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5/11/2012 1:36 PM
Markets Make an About Face
By WSS Research Team
By Carlos Guillen
Equity markets have been able to hold on to the gains made yesterday despite JPMorgan's loss of $2 billion in risky bets and Europe's continuing political instability. Investors have kept their cool as consumer confidence continues to climb and as the pricing backdrop is looking favorable for consumption to continue in the short run.
Giving investors something to be encouraged about today was consumer sentiment data that beat expectations. The University of Michigan Consumer Sentiment May preliminary result landed at 77.8, which was higher than the Street's expectation of 76.0, increasing from the 76.4 reached last month and continuing a rather encouraging trend that has been developing for the prior nine months. Consumers had been concerned about the deceleration of job creation and about the acceleration of gasoline prices; however, these concerns are attenuating as it is becoming evident that the negative jobs backdrop may has been overblown and as gasoline prices have pulled back by 21 cents from an almost one-year high of $3.94. A better jobs outlook and lower gasoline prices should come together to provide an encouraging backdrop for consumer spending to continue in the short run. On the other hand, the index of consumer expectations for six months from now, which more closely projects the direction of consumer spending, decreased to 71.7 from the 72.3 posted in April.
Also a bit encouraging today was that wholesale prices retreated, led by declines in fuel prices. According to the Labor Department, the Producer Price Index (PPI) decreased by 0.2% in April after remaining flat in March, landing below the Street's estimate of a 0.0% change. However, eliminating the noise effects of food and energy, PPI increased by 0.2%, in line with the Street's estimate of 0.2%. In general, a continuing drop in fuel prices should allow for lower raw-material transportation costs, which in turn will lessen company's incentive to charge customers more and dampen consumer spending. Lower prices should also allow the Fed to keep interests rates low as planned, at least until late 2014.
In all, equity markets are reacting positively to the economic data posted today, with the Dow Jones Industrial Average recuperating from its sharp drop at the opening bell. After much debate about increasing oversight of banking entities, today's news that JPMorgan lost $2 billion in risky bets raised investors' concerns of increasing regulation, sinking stocks early in the morning, but investors have made an about face in light of today's economic data, and this may lead the Dow to finish the trading session in the green.
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