MarketView for July 28

 

Summary 

 

Share prices came under pressure as a result of a weak durable goods report and a downbeat assessment of the economy from the Fed's Beige Book with the result that all the key equity indexes closed out the day in negative territory with the S&P 500 ending below its 200-day moving average. The S&P's 200-day moving average is currently around 1,114. Technicians are trying to determine if this means it is at the top as a result of the recent rally or a consolidation point leading to further gains.

 

On a more fundamental basis, Boeing disappointed investors after it forecast full-year earnings slightly below estimates. Boeing ended the day down 1.9 percent to close at $67.32.

 

The U.S. Federal Reserve's Beige Book, a summary of national economic conditions, added to the disappointment. It indicated activity was not as robust in a few districts and had lost steam over the past several weeks.

 

With 49 percent of S&P 500 companies reporting earnings, 77 percent have beat expectations, according to Thomson Reuters.

 

Defense contractor General Dynamics and ConocoPhillips both managed stronger-than-expected quarterly earnings. General Dynamics ended the day  up slightly at $61.80 while ConocoPhillips was unchanged at $54.44.

 

New durable goods orders fell for a second straight month in June, posting their largest decline since August, a reminder of the challenges faced by the economy.

 

Durable Goods Orders Fall

 

New orders for manufactured goods designed to last three years or more dropped 1.0 percent after falling 0.8 percent in May, surprising financial markets that had expected a 1.0 percent increase. The conclusion for Wall Street being that the economic recovery has deteriorated during the second quarter.

 

Nonetheless, according to the report from the Commerce Department, businesses that are well positioned in terms of cash continued to invest in plant and equipment. In other words the underlying demand remained intact with firms exhibiting confidence in the moderate economic recovery. This was evidenced by orders for non-defense capital goods excluding aircraft, a proxy for business spending, rising an unexpected 0.6 percent after increasing by an upwardly revised 4.6 percent in May. Markets had expected a flat reading.

 

Stocks on Wall Street fell as investors focused on the overall decline in orders and a full-year earnings forecast from Boeing Co that was below market consensus, and the U.S. dollar fell against the yen.

 

Data from consumer spending to manufacturing have suggested the recovery from the longest and deepest recession since the 1930s took a step back in the past few months.

 

The government is expected to report on Friday that growth slowed to a 2.5 percent annual rate in the April-June period from a 2.7 percent pace in the first three months of the year.

 

A separate report on Wednesday from the Federal Reserve showed U.S. economic activity was still rising but at a subdued rate.

 

"Among those districts reporting improvements in economic activity, a number of them noted that the increases were modest, and two districts, Atlanta and Chicago, said the pace of economic activity had slowed recently," the Fed said in its Beige Book, which is based on conversations with business contacts across the nation.

 

Some analysts said there was a chance second-quarter growth could beat expectations given signs of strong business investment. With profits booming, companies have stepped up spending on equipment and software after aggressively cutting back during the recession.

 

Durable goods orders are a leading indicator of manufacturing, which has benefited from businesses replenishing inventories drawn down to record lows during the recession. However, that effort appears to be running out of steam.

 

Economists had expected durable goods orders to rise last month because Boeing received 49 orders for civilian aircraft in June compared to only five in May. However,  non-defense aircraft orders tumbled 25.6 percent after falling 30.2 percent in May. Analysts said most of Boeing's orders were too late in the month to be caught by the report.

 

The drag on orders also came from bookings for computers and electronic products, which saw their largest decline since October. Orders for machinery recorded their biggest decline in 14 months, while those for primary metals fell by the most since March 2009.

 

Durable goods shipments, which go into the calculation of gross domestic product, fell 0.3 percent after sliding 0.7 percent in May.

 

Fed Says Economic Recovery Remains Slow

 

According to the Fed's latest Beige Book report, the overall increase in economic activity is still increasing but not as fast as was the case previously and in a few districts has lost ground over the past several weeks.

 

The Fed's latest Beige Book on national economic conditions, based on information before July 19, indicates a less-than-booming recovery with sluggish housing markets and sales of costly items like new cars weakening.

 

"Among those districts reporting improvements in economic activity, a number of them noted that the increases were modest, and two districts, Atlanta and Chicago, said the pace of economic activity had slowed recently," the Fed said.

 

The Beige Book reports on conditions in all 12 districts that are part of the Federal Reserve network  and is credible because it is derived from interviews and anecdotal information from coast to coast.

 

The latest report, compiled by the St. Louis Fed Bank, covers roughly seven weeks from the previous Beige Book in early June. While manufacturing continued to expand in most districts, several said activity had slowed or leveled off in New York, Cleveland, Kansas City, Chicago, Atlanta and Richmond. Retail sales -- a gauge of consumers' economic participation -- were generally higher but modestly so.

 

"Several districts cited apparel, food and other necessities as recent strong seller, while big-ticket items were weak sellers," the Fed said.

 

Most districts said new-car sales have declined and housing markets were sagging."Activity in residential real estate markets was sluggish in most districts after the expiration of the April 30 deadline for the homebuyer tax credit," the Fed said, referring to a now-expired $8,000 credit offered as an encouragement for first-time home buyers.

 

There was a modest improvement in labor markets, with several reports of temporary hiring. Consumer prices held steady in most parts of the country while wage pressures were described as "contained."