Eurozone Pieces Falling Into Place?

Expectations remain low for the two-day Euro-zone summit, but the Brussels gathering getting underway tomorrow is still the most important item on investors’ minds. Plans for using the bailout funds to directly recapitalize the Spanish banks have been going the rounds lately, but they will remain nothing more than wishes in the absence of tangible agreements on some sort of a fiscal or banking union.

The need for these measures is clear and obvious to all players, but the politics of getting them done is the complicated part. The German and French leaders are expected to meet ahead of the summit at a working dinner in Paris today, and we may get market-moving headlines out of that event.

Europe is by far the biggest worry for the market, but concerns have lately been rising about the domestic economic scene as well. And on that front, this morning’s May Durable Goods reading is relatively on the reassuring aside, though the report’s internals show pockets of weakness. Overall, the Durable Goods report shows that the factory sector, which has been a strong point of the U.S. economy since the onset of recovery in mid 2009, remains in decent shape.

On tap for release a little later are the May Pending Home sales, which could potentially spotlight a relatively positive slice of the domestic economic scene. Recent data on the housing front has generally been on the favorable side, but doubts remain whether the momentum can be sustained in the absence of a softening labor market.

The ‘headline’ Durable Goods Orders number came in better than expected, but the prior month’s ‘unchanged’ headline reading was revised downwards to negative 0.2%. This is the first positive ‘headline’ number after three months of negative readings. Excluding the volatile transportation segment, which tends to jump around on a month-to-month basis due to the ‘lumpy’ nature of Boeing (BA - Analyst Report) aircraft orders, durable goods orders came in lower than expected. Importantly, the ‘core’ reading, officially called 'nondefense capital goods orders ex-aircraft,' came in lower than expected.

The New Orders component of the national manufacturing ISM and the regional PMI’s is considered a proxy for the monthly Durable Goods reading. The June ISM reading is coming out next week, but the regional surveys from the Empire State, Philly Fed and Richmond regions seem to indicate that we may see a significant pullback in the New Orders component as well as the overall index level. This morning’s May Durable Goods report confirms that assessment.

While the slowdown in the economy’s growth momentum is no longer news -- even the Fed acknowledges it now -- the extent of that slowdown is far from obvious at this stage. This additional source of uncertainty, coupled with existing questions about Europe and China, remains a key headwind for the market.

In quarterly results, Lennar Corp. (LEN - Analyst Report), the homebuilder, and Monsanto (MON - Analyst Report), the agriculture company, handily beat earnings and revenue expectations. General Mills (GIS - Analyst Report) beat EPS expectations by a penny on inline revenue numbers. This followed Tuesday’s announcement of an 8% increase in the company’s dividend.

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