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Macro View

With this morning’s mixed economic data on the home front from the Jobless Claims and Durable Goods reports, stocks likely will not have much to offset the uninspiring picture coming out of Europe. The overnight summit of European leaders in Brussels failed to come out with anything new.

But even more worrying is the region’s economic outlook, including the thus-far robust German economy. A preliminary survey of Euro-zone purchasing managers for May, comparable to the ISM survey in the U.S., shows the region’s factory sector moving deeper into contractionary territory. A separate survey of German business confidence also shows loss of momentum.

The Brussels summit meeting reiterated the group’s desire to keep Greece within the currency union, but wants the country to stay true to its existing austerity commitments under the March bailout. With the anti-austerity left-wing party gaining momentum in the run-up to the June 17 elections, it is increasingly becoming obvious that Greece may be heading towards the long-feared exit.

On the positive side, the demand for Eurobonds is steadily gaining momentum following the change in French leadership, though Germany continues to oppose the move.

There is not much to feel good about in this morning’s domestic economic data either, with the weekly Jobless Claims numbers effectively unchanged from the previous week and the April Durable Goods report raising questions about the outlook for corporate capital spending.

It is perhaps a bit harsh to characterize the Jobless Claims data as negative. But the number has been ‘stuck’ at the 370K level for weeks now and refusing come further down. This morning’s reading showed a 2K drop to 370K, though the prior week’s tally was revised upwards by 2K. So, in effect, we have another unchanged reading.

The four-week average, which smooths out the week-to-week volatility, dropped by 5.5K to 370K. An optimistic take could be that the current consolidation phase in the claims data is a net positive. It will be interesting to see what next week’s May non-farm payroll numbers will bring, particularly following the disappointing releases in preceding two months.

While one could argue that the Jobless Claims report was not negative, there is no other way to put this morning’s April Durable Goods report. The ‘headline’ number was roughly in-line with expectations, and the prior month’s ‘headline’ drop was modestly revised upwards. But the ‘core’ reading, officially called non-defense capital goods orders ex-aircraft, came in weaker than expected and the prior month’s number was revised down.

The weak ‘core’ number and the negative revisions to the prior month raise questions about the health of business spending outlook going forward and will likely be perceived as another sign of loss of momentum in the economy. This data does not seem to be in-sync with what we are seeing from the manufacturing ISM data in recent months. While not unusual, it is nevertheless a red flag not to take the manufacturing momentum for granted.

In corporate news, Hewlett-Packard (HPQ - Analyst Report) came out with better-than-expected results and a credible-looking restructuring program that includes lay-offs totaling roughly 8% of its workforce.

But irrespective of the quality of the PC and printing giant’s restructuring plan, it is likely faced with a much softer IT spending environment than it may have been banking on. We saw some evidence of that in Tuesday’s results from Dell (DELL) and even Cisco (CSCO - Analyst Report) had pointed towards that in its quarterly results. This morning’s soft April Durable Goods report is also along the same lines.

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