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Week in Review: NYSE Comp. in Defined Downtrend, Credit Market Troubles Continue as Europe Leads the Decline, NFP Data Disappoints

The news moving markets today centers around fears about renewed economic weakness and continued credit market deterioration. I have included a number of stories below offering a good cross-section of the situation.

Meanwhile, traditional technical analysis helps tone down the noise and offers a pure indication of who is in control: the buyers or the sellers.  To that end, the chart below of the NYSE composite (60 min. bar chart) will help put this week’s trading into prospective.  As you can see, the market is in a well defined downtrend. This week’s rally was simply a move to the top of the channel helping to alleviate a serious oversold condition. The index will need to break above the down trend line and the 20 day moving average, both around the 6905-6910 area, before this selloff can be declared over.  We remain bearish and will look to book profits on the short side as the market nears the bottom of the channel.  

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Banks’ Overnight Deposits With ECB Increase to Record

June 3 (Bloomberg) — Overnight deposits with the European Central Bank rose to a record yesterday as the sovereign debt crisis made banks wary of lending to each other.

Banks lodged 320.4 billion euros ($394 billion) in the ECB’s overnight deposit facility at 0.25 percent, compared with 316.4 billion euros the previous day, the Frankfurt-based central bank said in a market notice today. That’s the most since the start of the euro currency in 1999. Deposits have exceeded 300 billion euros for the past five days.

Banks are parking cash with the ECB amid investor concern that a 750 billion-euro European rescue package may not be enough to stop the crisis from spreading and spilling into the banking industry. The ECB said on May 31 that banks will have to write off more loans this year than in 2009 and their ability to sell bonds may be hampered as governments seek to finance fiscal deficits.

Read More…

Goldman Sachs weighs in on economic woes…

Nonfarm labor productivity grew a downward-revised 2.8% (annualized) in the first quarter, below the first release of 3.6% and a bit less than expected, as output was revised down and hours worked were revised up. However, with compensation per hour also revised down, unit labor costs still fell 1.3%, only a bit less quickly than the first release of 1.6%. On a year-on-year basis, unit labor costs are still down 4.2%, the most rapid pace of decline in the history of the series (since 1947) except for the 2009Q4 drop of 5.1%. Thus, labor cost trends remain a strongly disinflationary force.

Next up, Briefing offers a good explanation of the employment numbers announces today…

Employment Report a Major Disappointment

The latest payrolls data confirmed the stagnate labor market that was implied from yesterday’s weak ADP report and the lackluster jobless figures over the past four weeks. Nonfarm payrolls increased by 431,000 in May, a disappointment from the 500,000 increase expected.

The details of the payroll numbers were even worse. The consensus estimate expected government hires would increase by roughly 275,000: temporary Census hiring would push up employment by approximately 300,000 while other government employment would decline by 25,000. This leaves the more stable private payroll growth at 225,000 for the month. However, government hires exceeded expectations by 115,000. The private sector produced only 41,000 jobs in May, 184,000 less than the consensus estimate.

Further, out of the 41,000 new hires, 31,000 new jobs were deemed temporary. If consumer demand suddenly decelerates, these hires will lose their jobs quickly. The only good take away from the payrolls data was that manufacturing payrolls increased by 29,000, its fifth consecutive monthly increase. The data confirm that the expansion in the manufacturing sector has not been impeded. The unemployment rate ticked back down to 9.7% in May after temporarily increasing to 9.9%, and it beat the median estimate of 9.8%.

However, like the payrolls data, the details of the move were a major disappointment. Economists were expecting that the move down in unemployment would be due to healthy gains in private payrolls. Unfortunately, the number of people employed actually declined by 35,000 in May. The reason for the drop in the unemployment rate was due to workers again leaving the labor market in droves. The labor forced declined by 322,000 for the month, its first monthly decline since December 2009. If the labor force remained at April’s level, the unemployment rate would have remained at 9.9%. On a positive note, personal incomes looked stronger in May. Average hourly earnings increased 0.3%, well above the consensus estimate of 0.1% growth. Weekly hours increased from 34.1 to 34.2. In all, average weekly earnings climbed an impressive 0.6%.

About Bret Rosenthal

Interpreting the news that moves markets. Principal of RCM, LLC, and founding partner of the Fortune's Favor Family of Funds
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