Batch of Surprise Data – Economy at a Glance

Chicago PMI, a measure of Chicago-area manufacturing, spiked to a reading of 58.7 in May, bouncing from 49.0 in April, which marked the worst reading in three-and-a-half years. Economists were expecting a much smaller increase to a 49.9 reading. The rebound was highlighted by a surge in production, order backlogs, employment and supplier deliveries from contraction to expansion.

The final May reading of the University of Michigan and Thomson Reuters consumer-sentiment index jumped to 84.5, better than analyst estimates of a final May reading of 83.8, and a sharp hike from 76.4 in April, according to news reports. A preliminary May reading pegged the gauge of 83.7.

The index of buying conditions for durable goods rose to 147 from 137.

Rising stock market and home prices prompted more consumers to report an improvement in their finances, rather than degradation, for the first time in five years, according to a market survey - 58% said the economy had improved.

The survey's one-year inflation expectation was unchanged at 3.1%, while the survey's five-to-10-year inflation outlook also held steady at 2.9%.

Meanwhile, the Commerce Department Friday reported that consumer spending fell a seasonally adjusted 0.2% last month, better than economists forecast for a 0.1% decrease. U.S. consumers made fewer auto purchases in April and spent less on gasoline and other fuels as energy prices fell.

Lax consumer spending for the month of April signals a weaker reading on U.S. gross domestic product in the second quarter, exclusive a sharp increase in May and June.

While upper income households continued to set the pace, confidence also began to improve among middle and lower income households in the latter part of the month. Wealthier households are more likely to be invested in equities and reap the benefits of this year's market performance.

Despite the decline in consumer spending, the savings rate of Americans continues to hover near a five-year low, holding steady at 2.5%.

The second estimate of the first-quarter GDP showed that the U.S. economy expanded 2.4% in the first quarter, which represents a downward revision of a 0.1 percentage point compared to a growth rate of 0.4% in the previous three months. The results slightly missed analysts' forecasts indicating the pace of growth had remained unchanged from the initial data, standing at 2.5%.

Pending home sales in the U.S. increased 0.3% to 106.0 in April, compared to 105.7 posted in March, and stayed 10.3% above April 2012 when the figure hit 96.1. However, the report disappointed analysts, who projected the index would rise 1.6% after a 1.5% gain registered in March.

The number of American first-time benefit seekers climbed to 354,000 in the week ending May 25, a 10,000 gain from the previous week's revised figure of 344,000. The four-week moving average stood at 347,250, representing an increase of 6,750 from the previous week's revised average of 340,500.

Greenback Finishes May with Rally, Treasuries Sink

The U.S. dollar climbed against most currencies Friday, losing ground versus the yen, as business activity and consumer confidence fueled speculation that the U.S. central bank will shrink its bond purchases.

The Federal Reserve is buying bonds to strengthen the economy through low borrowing costs, scooping up $85 billion of government and mortgage debt each month. Fed Chairman Ben S. Bernanke earlier this month that the central bank may cut the pace of purchases in the next few meetings if policy makers see indications of sustained improvement in economic growth.

The dollar rallied against 15 of 16 major peers, climbing 0.5% to $1.2978 per euro. Joblessness in the 17-nation euro zone rose to 12.2% in April, marking a new record since the data series began in 1995. Consumer price inflation was 1.4 percent in May, far below the ECB's target of just below 2%.

The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against currencies of six U.S. trading partners, has fallen 0.8% in five days through today, set for the biggest weekly slide since February 1.

Yields on 10-year Treasury notes increased six basis points to 2.17% and the Dollar Index, a measure of the currency against six major peers, hiked 0.5% to 83.43 Friday morning.

U.S. two-year note yields rose one basis point to 0.31% and 30-year rates increased three basis points to 3.30%.

But Doubleline Capital's Gundlach and Loomis Sayles' Fuss told CNN the recent rally in yields is unlikely to continue - both say the Federal Reserve will make sure that any rise in rates will be slow and controlled. Gundlach and Fuss said that the consequences for global markets and the economy will be dire if the central bank fails.

"People have been saying that the Fed thinks the economy is self-sustaining, and that means lack of support for bonds," Gundlach told CNN. "But the whole structure of the financial markets has been balanced on top of low interest rates."

Gundlach expects the absolute highest for the 10-year yield this year is 2.4%, but he expects it to stay closer to 2%.

Fuss expects rates to rise slowly but now without a fair share of volatility. He thinks the 10-year yield will end the year between 2.4% and 2.6%.

Neither expects rates to drop back to their July 2012 low.

Commodities Update: Energy

Oil futures dropped to the lowest level in almost a month on Friday after the Organization of the Petroleum Exporting Countries (OPEC) maintained its production target at a highly anticipated meeting in Vienna.

Prices stayed lower, after OPEC oil ministers at a summit in Vienna agreed to keep output target at 30 million barrels a day.

Ahead of the meeting, market participants discussed whether the organization would trim production targets to sustain higher oil prices after a boom in U.S. and Canadian shale oil - though many members expressed satisfaction with current price levels.

The rise in U.S. shale-oil production saw U.S. crude inventories rise to their highest level in more than 80 years on Thursday and is feared among some OPEC nations to reduce the demand for their oil. In April 2012, the output from OPEC exceeded the target by 1.6 million barrels a day, but the surplus narrowed to 460,000 barrels a day last month.

Crude for July delivery lost $0.61, or 0.7%, to $93 a barrel, erasing a 0.5% advance in Thursday’s New York Mercantile Exchange session.

July futures for rival benchmark Brent crude oil fell $0.58 to $101.61 a barrel – marking a decline of 0.4% for the month.

July heating oil slipped $0.03, or 1.2%, to $2.81 a gallon, down 2.4% on the month.

July gasoline was off $0.01 at $2.80 a gallon, a one-month decline of 0.5%.

Gasoline prices may have peaked for the summer, but are expected to spike again in September with hurricane season as a likely trigger. More than 40% of total U.S. petroleum refining capacity is located along the Gulf Coast, according to the EIA. Weather forecasters have already predicted that this year’s Atlantic hurricane season will be a particularly active one.

So far this year, the highest national average gasoline price was $3.79 a gallon on February 27.Prices climbed 17 days in a row to $3.66, from May 6 until May 22, topping $4 a gallon in several states, according to AAA — and marking the largest consecutive streak since February.

The Midwest was hardest hit in terms of refinery shutdowns and experienced the brunt of the peak, seeing averages up $0.82 cents a gallon in Minnesota and $0.66 a gallon in North Dakota, compared to the previous month. Minnesota, Iowa, Oklahoma, North Dakota, South Dakota, Kansas and Nebraska saw record-breaking retail gasoline prices in the first two weeks of May.

According to the Energy Information Administration, as of the week ended May 24, U.S. refineries operated at 86.4% of operable capacity, down from 88% a week earlier. For the same period of 2012, refineries operated at 89.1%.

The U.S. National Oceanic and Atmospheric Administration said there’s a 70% chance for 13 to 20 named tropical storms during the season, which begins June 1 and runs through November. Of those, seven to 11 could become hurricanes, NOAA said. An average season would be 12 named storms and six hurricanes.

Commodities Update: Metals

Gold for August delivery fell $17, or 1.2%, to $1,394.90 an ounce on the New York Mercantile Exchange’s Comex division.

Gold futures settled at $1,412 an ounce on Thursday. Gold futures are poised to close down in May, in line with the improving backdrop that is leading investors away from safe-haven assets like gold. Apart from March, gold futures have fallen each month beginning in October. Those futures are down about 17% in 2013 to date.

Gold prices could rise next week if metals traders continue to believe the Federal Reserve will stave off tapering its bond-buying program, the majority of participants in the weekly Kitco News Gold Survey said.

In the Kitco News Gold Survey, out of 36 participants, 27 responded this week. Of those 27 participants, 17 see prices up, while four see prices down and six see prices moving sideways or are neutral. Market participants include bullion dealers, investment banks, futures traders, money managers and technical-chart analysts.

Participants who see higher prices next week said gold could gain ground on increased expectations that the Federal Reserve won’t start tapering off its bond purchases in its quantitative easing program any time soon, especially after this week’s mixed U.S. economic data. Previously there were worries that the Fed could start curbing purchases as early as June.

July silver shed $0.52, or 2.3%, to $22.17 an ounce, compared to its 1.1% rise on Thursday, and marking a decrease of 8.1% for the month.

July copper lost $0.02, or 0.7%, to trade at $3.29 a pound – climbing 3.2% for the month.

Copper futures may react to official China manufacturing data slated for release Saturday. Investors are waiting to see if the government-sponsored Purchasing Managers’ Index matches preliminary results from a privately-compiled version, produced by HSBC and Markit, which showed Chinese manufacturing activity contracting in May.

Social Security Remains on Pace to Hit Exhaustion

It’s not necessarily a surprise, but a daunting reminder nonetheless. The Social Security’s reserves will be exhausted by 2033, trustees of the entitlement program said in a report on Friday, maintaining the projection from last year.

However, the outlook for Medicare’s finances has improved modestly, trustees said, with its hospital insurance trust fund expected to be exhausted in 2026, two years later than was estimated a year ago.

Trustees attribute the improvement, among other things, to lower projected hospital insurance spending, especially for skilled nursing facilities.

The improvement means that benefits wouldn’t have to be reduced as quickly as previously thought. If the trust funds for either program are exhausted, benefits are cut but not stopped altogether.

In their annual report, the trustees who oversee Social Security’s two trust funds said reserves for the fund that pays disability benefits would be exhausted by 2016. Combined with the fund that pays benefits to retirees, all Social Security reserves would be exhausted by 2033.

While the report paints a slightly healthier picture for the Medicare fund, it will likely do little to quell a partisan debate about entitlements.

“These programs face long-term challenges,” Treasury Secretary Jacob Lew said in a statement. “Social Security and Medicare represent a fundamental obligation we have as a country to provide income and health care security for our fellow citizens.”

Republicans have demanded cuts to retirement programs, something that could play into negotiations this fall over raising the U.S. debt limit.

For his part, President Barack Obama offered in his most recent budget to shrink the growth of Social Security benefits as part of a bigger deal to cut the deficit. Republicans said that offer didn’t go far enough.

Other options for bolstering Social Security’s finances include raising the retirement age. The program pays retirement and disability benefits to 57 million Americans. Last month, the average monthly benefit was nearly $1,270.