OREANDA-NEWS. May 11, 2016. U.S. equities slipped for the second straight week, as investors are once again questioning the pace of global economic activity. It was the first consecutive weekly loss for stocks since mid-February when the current rebound began. And the cumulative decline of 2.2 percent from the recent high on April 20 is quite modest. But recent economic data has been soft enough to raise questions about whether the rebound is fully justified. In the U.S., the latest example was the April jobs report. It was by no means a weak report, but it did fall short of expectations. The economy generated 160,000 new non-farm jobs instead of the 200,000 expected.

In addition, another 19,000 were revised away from the previous two-month total. The labor force participation rate fell for the first time since last September, as the unemployment report edged higher to 5.0 percent. At the same time, both hours worked and average hourly earnings edged higher. But the report nevertheless left the lingering impression that the rebound from the first quarter was more modest than hoped. And it follows softer than hoped readings on retail sales, consumer prices, industrial production, consumer sentiment, housing starts and permits, durable goods orders and manufacturing. To be sure, the economy is expanding, and apparently doing so at a faster pace than in the first quarter, which generated annualized growth of just 0.5 percent. But just how steep the rebound is remains open to question.

Skepticism Continues in the Marketplace

The same doubts have surfaced regarding China. A prolonged stimulus effort has stabilized the economy, resulting in the International Monetary Fund (IMF) recently upgrading its expectations of growth in 2016 by 0.2 percent to 6.5 percent. But the latest readings on trade and manufacturing suggest that growth remains modest. The U.S. futures market has lowered the chances of a June Fed rate hike to just eight percent. At the start of the year those odds were 75 percent. And as recently as the start of the second quarter they were 24 percent. Odds of a rate hike in December are now down to 53 percent after starting the year at 93 percent and the quarter at 62 percent. Several Fed officials have recently warned not to overlook the possibility of a rate hike sooner than futures would indicate, and the dollar strengthened somewhat in response, helping to knock equities lower.

The marketplace remains skeptical, as it has consistently throughout the recovery. Bond yields have drifted lower. The yield on the ten-year note fell to 1.78 percent last week from 1.83 percent the week prior, and down from 1.93 percent the day before the Fed chose to leave rates unchanged on April 27. During that same interim the two-year note yield has fallen from 0.86 to 0.72 percent. Conversely, high yield bond yields have drifted slighted higher, as has gold and the VIX index in a sign of lowered risk appetite.

Earnings Season Coming to a Close

First quarter earnings season is winding down and the results have been somewhat better than expected. A decline of 7.1 percent is now expected by Factset, an improvement over the 8.7 percent decline expected at the start of the quarter. Although more companies than usual are exceeding earnings expectations, consistent with the current slow growth environment more companies than usual are also reporting lighter sales. Unfortunately for them it is easier to manage the bottom line than the top line.

Earnings are now expected to fall again in the second quarter by 4.7 percent before resuming growth in the third and fourth quarters of 1.4 and 7.5 percent respectively, although those forecasts have come down as well. The economic calendar this week is fairly light, offering little hope of clarifying the growth question. Retail sales for April top the list of scheduled reports and are expected to rebound from the March decline.

Overseas, the Greek parliament voted new austerity measures ahead of a meeting this week of its creditors. While the IMF and Germany are at odds over how to proceed with Greece’s bailout and whether its debt needs restructuring, it is likely that all parties want to get these questions resolved before Britain votes whether to remain in the European Union on June 23. And in Brazil, the political turmoil continues with a Senate vote scheduled for Wednesday on the impeachment of President Rousseff.

Important Disclosures:       
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.

The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a widely used measure of market risk. It shows the market's expectation of 30-day volatility. The VIX is constructed using the implied volatilities of a wide range of S&P 500 index options.

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