1.5%. Mario Draghi, the head of the Central bank had said last month that he stood "ready to act if Europe’s economic outlook worsened". While we do not expect the "euphoria" attached to the U.S. labor situation reported Friday to continue, nor that we see any sustainable U.S. economic recovery it will remain "positive" on a relative basis against the Eurozone so that we maintain our bullish bias towards the U. S. currency. Stay with the dollar.
Energies: June crude oil closed at $95.61 per barrel, up $1.62 tied directly to the better than expected U.S. jobs data that psychologically improves the outlook for demand by the U.S. The U.S. services industry index weakened to 53.1% and the March factory orders were also lower by 4% but failed to dissuade the optimism towards energy demand equity market strength. Concern over renewed MidEast hostilities with the Israeli attacks in Syria also a factor in the shortcovering rally for crude. We remain bearish however, due to our expectation of continued global economic deterioration.
Copper: July copper closed at $3.3090 per pound, up 20.45 c or 6.8% tied to the U.S. economic data. Copper remains down 10% for the year and our ongoing bearishness continues on the basis of our general view of global economic decline. Our recommendation last week to take profits "off the table" was correct and we are now awaiting a new opportunity to short this market.
Precious Metals: June gold closed at $1,468.80 per ounce, up $1.20 tied to the dollar weakness in which it is denominated. The better than expected U.S. jobs data failed to deter the bearishness associated to precious metals which are historically a hedge against anxiety and as a safe haven during economic turmoil. The recent disappointment with precious metals had caused technicals to turn bearish and even the ECB’s decision to cut interest rates provided only minimal support for gold. We could expect further "choppy" trading activity in metals but would watch for global economic conditions or geopolitical evens that could prompt renewed demand for precious metals. We continue to suggest the sidelines until a clear trend develops. July silver closed at $24.075 per ounce, up 24.5c as silver, in our opinion, based on industrial demand, could provide a more stable position for those that prefer precious metal participation. Jly platinum closed at $1,499.40 per ounce, up 80c while June palladium gained $1.55 per ounce to close at $694.85.
Next page: Ags and softs
Grains and Oilseeds: July corn closed at $6.61 ½ per bushel, down 1/2c as better weather is forecast for the growing areas. The recent rally from the $6.10 area prompted by planting delays. We like corn but raise trailing stops. July wheat closed at $7.22 per bushel, down 6 1/2c after recent tours did not find any meaningful crop damage and the "freeze" has now passed. We prefer the sidelines in wheat. July soybeans closed at $13.87 ¼ per bushel, up 15c tied to tight cash markets. Also speculation that U.S. growers will not move acreage to soybeans from corn prompted shortcovering. We have favored beans in this group and continue to do so but raise trailing sell stops.
Meats: June cattle closed at $1.21925 per pound, down 172.5 points on long liquidation and on a technical correction in front of the weekend after recent strength. We could see renewed buying interest early in the week as demand improves for U.S. beef and weather could promote "barbecue" demand. We like cattle from here. June hogs closed at 92.325c per pound, down 50 points tied to weak cash market demand. We prefer the sidelines in hogs.
Coffee, Cocoa and Sugar: July coffee closed at $1.4015 per pound, up 70 points on reports that Brazilian producers are holding back shipping on speculation that the government would raise the minimum price for beans. We could finally see continued momentum build after the extended period of long liquidation. The Brazilian Governments price supports could prompt new buying. We like coffee from here but use stop protection. July cocoa closed at $2,412 per tonne, down $2.00 on profittaking after its recent gains from mid March’s lows around $2,100. Buying generated by the completion of the West African harvest and expectations pointing to sharply lower production for next year. We like cocoa from here but use stops. July sugar closed at 17.58c per pound, down 2 ticks. Expectations for Brazils cane harvest to accelerate with favorable weather and could produce a record crop. The rally on Thursday was prompted by reports that the three major sugar houses, Bunge, Wilmar, and Cargill took delivery of a record 1.4million tonnes of sugar. Strong demand from Asia and Middle East prompted the record delivery. We could see renewed speculative interest in sugar.
Cotton: July cotton closed at 86.18c per pound, up a half cent on shortcovering after the International Cotton Advisory Committee raised their price expectations even though they estimated higher global inventories. We prefer the sidelines in cotton.