MarketView for July 9

Summary  

Wall Street closed out its best week in a year on Friday, as the Street looks ahead to what is expect to be a solid second quarter earnings season. Stocks ended near the day's highs, but trading was thin. Just 6.197 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, making it the lowest-volume day of the year.

Google helped lift the Nasdaq, rising 2.4 percent to $467.46 after Beijing gave the company the green light to continue operating its China Internet search page. Rival Baidu fell 1.7 percent to $71.20.

The major stock indexes advanced 5 percent in the holiday-shortened week, as investors put a string of dismal data behind them to focus on what is expected to be another solid quarter for corporate results.

The earnings season unofficially begins with Alcoa after the closing bell on Monday. In addition to Alcoa, companies reporting next week include JPMorgan Chase, Bank of America and General Electric. Banks will be scrutinized by investors concerned about delinquencies and loan demand to gauge the sustainability of a recent improvement in credit quality.

Alcoa, the first Dow component to report, is expected to swing to a second-quarter profit, though falling aluminum prices have prompted analysts to reduce their earnings forecasts.

For the week, the Dow is up 5.3 percent, while the Nasdaq rose 5 percent. The S&P 500 chalked up a gain of 5.4 percent, its best weekly performance since mid-July 2009. But the index is still down about 11.7 percent from its most recent closing high in late April.

Johnson & Johnson was the largest drag on the Dow, falling 1.4 percent to $60.54 a day after it recalled more Tylenol and other over-the-counter drugs following consumer complaints of odors. The move expands a recall started in January.

In deal news, Air Products and Chemicals raised its hostile bid for rival Airgas late Thursday by 5.8 percent to $5.3 billion, but the offer remained slightly below the company's current market value. Air Products rose 1.4 percent to $69.74, while Airgas rose 1.6 percent to $64.90.

In economic news, U.S. wholesale sales fell unexpectedly in May, lifting inventories to their highest level in 11 months, a government report showed.

Wholesalers See Sales Decline, While Inventories Rise

The Commerce Department reported on Friday that sales at the wholesale level declined in May for the first time in more than a year, lifting inventories to their highest level in 11 months. Wholesale sales fell 0.3 percent in May after rising 0.9 percent in April, the Commerce Department said. It was the first drop in sales since March 2009. In the 12 months to May, sales were up 15.1 percent. Analysts polled by Reuters had expected sales at wholesalers to rise 0.5 percent in May from April. With sales declining, wholesale inventories rose 0.5 percent, building on April's 0.2 percent gain. Compared to May last year, inventories fell 2.1 percent.

Inventory rebuilding from record low levels has been one of the key drivers of the economy's recovery from the worst recession since the 1930s. Business inventories contributed 1.9 percentage points to growth in the first quarter.

After accelerating in the first quarter, consumer spending has turned sluggish as households struggle with a 9.5 percent unemployment rate and tepid income growth. Consumer spending normally accounts for 70 percent of U.S. economic activity.

In May, wholesale sales were pulled down by a 1 percent drop in purchases of nondurable goods. This was the largest decline since March of last year. The weak sales pace lifted the inventory-to-sales ratio, a measure of how long it would take to sell stocks at the current sales pace, to 1.14 months' worth from April's 1.13 months.

Although some business will want to get ahead of the curve and restrain any unwanted inventories buildup, others said the inventory-to-sales ratio, which has steadily declined from a peak above 1.40 months' worth at the beginning of 2009, remained at comfortable levels.

Sale of Treasurys Should Proceed Smoothly

Despite the recent lows across the yield curve, primary dealers are expecting Monday's sale of $35 billion in three-year notes to proceed without a hitch and, unless there is a significant rally immediately beforehand, without a tail.

That means that the yield on three-year notes auctioned on Monday will likely match the yield at which comparable securities are trading in the open market. Primary dealers cited the growing consensus that the U.S. economic recovery will be slow and anemic as a driver for demand for three-year notes, even as their yields held at 1.02 percent late on Friday.

The underlying demand for three-year notes endures, primary dealers said, and foreign interest will likely be strong. Over the past six auctions, the number of bids for three-year notes has been an average of 3.09 times higher than the number of securities available for purchase. The Treasury department reduced the auction size for Monday's three-year note sale by $1 billion compared to the previous three-year auction, making it likely that the bid-to-cover ratio will remain high.

Foreign buyers took down an average of $13.7 billion over the past six auctions, and indirect bidders, a category of bidder often seen as a proxy indicator for foreign central bank demand, bought an average 48.5 percent of the notes auctioned.

A weaker economic outlook spreading throughout financial forecasting firms will also make the three-year note more appealing.

Monday's auction will be the first of three next week in which the Treasury Department will sell a total of $69 billion of U.S. government debt. It will sell $21 billion of reopened 10-year notes on Tuesday and $13 billion of reopened 30-year bonds on Wednesday.