Will May Strength Continue in June? - Ahead of Wall Street

By Zacks | June 02, 2014 AAA

Monday, June 2, 2014

Stocks made strong gains in May and appear on track to start June on a positive note as well, despite the backdrop of mixed global data, with weak readings out of Europe and positive Chinese numbers. The U.S. manufacturing ISM report coming out a little later today will be key to how the markets perform. The expectation is for the ISM index to improve nicely from the April level.

Improved Chinese factory sector data is indicating that the country’s growth is improving. The country’s official manufacturing purchasing managers survey for May over the weekend came in better than expected at 50.8 vs. 50.4 in April, the highest reading this year. The gains were fairly widespread, with the sub-components for production and new orders making steady gains. The inventories sub-component fell, indicating that they will need to get replenished in the coming days while the exports sub-component also made strong gains even though it remained below the 50 mark.

Questions about China’s growth have been a lingering concern for the market for quite some time amid renewed signs of weakness in the country’s economy this year. This prompted the Chinese authorities to come out with a mini-stimulus package a few months back that may be starting to have an effect already. Competing measures of Chinese PMI, one by HSBC Bank (HSBC) and another by the research firm Markit, have started showing similar improvement, though the final HSBC measure for May hasn’t come out yet.

Beyond China, the U.S. manufacturing ISM reading is expected to improve to 55.5 from April’s 54.9 reading. The Euro-zone PMI data from research firm Markit this morning showed further loss of momentum for the currency region. The French weakness wasn’t unexpected, but the sharp slowdown in Germany’s factory sector came in as a big surprise. This could prove to be the final straw that pushes the European Central Bank to come out with its long-promised easing policy at this week’s meeting.

Sheraz Mian
Director of Research

 
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