MarketView for July 13

 

 

Summary

 

The major equity indexes rallied sharply on Friday, with the Dow Jones Industrial Average and the S&P 500 indexes breaking six-day losing streaks, as JPMorgan Chase reported stronger-than-expected second-quarter earnings despite a trading loss of $5.8 billion so far this year. Shares of JPMorgan were up almost 6 percent. In addition to earnings, JPMorgan also revealed that traders involved in the loss no longer work at the bank and could lose as much as two years of income.

 

Other major banks were also higher  on Friday Bank of America, Morgan Stanley, Citigroup and Goldman Sachs all closed between 3 and 6 percent higher.

 

Investors also reacted to comments from Federal Reserve Bank of Atlanta President Dennis Lockhart that stimulus action may be coming down the pike.

 

"My support for the current stance of policy rests on a forecast that sees a step-up of output and employment growth by year-end and into 2013," Lockhart said in prepared remarks. "If the economy continues on the track indicated by the most recent incoming data and information, that forecast will become untenable, as will the policy premises underlying it. This is a challenging juncture for policymaking."

 

Stocks also gained traction on disappointing economic numbers out of China, as investors grew hopeful that the weakness could prompt additional stimulus measures. During the second quarter, GDP in China grew at an annual pace of 7.6 percent, the lowest rate in three years and a deceleration from the 8.1 percent growth rate it saw the previous quarter.

 

Anxiety remained regarding the European debt crisis. The Street is concerned that political headwinds in Europe will stymie the latest rescue plan for the euro currency union, which eurozone leaders announced at a summit meeting late last month.

 

On Friday, Moody's downgraded Italy's government debt two levels, citing an increased likelihood the country will be slammed by higher borrowing costs. Yields on the Italian 10-year bonds rose to 6.06 percent. However, that is not all bad news for Italy, as an auction of 3-year bonds sold at an average yield of 4.65%, down from 5.3% in mid-June.

 

The University of Michigan's Consumer Sentiment Index for July fell to 72, from 72.2 the prior month. The reading was below expectations.

 

Consumer Sentiment Down Again

 

Consumer sentiment cooled again in early July to its lowest level in seven months as consumers were unenthused view of their finances and job prospects, a survey released on Friday showed.

It was the second month in a row that sentiment fell after a streak of gains that started in September and Americans' attitudes about their financial situations for the coming year reached an all-time low.

 

The Thomson Reuters/University of Michigan's preliminary reading on the overall index on consumer sentiment fell to 72.0 from 73.2 in June, frustrating economists' expectations for a slight gain to 73.4. It was the lowest level since December 2011.

 

Worries about the strength of the global economy have grown of late, along with concerns the euro zone debt crisis is taking its toll. After growing at a 1.9 percent annual rate in the first quarter, the economy is not expected to have done much better in the second quarter.

 

Only 19 percent of consumers expected to be financially better off in the coming year, the lowest proportion ever recorded by the survey. Americans were also gloomy about their longer-term prospects, with 39 percent anticipating their situation would be better in five years.

 

The gauge of consumer expectations slipped to 64.8 from 67.8, also the lowest since December.

 

While there was widespread recognition of an economic slowdown that did not have a large impact on consumers' view of their present situation, and the barometer of current economic conditions rose to 83.2 from 81.5. Still, news of job losses was mentioned twice as frequently as job gains, the opposite of the first six months of the year.

 

Separately, producer prices rose only slightly last month as energy costs dropped, suggesting inflation pressures remain muted and leaving the door open for more efforts to stimulate the economy by the Federal Reserve. The Labor Department said on Friday seasonally adjusted producer prices rose 0.1 percent last month. Analysts polled by Reuters expected the index to drop 0.5 percent.

 

While wholesale prices of finished goods rose, costs for intermediate and crude goods fell, suggesting less inflation pressure down the road. Energy prices dropped 0.9 percent in June, dragged down by a record drop in prices for residential electric power, which fell 2.1 percent. Diesel fuel prices sank 8.8 percent.

 

Higher food and gasoline prices took analysts by surprise, with gasoline prices up 1.9 percent. However, declines in prices for less-refined petroleum products, which go into making gasoline, pointed to softer costs ahead for gasoline. Cheaper energy prices are likely to help the economy as lower costs for fuels and other input prices leave companies with more money to spend on other things, such as equipment or even hiring.

 

Planned spending cuts and tax hikes next year could send the economy into recession, but the survey showed consumers are not yet overly worried about the so-called "fiscal cliff," with Americans expecting Congress will take action to avert a sharp tightening in policy.

 

But confidence in government economic policies remained near all-time lows at 11 percent.

 

So-called core inflation, which strips out more volatile food and energy prices, rose 0.2 percent, in line with expectations, the Labor Department data showed. While overall inflation has cooled recently, core inflation has held at higher levels.

 

Nonetheless, Americans' inflation expectations stayed in check in July. The University of Michigan survey showed consumers' one-year inflation expectation falling to its lowest level since October 2010 at 2.8 percent from 3.1 percent. The five-to-10-year inflation outlook held steady at 2.8 percent.

 

Fed's Lockhart Favors Easing if No Economic Improvement

 

A voting member of the Federal Reserve's policy-setting body said on Friday he has edged closer to supporting another round of quantitative easing if the sluggish economy can't shake its doldrums.

 

"My support for the current stance of policy rests on a forecast that sees a step-up of output and employment growth by year-end and into 2013," Atlanta Fed President Dennis Lockhart told a business group.

 

"If the economy continues on the track indicated by the most recent incoming data and information, that forecast will become untenable, as will the policy premises underlying it," he added.

 

Lockhart said in response to a direct question about whether he supports a third round of quantitative easing that he is still "on the fence" about it. But he made clear that a string of gloomy reports have him moving closer to believing aggressive further stimulus may be necessary.

 

"I have been watching the economic data and listening to what people tell us about what's going on in the economy with increasing concern," he told reporters later. "And in that sense, my receptivity has increased a bit."

 

In his last public statements, Lockhart had said the economic outlook would have to deteriorate before further monetary policy stimulus would be warranted. Since then, the government reported that employers hired fewer people than economists expected in June and the jobless rate held steady at a lofty 8.2 percent.

 

He said on Friday Fed officials are divided among those who think the outlook as is calls for further policy action before long and those who think further aggressive action should be held in reserve in case the situation gets worse.

 

The Fed meets at the end of the month, with a policy decision expected August 1. Many analysts expect the Fed to launch a third round of bond buying to boost growth later this year.

 

Such a move would add to the Fed's accommodative actions, which include keeping rates at near zero for 3-1/2 years, $2.3 trillion in bond purchases, a conditional pledge to hold borrowing costs at rock-bottom levels through at least late 2014, and shift in the average maturity in its portfolio to push down longer-term interest rates.

 

Lockhart said he had already cut his forecast for growth and job market gains at the Fed's June meeting.

 

"Incoming data have disappointed over the course of the first two quarters of the year," he said on Friday. In addition, risks of a shock have risen with economic turmoil in Europe, uncertainty over year-end U.S. tax increases and spending cuts, and a global slowdown, he said.

 

"It's possible another policy decision looms," he said. "My colleagues and I on the (Fed) may confront a decision on whether to respond more aggressively to the economy's apparent weakness."

 

Lockhart said that if the Fed decides to go on another bond buying spree, mortgage-backed securities might be part of the mix to give downtrodden housing markets a boost.