MarketView for August 29

Summary

The major equity indexes chalked up slight gains on Wednesday in the lightest trading of the year as Wall Street marked time until a key speech by Federal Reserve Chairman Ben Bernanke on Friday. Daily volume this week has been very low, even for a seasonally slow period, with the market recording three of the four lowest volume full sessions of 2012. The low volume reflected a lack of investment confidence ahead of Bernanke's speech.

Bernanke addresses a conference of central bankers in Jackson Hole, Wyoming, and could announce new measures to boost growth. He is expected to stoke expectations for a third round of quantitative easing, though he may not detail the timing of the Fed's action.

What little excitement there was came from data showing pending home sales rose 2.4 percent in July, a larger than expected gain, according to the National Association of Realtors.

Approximately 4.41 billion shares changed hands on the three major equity exchanges, as compared with the previous low on Monday of 4.46 billion shares. The year-to-date average is about 6.6 billion shares.

The S&P 500 index was slightly lower in the last two sessions, but the decline was less than 0.1 percent on both days. It hasn't closed with a 1 percent move in either direction since August 3.

The index has been pinned in a fairly tight range over the last three weeks, finding support at 1,400 while also unable to convincingly pierce the April high of 1,422.38, which has acted as a resistance point.

Investors are also focusing on the European Central Bank's meeting set for September 6 and a host of U.S. economic data scheduled for next week, including the Labor Department's payrolls report for August.

Wednesday's data included gross domestic product, which grew a revised 1.7 percent in the second quarter. The government figure was in line with economists' expectations and up from last month's government estimate of 1.5 percent gain.

The Fed said in its Beige Book that the economy continued to grow gradually in July and early August but that manufacturing activity was softening.

Second Quarter GDP Up Slightly Over Previous Estimate

Second quarter economic growth was slightly better in the revised number than initially, but the rate of growth is still too anemic to discount further monetary easing from the Federal Reserve. The country’s gross domestic product expanded at a 1.7 percent annual rate, the Commerce Department said on Wednesday, as stronger export growth offset a pull-back in restocking by businesses wary of sluggish domestic demand.

The revised GDP data showed export growth was strong, while import growth was the smallest in a year. Trade contributed 0.32 of a percentage point to GDP growth instead of subtracting a third of a point, as previously reported.

While that was an improvement on the government's first estimate of 1.5 percent published last month and the composition of growth was fairly favorable, it was insufficient to cut into an unemployment rate that ticked up to 8.3 percent in July.

The lack of stronger job growth, along with the uncertainty stemming from Europe's debt crisis and fears of big U.S. government spending cuts and tax hikes in 2013, could compel the U.S. central bank to offer additional stimulus by year end.

A growth pace of between 2 percent and 2.5 percent is generally seen as needed just to hold the jobless rate steady, and the sluggish recovery is proving to be a difficult hurdle for President Barack Obama in his quest to secure a second term in November's election. Growth in the third quarter is expected to show an improvement, but still remain below the economy's potential.

Export strength helped to offset the drag from inventories. However, the careful management of inventories could be a boost to the economy in the third quarter. Excluding inventories, GDP rose at a 2.0 percent rate rather than 1.2 percent.

Consumer spending, which accounts for about 70 percent of U.S. economic activity, was revised up a notch to a 1.7 percent pace from the previously reported 1.5 percent. Still, that marked a step-down from the first quarter's 2.4 percent pace, and a smaller rise is expected this quarter with demand for big-ticket items such as automobiles cooling.

Greater investment in the construction of nonresidential structures also gave a lift to GDP growth in the second quarter. However, growth in business investment in equipment and software was lowered to a 4.7 percent pace, the slowest since the third quarter of 2009, from 7.2 percent previously.

Growth in spending by businesses on equipment and software has slowed sharply from a peak of 18.3 percent in the third quarter of last year, and the retrenchment appears to have intensified early this quarter.

The report also showed that after-tax corporate profits rose at a 1.1 percent rate after sinking 8.6 percent in the first quarter. Government spending declined, but the drop was not as deep as previously reported. And even though consumer spending was bumped up, inflation pressures remained muted.

A second report showed contracts to buy previously owned homes hit their highest level in more than two years in July, suggesting the housing market's recovery was gaining traction and offering a relative economic bright spot.

The lackluster recovery has sparked a sharp debate among Fed officials over whether they should launch another round of bond purchases to spur stronger growth. The outcome of the central bank's next meeting on September 12-13 will be a close call. Jobs growth has picked up a bit and housing and retail sales have strengthened. However, business spending looks weak and inflation is slowing.

Fed Chairman Ben Bernanke could offer more clarity on the outlook for monetary policy when he speaks at a gathering of central bankers in Jackson Hole, Wyoming, on Friday.

The Fed's Beige Book report, which offers a snapshot of the economy, described economic activity as continuing to "gradually" expand in July and early August. It noted, however, that manufacturing activity was softening in many regions of the country.