MarketView for August 12

 

 

Summary  

 

After one of the most volatile weeks in memory, the major equity indexes managed to end the week on a positive note, a tentative sign that the worst of the selling may be over. Volume was much lighter than on any other day of the week and intraday swings were far less violent than in previous days. Both signs suggested a drop in investor anxiety. Nonetheless, the market was down for the week and posted its worst three-week decline since March 2009 when it hit 12-year lows.

 

About 9 billion shares traded on the major exchanges, a number that was sharply lower than the daily average of nearly 16 billion shares traded earlier this week. It was the busiest week in terms of volume since October 2008.

 

Blue-chips garnered more attention from investors looking for relative safety in the equity market. Boeing gained 4.9 percent to $61.75, leading the Dow industrials. The hope among investors is that share prices are in the process of stabilizing at current levels and will then resume a more orderly upward trend.

 

For the week, the Dow Jones industrial average fell 1.5 percent and the Nasdaq lost 1 percent. The S&P 500 fell on 11 of the past 15 days, chalking up a loss of 12.4 percent in three weeks. It was down 1.7 percent for the week.

 

A report on Friday showed U.S. consumer sentiment fell in early August to the lowest level in more than three decades.

 

Among individual stocks, Nvidia Corp shed 4 percent to $12.88, giving back sharp gains. Late Thursday, it forecast a larger-than-expected jump in revenue but some analysts were surprised with the lack of growth in one of its much-touted processors. Retailer Dillard's fell 18.2 percent to $41.51 after it posted quarterly profits below estimates.

 

Retail Sales Gain a Surprise

 

With increased spending by consumers on cars, furniture, clothing and gas in July, retail sales overall chalked up the largest gain in four months. The increase signaled indicated that consumers are more confident and could help dispel fears that the country is headed for another recession. Specifically, a report by the Commerce Department Friday morning indicated that retail sales were up 0.5 percent in July. It was the best showing since March. The government also revised sales higher in the previous two months.

 

Even after excluding sales at gas stations, which were influenced by an increase in gas prices, sales rose 0.3 percent last month. The better-than-expected retail sales report is the second strong signal on the economy in as many days. Overall the data for July indicate that the economy is in better shape than many would have you believe. Layoffs are down, retail sales are up and gas prices are falling. Employers added 117,000 jobs last month. That's not enough to significantly lower the unemployment rate, but it was a notable improvement after two dismal months of hiring.

 

In a separate report, the Commerce Department said that businesses added to their stockpiles for an 18th straight month in June. But the 0.3 percent rise in business inventories was the smallest gain in 13 months. Total business sales rose 0.4 percent after a 0.1 percent drop in May. The higher retail sales number should serve to boost sentiment and spur further inventory restocking in coming months.

 

The retail sales report is the government's first read on consumer spending for the July-September quarter. Consumer spending is always closely watched because it accounts for 70 percent of economic growth. But in June, consumers cut spending for the first time in 20 months, a troubling sign.

 

For July, auto sales rose 0.4 percent after a 0.7 percent gain in June. Demand for cars has been low this year, and many dealers have also had a hard time stocking popular models because of supply chain disruptions stemming from the Japan crisis. Gasoline sales rose 1.6 percent. The increase was largely because of the rise in gas prices that have since been reversed. Purchases of furniture rose 0.5 percent, electronics store sales increased 1.4 percent, and sales at specialty clothing stores climbed 0.5 percent.

 

Sales at department stores fell 0.8 percent in July. Economists had expected them to show a rise following reports from big retailers that they had a decent start to the back-to-school shopping season. Sales at a broader category of general merchandise stores, which includes department stores and big retailers such as Wal-Mart, were flat in July following a 0.5 percent rise in June.

 

Many retailers had reported last week that back-to-school promotions had helped boost their sales in July. Target, Macy's and luxury chain Saks all reported gains that beat Wall Street expectations. But retailers are worried that consumers may be thrifty when shopping this summer, sticking with basic necessities and holding out for sales. That's a popular strategy in tighter economies, but one that hurts stores' profits.

 

High unemployment and a spike in gas prices have forced many consumers to be more cautious about spending. Their hesitation was a major reason the economy grew a meager 0.8 percent in the first six months of the year, the weakest growth since the recession officially ended.

 

Consumer Sentiment Touches 30-year Low

 

Consumer sentiment fell sharply in early August, hitting its lowest level in more than three decades. Consumer sentiment, which hit its lowest since 1980 when the economy was in recession, fell on fears of a stalled recovery combined with gloom from partisan bickering over government debt, the Thomson Reuters/University of Michigan’s consumer sentiment survey reported. The preliminary August reading on the consumer sentiment index fell to 54.9 in early August, down from 63.7 in July, and has fallen for three months.

 

High unemployment, stagnant wages and the protracted debate in Congress over raising the government debt ceiling alarmed consumers in the University of Michigan survey even before the downgrade of United States sovereign debt by Standard & Poor’s. The consumer sentiment index registered most of the decline before the credit rating downgrade on Aug. 5.

 

Bad economic times were expected by 75 percent of all consumers in early August, just below the record peak of 82 percent in 1980. Buying plans for household durables and vehicles declined in early August, falling back to their recession-level lows.

 

Italy Gets Tough on Italy’s Economy

 

Friday saw Prime Minister Silvio Berlusconi announced a painful group of tax increases and spending cuts in order to meet European Central Bank demands for action on shoring up Italy's strained public finances.

 

At an emergency evening cabinet meeting, the government adopted an austerity package worth 20 billion euros in 2012 and a further 25.5 billion euros the following year to bring the budget into balance in 2013. The measures ranged from a special levy on incomes above 90,000 euros to higher taxes on income from financial investments and cuts in the cost of government, notably through a cull in the number of local politicians.

 

The ECB demanded accelerated deficit cuts from Italy as a condition for buying its bonds on the market after a sell-off sent Italian borrowing costs soaring and threatened to put the euro zone's debt crisis on a new, unmanageable plane.

 

Berlusconi, who frequently boasts of "never putting his hand in the pockets of Italians", said he agreed to the tax increases only reluctantly and the decision made his "heart drip blood". "We are personally very pained to have to adopt these measures," he told reporters after the cabinet had approved the plan.

 

After days of criticism for a lack of clarity over how it intended to meet the balanced budget target, Berlusconi and Economy Minister Giulio Tremonti delivered a harsh dose of austerity for Italy's fragile economy. Before the announcement, Italy's biggest unions had pledged to oppose measures which hurt ordinary Italians including pensioners.

 

The package, adopted by emergency decree, must now be approved by parliament within 60 days.

 

Despite a huge public debt, Italy, the euro zone's third largest economy, had kept out of the crisis until last month when doubts over its slack growth and the government's ability to control finances triggered the selloff of Italian bonds.

 

The extent of the cuts underlines how far the government has been pushed since markets turned on Italy last month, dragging it close to a Greek-style emergency.

 

Market panic has eased since the ECB stepped into the market, bringing Italian bond yields back down from the 14-year highs they hit last week but wild swings on the stock market have underlined the persistent fear among investors.

 

The budget deficit will fall to 1.4 percent of gross domestic product in 2012 from 3.8 percent this year, and be eliminated in 2013, he said.

 

In a sign of how much pain the steps will impose on ordinary Italians, regional government leaders, who will bear a large part of the cuts, condemned the measures as unjust.

 

Berlusconi rejected the idea of a "wealth tax" on private assets but the planned "solidarity tax" on high earners is clearly aimed at showing that sacrifices are being shared.

 

The package imposes a 5 percent extra tax on income above 90,000 euros and 10 percent more tax on income above 150,000 euros, as well as increasing the tax rate on financial income to 20 percent from a current level of 12.5 percent.

 

Little detail was offered on measures to stimulate growth but Labor Minister Maurizio Sacconi said they included moves to make it easier to strike labor deals at the company or regional level, a key element in freeing up the rigid system of centralized contracts.

 

The plan also aims to curb tax evasion and brings forward measures to raise the retirement age for women in the private sector, originally programed to begin in 2020 but which will now start in 2016.

 

Additional measures include a rule ensuring that non-religious public holidays, such as the June 2 anniversary of the founding of the Italian Republic, are celebrated on a Sunday to increase the number of working days in a year.