Wednesday, May 11, 2011
Stocks are likely to sustain the positive momentum from the last three days, but the lack of a clear catalyst may limit gains. We do not have much on the domestic economic front today, though we will get a host of reports dealing with the labor market and wholesale prices on Thursday. Beyond U.S. shores, we got a better looking read on China’s inflation picture today.
Consumer prices in China increased at a higher-than-expected rate; the rate of increase was lower than the preceding month. China’s April CPI was up 5.3% — above the 5.2% expectation and the 5.4% increase in the March reading. The monetary authorities have been employing a combination of increased reserve requirements for banks and interest rate hikes to combat the pricing pressures. The benchmark one-year interesst rate has gone up four times in the last seven months, and the expectations are for one or two more rate increases this year.
The decelerating trend, if sustained over the coming months, is positive and likely evidence that the Chinese central bank’s steady tightening policy is bearing fruit. This should be another positive for commodity prices, which reversed last week’s sharp losses on the back of renewed optimism about the global economy following the improved labor market prospects in the U.S. China’s ability to handle its inflation issue without derailing its economic growth is a further boost to that improving scenario.
The earnings season is winding down, but we still have a few major ones trickling in. We had a soft report from Disney (DIS) after the close on Tuesday, with strength on the advertising and parks end offset by weakness in the studio business. Macy’s (M) came out with an impressive earnings report this morning. The department store giant came ahead of top- and bottom-line expectations and raised guidance and dividend.
We have Cisco (CSCO) reporting after the close today. The beleaguered network giant has been unable thus far to respond to secular shifts in its core products and end markets, raising doubts about its business model.
Given the lack of any major catalysts, I am looking for a quiet trading session today, though the overall tone will likely remain positive. We have a lot on the economic docket tomorrow, with Jobless Claims as the key report.
Sheraz Mian
Director of Research
Zacks Investment Research
