Aggressively Flat

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DOW + 2 = 17,789
SPX + 2 = 2099
NAS + 4 = 4952
10 Y + .01 = 1.84%
OIL – .22 = 48.88
GOLD – 2.30 = 1213.70

It turned out to be an aggressively flat day on Wall Street. The Dow kicked off the morning with a 120-point drop and the S&P 500 index posted an early 22-point slide, followed by clawing and scratching back to slightly positive territory.

Manufacturing activity grew in May but at a very slow pace that suggests the sector is unlikely to speed up anytime soon. The Institute for Supply Management said its manufacturing index rose to 51.3% last month from 50.8% in April. Readings over 50% indicate more companies are expanding instead of shrinking.

The index has been above the cutoff mark for three straight months after slipping below 50% for five straight months. The big improvement came in how fast companies delivered goods to buyers and replenishing of inventories, a sign that demand may have picked up a bit.

JPMorgan’s Global Manufacturing Purchasing Managers’ Index (PMI), produced with Markit, came in at 50.0 last month, right on the level that separates growth from contraction, compared to 50.1 in April.

Construction spending dropped 1.8% in April. The monthly data followed an upward revision to March data of about 1.5%. Weakness in April was widespread. Residential construction declined 1.5%, while public construction spending fell 2.8%. Outlays for highways were down 6.6%. Many categories are stronger than they were a year ago, however, and overall all spending is 4.5% higher than in April 2015.

The U.S. auto industry looks set for another record year, even as May new-vehicle sales showed a decline. General Motors (GM), the largest U.S. automaker, reported a 14.3 percent drop. Ford Motor (F) said its sales fell 6 percent. Fiat Chrysler (FCAU) said sales rose 1 percent. In 2015, vehicle sales were a record 17.47 million vehicles. Overall, sales hit an annualized sale pace of 17.45 million units in May.

Toyota, Fiat Chrysler, Volkswagen and Mitsubishi are still selling new vehicles with defective air bags that will eventually have to be recalled. According to a report from the Senate Commerce Committee, the automakers confirmed they are continuing to sell some vehicles with ammonium-nitrate inflators without a drying agent.

The vehicles are legal to sell but must be recalled by 2018. The report also said that 11 automakers have replaced more than 2.1 million older Takata airbags with newer versions that would also need to be replaced. It just seems so incredibly stupid.

Prime Minister Shinzo Abe is postponing an increase to Japan’s sales tax (from 8% to 10%) by two-and-a-half years until 2019. Additionally, Abe will announce a new stimulus package in the fall aimed at sparking private demand and accelerating infrastructure projects. The decision marks an about-face for Abe, who already pushed off the hike once, and repeatedly said that only an economic shock on the scale of the Lehman Brothers collapse or a major earthquake would prompt another delay.

The OECD, which has a history of cutting its growth outlooks, has done it again, warning global policymakers of a self-fulfilling “low-growth trap” where ultra-loose monetary policy risks doing more harm than good. The organization lowered its world growth forecast by some 0.3%, predicting the global economy to expand by 3% in 2016 and “by only” 3.3% in 2017.

Looking at other major events on the calendar, tomorrow the ECB and OPEC meet, separately of course. The European Central Bank is not expected to announce any new stimulus measures. OPEC is expected to talk about caps on output but OPEC is not expected to announce an actual freeze on production.

Saudi Arabia has already said it won’t freeze production unless Iran freezes production, which Iran says it won’t do. Six months after OPEC left its high-production policy in place, some of the cartel members who called loudest for output cuts are feeling the most pain.

Friday brings the monthly jobs report, and we are looking for a repeat of the April numbers, somewhere around 160,000; any numbers significantly below 150,000 or above 200,000 could change the outlook for Federal Reserve decisions on interest rate policy; the FOMC meets on the 15^th.

One week later, there is a referendum in the UK and voters will decide whether to stay in the Euro Union or exit. Right now the Brexit is a toss-up. The official scolding seems to be backfiring.

Two weeks before a FOMC meeting, the Federal Reserve publishes the Beige Book, an anecdotal collection of observations on the economy from the 12 Fed districts. Today’s Beige Book noted tight labor markets in most districts despite modest job growth, growing price pressures. More generally, the Fed reported modest or moderate economic growth in the majority of its 12 districts.

Consumer spending was “up modestly on balance” in many regions. Reports on the factory economy were mixed, and banks generally saw higher demand for loans. Crop conditions were described as “promising in many districts,” though “low commodity prices continued to put pressure on agricultural incomes.”The energy sector “remained weak” (no surprise) and everything else is good news for American workers.

Also today, we learned that Fed Chair Janet Yellen will deliver her semiannual testimony before Congress on June 21, about a month earlier than usual. This means we’ll hear from Yellen on June 6, June 15, and June 21. So, plenty of Fedspeak from the most important member of the FOMC ahead of a July 27 policy announcement that could include the Fed’s next rate hike.

Or the Fed could hike rates in June, and Yellen could try to explain how the Fed has been hacked at least 50 times in the past 4 years. The disclosure of breaches at the Fed comes at a time when cybersecurity at central banks worldwide is under scrutiny after hackers stole $81 million from a Bank Bangladesh account at the New York Fed.

French commuters are facing more travel disruptions as rail workers go on strike and President Hollande seeks to contain the labor unrest that caused many gas stations to run dry over the past week. About half of the nation’s train services have been canceled across the country, and there are concerns that the Euro 2016 soccer tournament, which France hosts from next week, may be disrupted.

Michael Dell and Silver Lake Partners underpriced their 2013 $24.9 billion buyout of Dell by about 22 percent and may have to pay tens of millions to investors who opposed the deal for the computer maker. The court ruling applies to about 5.5 million Dell shares. Dell shareholders claimed the Dell buyout took advantage of a dip in the company’s stock price and its board never determined the intrinsic value before negotiating. A Delaware judge was asked to make an appraisal of the fair value of the deal.

Cloud-based software maker Salesforce.com (CRM) said it would buy Demandware (DWRE), whose software is used by businesses to run e-commerce websites, for about $2.8 billion, or a 56 percent premium to Demandware’s Tuesday closing. The deal will help Salesforce open a new front as it looks to take away more market share from traditional software providers such as Oracle and SAP, both of which already offer cloud-based e-commerce services.

The Demandware deal follows Salesforce’s formula: Buy fast-growing companies that have the dual benefit of propping up Salesforce’s growth rate and opening new business lines. Salesforce is paying about 11 times Demandware’s revenue in the past year – more than double the median multiple offered in similar transactions over the last decade.

Who knows, maybe Salesforce will actually turn a profit someday. Meanwhile, consider that Salesforce and Google went public about the same time in 2004, and even though Salesforce has trouble posting earnings, the share price has outperformed Google.

Freeport McMoRan (FCX) has wrapped up the sale of a 13% interest in its Morenci unincorporated joint venture to its Japan-based partner, Sumitomo Metal Mining Co for $1 billion in cash.  Freeport is taking aggressive actions, including asset sales and deferral of capital spending in an effort to cope with the weak commodity pricing environment.

Boeing has secured a more than $3 billion U.S. Air Force contract for Joint Direct Attack Munitions tail kits that use GPS to make conventional bombs into precision-guided weapons. Boeing’s contract was raised from an initial $1.75 billion awarded in October 2014, due to warfighter demand and the need to replenish depleted inventories.

Doctors at Hackensack University Medical Center in New Jersey have confirmed the birth of a child suffering from Zika-linked microcephaly, a condition wherein the child’s brain and head are partially developed. Reports indicate she is the first baby born with complications from the virus in the tri-state area. The mother is said to have contracted Zika while in Honduras and was admitted to Hackensack while vacationing in the U.S.

Following the lead of Britain and Australia, Canada is making plain packaging of cigarettes compulsory in a bid to cut the rate of smoking. Although the country already obliges firms to slap large graphic warning labels on cigarette boxes, the new measures would require a uniform, standardized color and font on packs and restrict the use of logos and trademarks.

The Food and Drug Administration proposed voluntary guidelines for the food industry to reduce salt. Though the guidelines are not mandatory, consumer advocates said they are meaningful because they will serve as a benchmark by which companies can be measured.

Americans eat almost 50 percent more sodium than what most experts recommend. More than 70 percent of sodium consumed is already in food before it reaches the table, according to the Centers for Disease Control and Prevention, and health advocates say the guidelines could help reduce that.