New Quarter, New Expectations


Hardly anyone expects stocks to sustain the impressive momentum from the first quarter as a new quarter gets under way today.

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Hardly anyone expects stocks to sustain the impressive momentum from the first quarter as a new quarter gets under way today. But few expected the market to do as well as it did in the first three months of the year either, when a combination of improving domestic economic data and fading European fears helped improve risk appetites.

Driving the market’s near-term trajectory will be a heavy schedule of economic data in this holiday-shortened week, starting with today’s March Manufacturing ISM survey. The expectation is to get a modest improvement in the ISM reading, even though the regional manufacturing surveys, particularly the Chicago PMI, had shown less resilience.

We also have Purchasing Managers Index (PMI) readings for March available for China and the euro zone. The euro zone PMI reading, released by the financial information company Markit, showed activity levels dropping deeper into contractionary territory.

The official Chinese PMI reading, released over the weekend, turned out to be better than expected at 53.1, up from February’s 51.0 reading. The official Chinese PMI reading is contradictory of the private-sector PMI reading from HSBC Bank (HBC) released last week showing the factory sector in contractionary territory. Apparently the HSBC survey is more geared towards small- and medium-sized export-centric firms that are facing some difficulties in accessing bank credit due to tight lending standards, while the official PMI survey more closely tracks larger firms.

The disconnect between the two data points makes it difficult to get a firm handle on the country’s manufacturing sector. But it nevertheless lowers the odds of a sharp drop in Chinese output.

Beyond today’s spotlight on the manufacturing sector, the focus the rest of this week will be the labor market, with March’s non-farm payroll report coming out Friday morning. Since the market will be closed that day in observance of Good Friday, we will have to wait till Monday to get investors’ reaction to the jobs report.

The expectation is for another 200,000 reading for total gains and a bit higher reading for private-sector jobs. With weekly jobless claims in the 350,000 vicinity, the March expectation seems reasonable. But a number of analysts have been casting doubts over the recent run of positive labor market readings on seasonality grounds. Their contention is that this year’s unusually mild winter contributed to the job gains over the last three months. It will be interesting to see if a positive March jobs reading will end that debate.

In corporate news, Avon Products (AVP) is rejecting the roughly $10 billion buyout bid from privately-held Coty Inc, claiming that the bid ‘substantially undervalues’ the company. Shares of Groupon (GRPN) will also be in focus after the company’s restatement of prior results after the close on Friday. The issue raises questions about the daily deals company’s accounting practices and outlook.

The information supplied above by Zacks Investment Research Inc. contains opinions based on factual research which may or may not be accurate. Neither Zacks nor Intellisphere will assume any liability for losses from investment decisions based on this information.

Sheraz Mian is the Director of Research at Zacks Investment Research where he relies on valuable data to assess winning stocks and funds.

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