TradeTheNews.com 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