MarketView for July 29

Summary 

Wall Street lost additional ground on Thursday as all the major equity indexes closed out the trading day in the red due for the most part to weak outlooks from technology companies and downbeat comments from a Federal Reserve official left the plate bare of any good news on which to build a rally. Furthermore, the market has struggled to make any  headway at all this week. The S&P 500 fell for a third straight day and has run into resistance around its 200-day moving average as investors searched for a catalyst to take stocks higher.

Investors took advantage of early declines to bargain hunt, particularly in the technology sector, which had fallen over 1 percent after tech firms Nvidia and Symantec gave weak outlooks.

Meanwhile, Friday's Commerce Department report on second-quarter gross domestic product will be another marker for the strength of the recovery, which appears to be losing steam after several weak economic reports.

On the economy, St. Louis Federal Reserve Bank President James Bullard said he is worried about the risks the United States could fall into a Japan-style quagmire of falling prices and investment. That pressured stocks before a late session rebound.

Friday's GDP number is widely expected to show U.S. economic growth slowed in the second quarter as some investors fret about the possibility of a double-dip recession.

Nvidia and Symantec cut expectations for the next quarter, raising questions about demand for technology components and contributing to concerns that the economic growth is slowing. Nvidia fell 9.9 percent to $9.13, and Symantec dropped 11.2 percent to $13.03.

Exxon Mobil, the S&P's largest company by market capitalization, fell 0.9 percent to $60.34 after reporting a better-than-expected quarterly profit. Consumer staples also fell, with the S&P consumer staple index down 1.1 percent after Kellogg lowered its outlook and Colgate-Palmolive posted weaker-than-expected sales. Kellogg's shares fell 6.9 percent to $47.98 while Colgate-Palmolive dropped 6.8 percent to $78.12.

Through Thursday morning, 60 percent of companies in the S&P 500 have reported quarterly earnings, with 75 percent of companies beating expectations and 35.1 percent year-over-year earnings growth. However, companies' forecasts for the third and fourth quarters have frequently missed Wall Street's expectations.

New Unemployment Claims Fall

The Labor Department reported on Thursday that new claims for unemployment insurance fell last week. Nonetheless, they continue to remain at a stubbornly high level, which means that the labor market is finding it slow going in its effort to recover from the Great Recession.

Initial claims fell by 11,000 claims to 457,000, the Labor Department reported on Thursday. However, economists are for the most part of the opinion that the number of new claims will have to decline to a range of between 400,000 and 450,000 claims to signal sustainable job growth.

In the week ended July 17, 4.57 million people were still receiving jobless benefits after an initial week of aid, up 81,000 from the previous week. The continuing claims data covered the survey period for the government's July household survey, from which the national unemployment rate is derived.

Sluggish jobs growth, marked by a 9.5 percent unemployment rate, is the biggest obstacle to the economy's recovery from the most brutal recession since the 1930s -- a recovery that has shown signs of wilting in the last couple of months.

President Barack Obama is pressing for approval of a $30 billion plan to help small businesses and create jobs but that plan is continually derailed by Republicans in the Senate.

However, the same employment difficulties that plague the United States and hold back the economic recovery, the same does not appear to be the case for parts of the European Union. Euro-zone economic sentiment rose strongly this month to a 28-month high and unemployment in Germany fell to its lowest level since November 2008. The upbeat European data lifted the euro to a 12-week high against the U.S. dollar, which also fell versus the yen.

Meanwhile, for the United States the high unemployment rate has meant that consumer spending has been tepid and home foreclosures have remained elevated. Foreclosures rose in three of every four large U.S. metropolitan areas in the first half of this year, likely ruling out sustained home price gains until 2013, RealtyTrac stated on Thursday. Unemployment was the main culprit driving foreclosure actions on more than 1.6 million properties, the company said.

In the week ended July 17, 4.57 million people were still receiving jobless benefits after an initial week of aid, up 81,000 from the previous week. The continuing claims data covered the survey period for the government's July household survey, from which the national unemployment rate is derived.

Fed’s Balance Sheet Shrinks

The Federal Reserve's balance sheet decreased during the latest week, Fed data released on Thursday indicated. The balance sheet -- a broad gauge of Fed lending to the financial system -- was $2.308 trillion on July 28 versus $2.315 trillion on July 21.

Fed lending remains near its record high of $2.334 trillion hit in May. After declining early last year, the balance sheet started accumulating mass amid the Fed's asset-buying program. The program, known as quantitative easing, was aimed at broadly holding down borrowing costs and supporting the ailing housing market as the economy recovered from the worst recession in 70 years.

That effort was also led by the Fed's purchases of mortgage-related securities, which came to a conclusion at the end of March. Since then, weekly balance sheet fluctuations have at times been influenced by the delivery of those securities, some of have lagged.

The Fed's holdings of mortgage-backed securities backed by housing finance companies Fannie Mae and Freddie Mac totaled $1.117 trillion on July 28, as compared to $1.125 trillion on July 21. The Fed's ownership of debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Bank System was $159.38 billion, unchanged versus the previous week.

Primary credit via the Fed's discount window averaged $11 million per day in the latest week, down from $25 million per day in the previous week.

This report also marked the first time all three Maiden Lane LLC facilities were in the black, with fair value readings above par. The entities were created to house assets related to the fire sale of Bear Stearns to JPMorgan and the bailout of AIG. This development increases the likelihood that the New York Fed will not lose money on its holdings of these assets.