Market Entering Thinner Air - Ahead of Wall Street

Wednesday, May 28, 2014

U.S. stocks are indicated to open on a positive note, but the market will likely find it difficult to sustain the positive momentum of the last few sessions that has pushed it to record levels. There is not much on the U.S. data front aside from another weak soft reading on mortgage applications, though today's European data is on the soft side.

Weak data out of Europe this morning increase the odds of some sort of stimulus measure from the European Central Bank next month. The soft French consumer spending and PPI data wasn't much of a surprise as the French economy has been struggling for a while, but the renewed signs of weakness in the German economy is something that the ECB simply can't overlook. This morning's soft import prices and labor market readings for the German economy show that the country's economy has lost some of its momentum in the current period after a solid showing in the first quarter.

Disinflation in the common currency region has been a persistent worry for the ECB, and this German data shows that the issue isn't going away. The ECB may not come out with a Fed type QE program, but the markets are expecting it to come out with measures to incentivize bank lending. The most likely route for the ever-cautious central bank will be interest rate cuts, though a lowering of its inflation target, particularly for the near term, also remains in the cards.

In corporate news, we got strong earnings reports from Toll Brothers TOL and Michael Kors KORS this morning. The Toll Brothers strength isn't a comment on the health of the broader housing market, which has lately been showing signs of fatigue. Toll's exposure to the affluent Boston to Washington DC corridor enabled it to deliver 36% more units, with the average home price jumping an impressive 22%. This is a very Toll Brothers-specific report and not reflective of the housing market as a whole, as this morning's mortgage applications report reconfirmed.

Sheraz Mian
Director of Research

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