MarketView for July 8

 

 

Summary  

 

It was another good day on Wall Street with the major equity indexes rising for third straight day on Thursday as jobless claims fell and a handful of large retailers report solid sales. Share prices appear to have regained their footing after several gloomy economic reports rekindled concerns that we might be facing a double-dip recession. Nonetheless, low volume suggests skepticism still prevails.

 

Teen apparel retailers like Abercrombie & Fitch and department store chains like JC Penney exceeded June sales expectations. JC Penney ended the day up 6.7 percent to close at $23.24, while Abercrombie & Fitch closed up 7.8 percent at $35.45.

 

Semiconductor shares fell after posting their best one-day gain in weeks on Wednesday. Micron Technology was down 2.3 percent to close at $8.69. Apple ended the day down 0.2 percent at $258.09 and Intel saw a decline of 0.2 percent to close at $20.10.

 

Sales at stores open at least a year rose 3.1 percent for the month, according to company reports, just shy of the 3.2 percent expectation. Even though sales grew, retailers relied heavily on promotions to win over cautious consumers in June.

 

Initial claims for state unemployment benefits fell by 21,000 claims to a seasonally adjusted 454,000 claims for the week ended July 3, the lowest level since early May, the Labor Department reported on Thursday.

 

Economic Data Shows an Economy Still Struggling

 

New U.S. claims for jobless benefits fell last week to their lowest level in two months. The larger-than-expected decline in jobless claims was a relief after a number of weak reports had some believing that we were about to see a double dip recession. Nonetheless, unemployment remains painfully high, while other data on Thursday indicated that consumers continue to swim upstream. For example, retailers were forced to discount merchandise to a greater extent than they had wanted to or expected to in order to keep sales moving ahead in June.

 

Initial claims for state unemployment benefits dropped 21,000 to 454,000 last week, and the number of people continuing to receive benefits in the final week of June was the lowest in seven months, the Labor Department said. Economists had expected first-time claims to decline to just 460,000.

 

Adding to the retail malaise was a report by the Federal Reserve that consumer credit fell more than expected in May. Retail sales are heavily dependent on credit card purchases. The Federal Reserve said U.S. consumer credit dropped by $9.15 billion in May, the 15th decline in the last 16 months. Sales at stores open at least a year -- a benchmark of retail performance, -- rose 3.1 percent in June from a year earlier, just shy of the 3.2 percent increase that Wall Street predicted, according to reports on Thursday from 28 retailers tracked by Thomson Reuters.

 

Nonetheless, while the growth might resemble molasses in winter, the economy is still expanding following the longest and deepest recession since the 1930s. The promotional trend that drove much of the gains in June sales was seen likely to continue into July.

 

Although layoffs have abated after last year's bloodletting, companies are skeptical of the economy's strength and are reluctant to start hiring workers on a wider scale.

 

Some economists said a decision by General Motors to limit the number of plants it is shutting down as part of its annual summer retooling may have helped lower claims for jobless benefits last week. However, a Labor Department official said there was nothing unusual in the report.

 

The number of people still receiving jobless benefits during the final week of June after an initial week of aid dropped 224,000 to 4.41 million, the lowest level since November. That pulled down the insured unemployment rate, which measures the percentage of the insured labor force that is jobless, to 3.4 percent from 3.6 percent the prior week.

 

With Congress squabbling over extending aid for the long-term unemployed, the number of people on emergency benefits dropped 367,948 to 4.15 million in the week ended June 19. About 45 percent of the 14.6 million people unemployed in June had been out of work for six months and more. If benefits are not extended, consumer spending will be hurt.

 

Retail Sales Weak

 

Retailers relied heavily on promotions to maintain sales growth in June, helping teen clothing chains and department stores, but the trend may hit margins as they head into the key back-to-school shopping season. Sales at stores open at least a year rose 3.1 percent for the month, just shy of the 3.2 percent increase expected by Wall Street. That compared with a 4.9 percent drop a year ago.

 

Teen apparel retailers like Abercrombie & Fitch and Hot Topic were among the best performers, along with department store chains such as Macy's and JC Penney. Those companies benefited from warmer weather and promotions for Memorial Day. Penney cited brisk sales of men's summer apparel ahead of Father's Day as well. Shares of Abercrombie surged 8 percent, while Penney gained 6.3 percent.

 

But weaker-than-expected results from companies like Gap Inc and discount chains like Target Corp highlighted concerns over profitability for the wider sector. Gap same-store sales were flat, while analysts were expecting a 3.4 percent rise. This sets the company up for margin pressure this month as it tries to clear merchandise for the fall. Gap shares fell 8 percent, while Target fell nearly 2 percent.

 

June marks the 10th consecutive month of rising sales after a year of declines during the recession. The International Council of Shopping Centers said June sales came in at the low end of its outlook and forecast a same-store sales increase of 3 percent to 4 percent in July.

 

Limited Brands, which operates retail chains Bath and Body Works and Victoria's Secret, said June same-store sales rose 6 percent, well ahead of the 3.2 percent gain analysts had expected. It forecast July same-store sales to be up in the mid-single digit percentages. Costco reported a 4 percent rise in June same-store sales, but fell slightly short of forecasts as its stores were closed on Memorial Day.

 

Austerity Needed Says IMF

 

High unemployment and a moribund housing market have increased risks to the U.S. economic recovery, while the public debt looms large and needs to be cut, the International Monetary Fund said on Thursday. In a statement after annual consultations with U.S. authorities, the IMF raised its U.S. growth forecasts slightly to 3.3 percent for 2010 and 2.9 percent for 2011, but said unemployment would remain above 9 percent for both years.

 

The lofty jobless rate, coupled with a large backlog of home foreclosures and high levels of negative home equity, posed risks of a "double dip" in the housing market, it said. But the IMF said it did not think a renewed recession was likely.

 

"The outlook has improved in tandem with recovery, but remaining household and financial balance sheet weaknesses -- along with elevated unemployment -- are likely to continue to restrain private spending," the Fund said.

 

The IMF also said commercial real estate continued to deteriorate, posing risks for smaller banks. Further tipping the balance of risks to the downside, it said Europe's sovereign debt crisis could worsen financial market conditions and hurt trade.

 

David Robinson, the IMF's Western Hemisphere deputy director, conceded in a news briefing that recent data had come in on the weak side since the report was completed on June 21. If the weakness continued, the Fund may have to revise its forecasts downward, he said.

 

In a separate report on the world economy, the IMF raised its 2010 global growth forecast to 4.6 percent from the 4.2 percent it had projected in April. Apart from dealing with economic risks, the IMF said the key challenge for the United States was to develop a credible strategy to put its budget on a sustainable path without jeopardizing the recovery.

 

The fund said U.S. federal debt as a percentage of gross domestic product would rise from 64 percent in 2010 to 80.4 percent by 2015, 96.3 percent by 2020 and 135 percent by 2030. These debt forecasts are higher than those of the Obama administration and the Congressional Budget Office, which projects debt-to-GDP at 77.4 percent in fiscal 2015, and 90 percent by 2020.

 

The IMF said it welcomed commitments by the Obama administration to stabilize this at just over 70 percent of GDP by 2015 but called for a downward path after that, a step that would require both spending cuts and increased revenues. According to the IMF, the largest contribution the United States could make to global growth and stability would be to increase its domestic savings -- particularly by reducing deficits.

 

"The U.S. is no longer going to be the global consumer of last resort and therefore other countries, especially those with current account surpluses, will need to take up the slack," Robinson said.

 

"With our assessment that the dollar is now somewhat overvalued from a medium-term perspective, I emphasize medium-term, this will also need to be accompanied by greater exchange rate flexibility and appreciation elsewhere," he said.

 

Robinson said he believed the dollar's value would decline moderately over the next five years based on economic fundamentals. The dollar's rise in recent months was "not helpful" in sustaining global recovery but was not a "deal breaker" either, he said.

The Fund said the Federal Reserve's pledge to keep interest rates exceptionally low was appropriate to fight deflation and the drag on the economy from reduced government spending, but said the U.S. central bank must clearly communicate its plans for exiting its supportive policies.

 

The IMF also said that while the United States has made considerable progress in restoring financial stability, more capital will be needed in the banking system to support additional lending -- particularly if securitization markets remain impaired.

 

It said U.S. financial reform legislation would reduce systemic risks in the financial system, but noted that Congress missed an opportunity to consolidate bank regulators, maintaining a burden on agencies to cooperate and avoid gaps in supervision.