Upbeat Economic News Seen As Threat To Quantitative Easing

The Commerce Department’s Census Bureau startled investors with some surprisingly good economic news on Friday morning. The report on Durable Goods Orders for April revealed that new orders for manufactured durable goods jumped by 3.3 percent on a month-over-month basis, compared with economists’ expectations for a less-significant, 1.1 percent increase.

Ben Bernanke’s testimony before the Joint Economic Committee on Wednesday was still reverberating through the news media. Dr. Bernanke’s statement that the FOMC could make adjustments to its bond purchases “within the next few meetings” if economic conditions warranted it raised fears that we could be experiencing those economic conditions right now. As a result, investors remained risk-averse throughout most of the day. The major stock indices began to make modest advances during the afternoon.

The Dow Jones Industrial Average (DIA) picked up 8 points to finish Friday’s trading session at 15,303 for a 0.06 percent advance. The S&P 500 (SPY) finished the week with a 0.06 percent decline to close at 1,649.

The Nasdaq 100 (QQQ) dipped 0.01 percent to 2,991.02. The Russell 2000 (IWM) was unchanged at 984.

In other major markets, oil (USO) declined 0.51 percent to close at $33.37.

On London’s ICE Futures Europe Exchange, July futures for Brent crude oil declined by a penny (0.01 percent) to $102.59/bbl. (NYSEARCA:BNO).

June gold futures declined by $6.40 (0.46 percent) to $1,385.40 per ounce (GLD).

Transports were in reverse on Friday, with the Dow Jones Transportation Index (IYT) declining 0.35 percent.

In Japan, stocks went on a rollercoaster ride as the yen weakened, strengthened and weakened again. By the end of the session, the Nikkei 225 Stock Average climbed 0.89 percent to 14,612 (EWJ). The late-day stock advance followed a weakening of the yen to approximately 101.85 per dollar. A weaker yen results in more-competitive prices for Japanese exports in foreign markets (FXY).

In China, stocks advanced on the Shanghai Stock Exchange as a result of gains by the technology and healthcare sectors. The Shanghai Composite Index rose 0.58 percent to 2,288 (FXI). Hong Kong’s Hang Seng Index declined 0.23 percent nosedive to 22,618 (EWH).

European stocks made a modest retreat on Friday, as investors apparently remained fearful that Thursday’s sell-off could be the beginning of a more significant decline (VGK). The Euro STOXX 50 Index finished Friday’s trading session with a 0.45 percent decline to 2,764 – remaining above its 50-day moving average of 2,696. Its Relative Strength Index is 58.3 (FEZ).

Technical indicators reveal that the S&P 500 remains far above its 50-day moving average of 1,592 after closing at 1,649 – as bears get more evidence that we could be watching the formation of a head-and-shoulders pattern, which would signal a further decline. Its Relative Strength Index fell from 62.10 to 61.61. Although both the MACD and the signal line continue soaring above the zero line (suggesting the likelihood of a further advance) the MACD has assumed a downward trajectory and has now crossed below the signal line, suggesting the likelihood of a further decline.

For the day, most sectors were negative, except for the consumer staples and financial sectors, which advanced by 0.94 percent and 0.10 percent, respectively. The energy sector was the laggard of the group, falling 0.58 percent.

Consumer Discretionary (XLY): -0.30%

Technology: (XLK): -0.16%

Industrials (XLI): -0.32%

Materials: (XLB): -0.34%

Energy (XLE): -0.58%

Financials: (XLF): +0.10%

Utilities (XLU): -1.07%

Health Care: (XLV): -0.30%

Consumer Staples (XLP): +0.94%

Bottom line: Before Ben Bernanke testified that the end could be near for the quantitative easing program, disappointing economic reports were usually seen as good news by investors, since it demonstrated the need for more bond-buying. We have now progressed to the inverse situation where upbeat economic news sends investors to the sidelines, out of fear that the Fed’s liquidity pump could be shut off sooner than expected.

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