Friday, July 29, 2016

Barrage of Data Gives Mixed Signals for Second Half Market Update: Barrage of Data Gives Mixed Signals for Second Half
Fri, 29 Jul 2016 16:27 PM EST

This week investors digested a deluge of corporate earnings reports and key economic data while oil prices continued retreat. The S&P500 finished out near another all-time high, while the DJIA was weighed down by weak earnings commentary from several component names. The advance Q2 US GDP estimate showed the US economy has grown at less than a 2% pace for three straight quarters. Expectations for Japanese stimulus ratcheted up and the same went for the BOE. The US Federal Reserve hinted towards an increasing willingness to raise rates later this year, but market reaction/expectations suggest the consensus view is the Fed remains firmly in a wait and see mode. For the week, the DJIA fell 0.8%, the S&P500 slipped 0.1%, while the Nasdaq rose 1.2%.

The first estimate of the second quarter US GDP did not see the bump higher that was widely expected. Analysts were calling a healthy rise in Q2 GDP to +2.5% after the anemic +1.1% in Q1. There was no bounce, however, and the advance reading came in at +1.2%, while final Q1 GDP was revised down to +0.8%. Inventory declines continued to drag on GDP, while nonresidential fixed investment declined at a 2.2% y/y pace, the third straight quarterly drop. There were strong components in the report: personal consumption expanded at a 4.2% rate, while outlays on goods advanced 6.8%. And the decline in inventories is apt to deliver a big boost later in the year.

The suspense continues in Tokyo, where neither Abe's government nor the Bank of Japan provided concrete details on their plans for big new stimulus packages. The government has confirmed its stimulus will total ¥28 trillion, however the policy mix making up this humongous plan remains unclear. There was press speculation - later denied - that the government would sell 50-year JGBs, the longest maturity of postwar era, although they did suggest that around 25% of the plan would be new spending. The government did confirm that the new plan would be disclosed in full next Tuesday. Expectations were running high ahead of Friday's BoJ meeting, with analysts debating whether the bank would pursue expanded asset purchases, deeper interest rates cuts, or both. In the event, the bank merely boosted its ETF buying program to ¥6 trillion from ¥3.3 trillion and doubled the size of its dollar lending program to $24 billion. The weaker yen trend seen since the election reversed this week, with USD/JPY dipping back below the 102 handle by Friday.

The Fed held pat on Wednesday, as expected, and tweaked the statement just enough to suggest a slightly more hawkish outlook. The dollar modestly sold off, with EUR/USD trading back up to the high end of its most recent four-week range, closing out the week around 1.1150, suggesting the market now sees the prospect of another rate hike this year as good for risk appetite. The capsule summary of economic conditions was sweetened to reflect improved economic data, while the second paragraph gained a line saying "near-term risks to the economic outlook have diminished." Similar changes in April were thought to herald a June hike (before the Brexit disaster), and analysts suggest the new additions this time indicate a September hike is on the table. Before the statement, fed funds futures showed roughly 30% odds of a rate hike in September and a 48% chance by December. The futures were more or less unchanged after the statement.

UK economic data is starting to expose the negative impact of Brexit on the UK economy, and the Bank of England is gearing up to cut rates and expand its QE program next week. Second quarter UK GDP was ok, however July reports on consumer confidence, retailing and industrial trends all sank deep into the red. The GFK consumer confidence index sank to a two-year low, while the business optimism component of the CBI industrial trends report was stunningly pessimistic. The BoE's Weale told the FT that the Brexit vote had rattled the economy more than he expected. The consensus is that the BoE will cut rates by at least 25 bps and increase QE by £50-75 billion. Other European data was more upbeat, with the German July IFO business confidence survey holding up very nicely, and other measures of Continental consumer confidence not flagging nearly as much as feared. With the euro zone looking solid, many commentators expect the ECB to continue with its wait-and-see policy for a while yet.

Crude prices saw another week of sustained losses, as both WTI and Brent sank toward the $40 level amid persistent reports of oversupplied markets. The Baker Hughes rig count has marched higher for five weeks in a row, with total rigs working on North American drilling up about 10% in a month. US crude inventory reports showed more gains in oil stores, and supply disruptions are being resolved in Libya, Nigeria and Canada. Cheap crude has led refiners to produce lots of refined products, which has pushed down margins worldwide, while anemic global growth is not delivering robust demand. There was a slight bounce higher at week's end as short-covering kept WTI and Brent from dipping into the 30s. In second-quarter earnings out this week, Exxon and Chevron both took a severe beating, with Exxon's profits down 60% y/y, while revenue at both firms fell more than 20% as refining margins were pressured.

Earnings from global manufacturers Ford and Caterpillar carried pronounced warnings about the global economy. Ford warned there were risks that could keep it from achieving its FY guidance, and the CEO cautioned that the US economy remains under pressure. Cat said "world economic growth remains subdued and is not sufficient to drive improvement in most of the industries and markets we serve." Consumer names continued to indicate some problems: McDonald's headline results were good, but the firm's sales comps were way below expectations, as analysts had predicted a much bigger bump from the firm's big all-day breakfast push. Google, Amazon and Facebook all widely beat expectations and saw continued huge rates of growth in their core internet services. Apple saw its second consecutive quarter of lower revenue and lower iPhone sales, however shares of the tech giant saw solid gains on optimism about the next smartphone cycle.

Yahoo reached a deal to sell off its core operations, with Verizon agreeing to pay $4.83 billion in cash to acquire its internet assets. The sale did not include Yahoo's cash, its shares in Alibaba Group, its ownership stake in Yahoo Japan, and the non-core patent portfolio. These will continue to be held by Yahoo, which will change its name at closing and become a publicly traded investment company. Verizon plans to combine Yahoo with its AOL unit. Oracle reached a deal to acquire NetSuite for about $9.3 billion, or $109 per share in an all-cash deal. While their service offerings are similar, NetSuite offers Oracle access to companies sized smaller than its traditional client base, and could also give it some additional competitive edge in taking on primary rival Salesforce.