- Fed Chairman Bernanke appeared before House and Senate committees this week for his semi-annual monetary policy report. Ahead of the testimony, there was some speculation that Bernanke would finally provide some hints about QE3. However the chairman simply reiterated his prior outline of strategies the Fed might have at its disposal to further ease policy and stuck to his script from the June decision. A trio of data reports out this week suggested that the US economic conditions were not nearly bad enough to justify QE3: the July Empire Manufacturing survey was much better than expected, June industrial production data indicated that US output likely snapped back from the dire conditions seen in May, and June US housing starts climbed 6.9%, hitting their highest level since October 2008. In addition, the MBA mortgage report for the week ended July 13th jumped 17% as mortgage rates hit fresh record lows. It wasn't all good news, however: June retail sales fell for the third straight month, making for the longest downtrend since 2008 and the July Philly Fed index was lower than expected, although it ticked up from the very poor -16 reading in June. Some better corporate earnings reports helped drive mild equity gains through the middle part of the week, although trading volumes were notably light. On Friday, the brief risk-on rally came to a halt on press reports that Spain's Valencia region has requested aid from Madrid even as its Spain's European partners worked on formally approving the bank bailout scheme. Shorter-term debt issued by Germany, France, the Netherlands, Switzerland, Finland and Austria saw negative yields, while Italy's and Spain's 10-year yields surged back above six and seven percent, respectively. There was some better economic data out of China, although the NDRC warned that the economic slowdown might extend beyond Q3. Despite the gyrations, US equities posted modest gains on the week.
- The financial sector had a rough ride this week. After JPMorgan's very mixed report last Friday, there were flattish or poor results from Citigroup, Goldman Sachs, Bank of America and Morgan Stanley this week. Ultra low rates are taking their toll on interest margins, regulatory reforms have cut deeply into trading revenues, the European crisis lurks in the background and the recovery in mortgage lending has been very mild. BoA reported a decent profit versus a giant loss in the year ago quarter, but its shares still fell 3% this week. Morgan Stanley's revenue was down 24% from the year-ago quarter, with steep declines seen across the firm's core businesses. Goldman's profits were down 12% on a y/y basis. Citi's profits were down slightly y/y.
- Visa, MasterCard and other card issuing firms agreed to a $7.3B debit card swipe fee settlement with US merchants this week. If approved, the deal would resolve lawsuits filed by retailers in 2005. The card companies and banks would also allow stores to start charging customers extra for using certain credit cards. Shares of Visa and MA gained on the news, but poor results from American Express on Thursday dragged down the card issuers.
- Johnson & Johnson and Coca-Cola provided the usual in-line performance, up on a modest basis y/y. Business for both giants was pretty good in the quarter, with the exception of Coca-Cola's Europe volumes, which continue to decline. The strong USD hurt both names, cutting profits by approx 4% a piece in the quarter. Verizon saw some softness in new wireless and new FiOS customers in Q2. The company does not break out iPhone sales, but one industry watcher said Verizon only sold 2.7M iPhones (v estimates of around 3.4M units, and 3.2M units last quarter), given credence to the notion that iPhones sales are slowing ahead of the expected launch of the new model this fall. YUM! Brands missed earnings expectations and reported some softness in its China business due to inflation.
- Three major chip names - Intel, AMD and Qualcomm - reported varying results this week. Intel met expectations in its Q2 and analysts seem to agree that while its Q3 and FY12 revenue outlooks are not great, they could have been worse. Shares of AMD plummeted on its very weak forecast for Q3. Qualcomm met expectations and said it expects a "strong December quarter" as it will have overcome a shortfall in its advanced chip supply by the end of 2012. IBM beat earnings estimates, although the firm was a hair behind revenue targets, thanks to flat software revenue and declines in its overall Americas segment revenue. The firm complained about the very large FX translation headwinds it has been facing. Microsoft reported solid, in-line performance and had lots of brave words on the firm's Windows 8 rollout. Google saw very strong revenue, and both gross ad revenue and paid clicks continue growing at a healthy rate. Google had little to say about Marissa Mayer, a long time executive who defected to become Yahoo's latest CEO in a surprise announcement.
- After several months of rejected approaches, GlaxoSmithKline has finally found the right price point for partner Human Genome Sciences, which agreed to be acquired for $14.25/share or a total of $3 billion. This compares with GSK's prior $13/share offer. The acquisition will secure GSK's rights to recently launched lupus drug Benlysta and full ownership of experimental medicines for diabetes and heart disease.
- EUR/USD remained locked within the 1.2150 to 1.2330 corridor this week as euro buy-stops accumulated just above top end of the range. Decent bill auction results out of Europe stabilized the single currency to a certain degree but the effects were offset by a weak Spanish bond auction on Thursday. There were some headwinds as well from talk that the Swiss National Bank was selling off euros accumulated from its defense of the EUR/CHF floor at 1.2000. By the end of the week concerns over possible contagion in Europe pushed the 10-year Spanish/German government bond spread to a fresh EMU record level above 600 bps, squashing the euro.
- The BoE minutes weakened the pound sterling. Analysts believed that the vote to hike the Asset Purchase Target by £50B was unanimous, but the minutes showed that there were two dissenters, Broadbent and Dale, provoking some uneasiness. The BoE also tweaked its view on interest rates, noting that the MPC would reconsider rate cuts in light of the new initiatives. Back in June the MPC discussed the merits of cutting rates but saw no advantages to further QE at the time. The GBP shook off weakness provoked by the minutes and benefitted from the weak euro. EUR/GBP plumbed three-and-a-half year lows as it tested below the 0.78 handle.
- USD/JPY remained under pressure from the start of the week, breaching the 200-day moving avg around the ¥79 handle and extending its losses below ¥78.50, a 6-week low. The stronger JPY provoked further verbal intervention from Japanese authorities, as Finance Minister Azumi called the yen strength "speculative" and Bank of Japan Gov Shirakawa cautioned that the European debt crisis is contributing to JPY gains. Later in the week, the chairman of Japan Automobile Manufacturers Association remarked that the USD/JPY exchange rate "around ¥80" is still very tough for Japan automakers.
- The case for a China soft landing made by last week's release of Q2 GDP was further supported by surprisingly strong housing figures and lending estimates. June new home prices only fell in 21 out of 70 major cities, less than half the May figure, while measured prices in all Chinese cities was flat m/m - the first non-negative print in 9 months. Chinese lenders are also increasingly more active, as press reports suggested the top 4 banks' loans in the first half of July already reached CNY50B, more than twice the amount in the same period of June. The National Bureau of Stats was quick to respond to the latest data, noting it will keep the lid on property speculation with price oversight remaining a part of Beijing's long-term policy objective. Separately, an IMF quarterly review cut China's 2012 and 2013 GDP targets by 0.2pts and 0.3pts to 8.0% and 8.5%, respectively.
- In Australia, the RBA policy meeting minutes tilted toward the less dovish stance, pointing to stronger than expected GDP data, rising household consumption, and more positive developments in the China economy. The Australian central bank concluded it was appropriate for rates to be "a little below average" in light of slower global growth, suggesting domestic conditions may have to deteriorate again in order for RBA to consider another easing. Later in the week, press reports indicating the Bundesbank was joining other global central banks in diversifying their reserves into the Aussie dollar elevated AUD/USD above $1.04, its highest level in nearly 3 months.
