There were no surprises in the Michigan Consumer Survey published this morning.  The overall index increased to 70.8 in June, from May's 68.2.  This figure was the highest since September of last year.  However, the increase was mainly driven by the Present Conditions index, which includes the rally that we have seen in the equity market.  In fact, the Expectations index actually declined slightly to 69.2, from 69.4, indicating that consumers remain doubtful.  The decline in June reversed a three month increase which had begun in March.

The lower expectations index, combined with higher savings rate that we saw in the personal income report, indicate a slower recovery in consumption.

Claims for the week of June 20 jumped to 627k from upwardly revised 612k.  The 4-week average of initial claims also went up.  It increased to 617,250 from 616,750. 

In addition, as we expected, continuing claims increased, reversing what many "green shooters" were referring to as the start of a downward trend.  The only slightly positive news was that the 4-week average of continuing claims declined by 3,250.  However, again we have cited many reasons as to why this may be occurring, none of which is a bottoming-out signal of U.S. unemployment.  We look for another all-time record of the exhaustion rate in Dept. of Labor's next monthly report. 

Lastly, federal program extended benefits, continued to increase week-to-week.  It shot up 29,150 from the prior week.  We expect this figure to continue to increase.  We note that this number lags continuing benefits by one week and initial claims by two.

Q1 GDP will likely be revised and many think the new figure will be slightly better than the 5.7% contraction that was previously released.  What we will be looking at is the price index.  Given Fed's statements yesterday, the market could react negatively if the price index was revised upwards.

Consensus -
GDP:     -5.7%

Initial jobless claims will likely come in slightly higher than the 600k consensus.  Of course, there is a chance of an upward revision of last week's numbers.  We expect an increase in continuing claims after last week's surprising decline, which we believe was possibly driven by no filings 1-2 weeks before/after the Memorial Day weekend, higher exhaustion rate, and not all auto industry 'victims' yet being accounted for.  As a reminder, continuing claims lag initial claims by one week.

Consensus -
Initial jobless claims:    600k

The Fed did not change its rates.  It said the economy is still contracting but at a slower pace.  Unfortunately, the Fed sounds like it does not expect inflation, with which we disagree.  Another way to look at this is that the Fed does not expect economic recovery anytime soon (likely not even by Q4 as all "green shooters" expect), therefore it does not see a threat of inflation.  We believe that without any "exit" strategies, the Fed will have a tough time addressing inflation which can pop up without any warnings.  We think that just re-stocking inventories, which many companies may do in anticipation of a recovery, could ignite inflation, or would put a pressure on earnings as producers will not be able to pass the higher costs to consumers and would absorb those costs.  The Fed disappointed, in our opinion.    

• Fed funds rate target range remained at 0.00% - 0.25% because it "continues to anticipate that economic conditions are likely to warrant" those levels for "an extended period."
• It was positive regarding the financial markets.
• However, it remained negative on consumption, citing unemployment, declining wealth and tight credit as reasons why.
• The Fed "expects that inflation will remain subdued for some time."
• The Fed also did not change its plans to buy $1.25 trillion of mortgage backed securities.  It appears that the Fed anticipates further devaluation of those so-called assets later this year, making them more attractive to purchase.

Surprisingly, it appears bidders were not worried too much about potential inflation, therefore did not demand higher yields.  The yield on today's offering was 2.7%, slightly lower than a 2.72% which many had expected.  Bid/cover ratio of 2.58 was very strong.  This is good news as many view it widening the spread of the notes yield and the equity market yield, which makes the stocks more attractive. 

Again, this is very surprising.  We remain cautious because suddenly it appears that everyone (at least market players) is ignoring the realistic threat of inflation.  All markets are displaying too much confidence in the Fed and the entire government, which is literally scary.  We'll see what the Fed says later this afternoon.  Given all of the political BS surrounding the entire market, we think the Fed will not say anything negative.  But we hope that the Fed will be more realistic.

New home sales for May came in at 342k, significantly below the 360k consensus.  In addition, the April figures were revised down.  Annual sales rate in April was lowered from 352k to 344k.  May's sales were still below April's downwardly revised figures.  Today's results, combined with yesterday's existing home sales, indicate that the housing market may not have hit the bottom yet.

Besides the overall miss, another figure that caught our attention was month's for sale.  This number increased to 11.5, from 10.8 in the prior month.  We view this as another indication of weak demand in the housing market.

The only positive number that we saw was a slight decrease in the month's supply, going to 10.2, from 10.4 in April (then again, April's month's supply was revised up to 10.4 from 10.1).  However, as mentioned before, this figure remains significantly above what we have seen on average during other recessions.  Month's supply was around 8.1 in prior recessions.  The overall historical average figure is 6.1.

The housing market remains weak.  With inflation possibly around the corner, this market could take another hit.  We will see what the Fed will have to say about inflation later today.

The better than expected durable goods and MBA Applications survey have pushed S&P 500 futures up more than 1%.  If S&P 500 closes above 900 today, it will not only be crossing the 200-day MA, but will also prevent the slope of the 50-day MA from turning negative; all of which are very positive.

We note that new-home sales, comments from the FOMC meeting and the 5-year note auction could impact what we are seeing now.  We had a negative sentiment for all of these, but then again, we're dealing with politics and today's durable goods numbers will probably give the Fed something to brag about, which would be positive for the market.

Surprisingly, May durable goods were not only positive, but they matched April's increase.  It appears that inventories of manufactured goods remain at low levels.

• Durable goods orders increased 1.8% in May from the prior month.  We expected a decline of at least -0.7%.
• We note that shipments were down 2.1%; however, shipments of cores capital goods were up 0.3%.  This was the first increase since Dec.

Again, we may have been too pessimistic about this economy.  However, we remain cautious.

For the week ending June 19, both the purchase and refi indexes showed week to week growth as mortgage rates began to fall slightly.

• Total index came in at 548.2, up 6.6% from the prior week
• Purchase index was at 280.3, up 7.3% from last week
• REFI index was at 2116.3, up 5.9% from the prior week

We certainly did not anticipate such positive news.  However, we must note that this data also displays the sensitivity level of purchases and ref's to mortgage rates, which is very high.  If inflation shows its ugle head (which many fear it will), purchases and refi's could plummet very quickly.