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Quiet Capital Markets Last Week – So Far, So Good?

Sam Wardwell
calender-icon Posted on July 29, 2013

Wardwell’s Weekly Market Report

Observations on the Capital Markets – Week Ended July 26, 2013

• Earnings watch: halfway through year – so far, so good
• Minimal, but OK key economic data – mixed signals in housing
• Global markets watch

Earnings Watch: Halfway through the Year – So Far, So Good
The capital markets were relatively quiet last week. About 2/3 of companies in the S&P 500 Index have beat expectations and revenues are surprising on the upside, tracking for about 6% year over year (y/y) growth. This is key, since there is only limited potential for companies to continue to build earnings through cost cutting.

  • ”Smokestack” industrials are OK, as capital spending looks poised for second-half strength.
  • The consumer seems to be OK as well, as auto sales have been strong and other consumer discretionary groups have been decent as well.
  • Banks are surprising on the upside. Loan demand is rising and lending margins are solid.
  • Large-cap stocks are generally doing a better job than small-caps of meeting/beating earnings estimates.

Minimal, but OK Key Economic Data with Mixed Signals in Housing

  • Unemployment claims climbed a bit – by 7k to 343k.
  • June durable goods orders rose more than expected. Aircraft orders were strong, while tech was soft.
  • New home sales were solid, reaching their highest level in five years – up 8% month over month (m/m) and almost 40% y/y. Meanwhile, the median home price was up 7.4% to $249,700, compared with June 2012 and low inventories bode well for future construction and employment.
  • On the downside, existing home sales dropped m/m in June, but they also dropped m/m in June 2012; volumes are up 15% y/y and the median price was up 13% y/y. Some homebuilders are reporting that rising rates are hurting sales. Meanwhile, mortgage applications were down (again) week/week (w/w) and are trending below the Q2 pace.

Global Markets Watch

  • Positive news in Europe, as the Markit Eurozone PMI (Purchasing Managers Index) rose from 48.7 in June to 50.4, its highest level since January 2012. In Spain, the unemployment rate fell. In Portugal, the president decided not to call immediate elections, keeping in power a center-right coalition government committed to reforms. The Socialist Party (not a member of the governing coalition) is opposing public sector layoffs and pension cuts; if elections were held, it was thought they might lead the next government. Portuguese Treasuries rallied on the news.
  • In China, growth concerns rose. The closely-watched HSBC Flash China Manufacturing PMI was weaker than expected, dropping for a third consecutive month in July, to 47.7, an 11-month low. Prime Minister Li clearly laid out the Chinese government’s goals: “reasonable growth” of 7.5% or better, provided that inflation remains below 3.5%. More importantly, he suggested there was a minimum ’red line’ at 7.0% growth ,which would spur new stimulus. Beijing ordered cuts to (excess) production capacity in 19 industries.
  • In Japan, bad inflation and persistent deflation. The June CPI (Consumer Price Index) ex-food rose 0.4% y/y, the highest rate in almost five years. When energy is stripped out, though, (to make it equivalent to U.S. Core CPI), it was -0.2%. That’s the lowest rate of deflation since 2009.

Comment: While Japan’s slowing rate of core deflation is encouraging, it’s not yet making life better. If yen weakness leads to higher prices for (imported) energy but not to higher wages, living standards fall.

  • In the U.S., waiting and watching. Congress goes on recess at the end of the week and will return in September. Government spending authorizations run out at the end of September – and, if the debt ceiling isn’t raised, the government runs out of money before Thanksgiving. Republicans want to spend no more than the level capped by the sequesters; Democrats want to spend more, and little progress is being made.
  • The Fed was quiet in front of its 7/30-31 meeting, but we’ve heard lots of chatter about the relative merits/chances of Janet Yellen and Larry Summers as next Fed chairman when Bernanke’s term expires in January.

Data Sources: The Wall Street Journal, Financial Times, Bloomberg


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