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Summer
rally afterall?
Econoday Simply
Economics 7/14/00
By Evelina M. Tainer, Chief Economist |
Technology stocks back in favor
Stock prices continued on their upbeat note again this week. To the relief
of many, higher than expected earnings were released by some large companies.
The markets labeled Alan Greenspan's speeches "benign". He said nothing
about monetary or economic policy on Tuesday and Wednesday but rather
confined his remarks to mostly encouraging comments about technology and
advances in efficiency. On tap next week is the first of his two congressional
testimonies on monetary policy. Mr. Greenspan offered a distraction from
the market's focus on corporate results. But earnings news will continue
to dominate the market's attention in the upcoming weeks.
Merger activity and good
earnings have stimulated otherwise meandering markets into what has
been tentatively labeled a summer rally. The announced merger between
UBS of Switzerland and Paine Webber invigorated the Dow Industrials.
The Dow
and especially the Nasdaq
were stirred by the better than expected profits, which made memories
of some earnings warnings fade away. The Nasdaq rose on better than
expected profits from Yahoo!, and images of higher profits and rising
markets for the tech sector emerged. The markets noted the producer
price and retail trade data and then shifted their to focus on Mr. Greenspan's
upcoming testimony instead.
The Dow and Nasdaq have been
outperformed so far this year by the Toronto
Stock Exchange Composite 300, the
Paris CAC,
and the Frankfurt
DAX. Of the five major indexes
graphed below, the Japan Nikkei
225 is the worst performing, down
about 9.5 percent so far this year. The TSE is outperforming everyone.
It’s up over 28 percent after rocketing up 30 percent last year.
Bond market's worry beads
Early in the week, the bond market drifted along with
no special news. Investors contended with a heavy outpouring of corporate
and agency bonds and were distracted by absorption problems away from
the treasury market. Market players could not glean any market moving
words from Alan Greenspan's speeches on Tuesday and Wednesday. Thursday's
economic reports on import/export prices and unemployment claims were
both market friendly and bond prices rose. Weekly unemployment data
were fraught with seasonal closing problems and holiday distortions.
Investors once again became nervous about Japan's economy, buying U.S.
Treasuries after a major non-financial company was allowed to file for
bankruptcy.
The producer price index data showed a benign price
picture except for energy. However, the retail sales report was not
as sanguine. It wasn't June sales that upset the bond market so much,
but rather the hefty upward revisions to April and May, which only proved
that the consumer is still shopping. This raised the specter of an interest
rate increase at the August 22 FOMC meeting. However, many traders are
looking beyond Friday's data and to Alan Greenspan's congressional testimony
on July 20 (Senate) and July 25 (House).
The dollar also rises
Currency flows related to international merger activity
pushed the dollar higher and the euro lower. The foreign exchange markets
ignored the substantial upward revision in European Monetary Union first-quarter
gross domestic product to a 3.7 percent annual rate. Mergers and acquisitions
activity appears to be moving in the wrong direction for the euro. Further
announcements of EMU companies buying U.S. firms could push the common
currency lower. Foreign investors bought a record $141 billion of U.S.
securities in the first quarter, the Securities Industry Association
said in June, bolstering the dollar and helping to weaken the euro.
The dollar rose and the yen
fell when a major Japanese firm declared bankruptcy, placing greater
pressures on the flailing Japanese banking sector as other companies
in critical financial conditions consider their options. This is compounded
by continued Bank of Japan rhetoric concerning their zero rate interest
policy (ZIRP). The Bank would like to see an end to it but has been
pressured especially by the Ministry of Finance, which would like to
see it continued until Japanese growth is more stable. The markets are
questioning the Bank of Japan's resolve given the bankruptcy news and
the potential strains it may cause.
Markets
at a Glance
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Treasury
Securities |
12/31/99
|
July
7 |
July
14 |
Weekly
Change |
30-year Bond |
6.48% |
5.86% |
5.88 |
+ 2 BP |
10-year Note |
6.43% |
6.00% |
6.10 |
+10 BP |
5-year Note |
6.34% |
6.09% |
6.25 |
+16 BP |
2-year Note |
6.24% |
6.27% |
6.40 |
+13 BP |
|
|
|
|
|
Stock Prices
|
|
|
|
|
DJIA |
11497* |
10637* |
10807* |
+1.61 % |
S&P 500
|
1469* |
1479* |
1510* |
+2.10% |
NASDAQ Composite
|
4069* |
4023* |
4243* |
+5.46 % |
Russell 2000 |
505* |
528* |
532* |
+0.76 % |
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Exchange
Rates |
|
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Euro/$ |
1.0008 |
00.9476 |
0.9375 |
-1.07 % |
Yen/$
|
102.40 |
107.83 |
107.87 |
0.04 % |
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Commodity
Prices |
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Crude Oil ($/barrel) |
$25.60 |
$30.38 |
$31.30 |
+3.03 % |
Gold ($/ounce) |
$289.60 |
$284.70 |
$282.00 |
- 1.00 % |
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(BP = basis points; stock
price indices are rounded) |
The consumer
hasn't stopped spending yet
Retail sales climbed 0.5 percent in June after
an upwardly revised increase of 0.3 percent in May. Second quarter consumer
spending looks stronger than originally thought — apparently consumers
are not done spending yet, although they are not spending with quite
the same abandon as they were a few months ago! A surprise 1.5 percent
jump in auto sales was a major factor behind the increase. Excluding
autos, sales rose a more sedate 0.2 percent in June after a revised
0.5 percent increase in May.
Durable goods rebounded in June, climbing 0.7 percent
after remaining flat in May. The increase largely came from rising auto
sales. However, building material and hardware sales continued to fall
as would be expected with the current downward trend in housing starts.
Furniture and appliance store sales also dipped in June after a revised
increase in May. Higher interest rates typically hamper durable goods
spending, though this obviously didn't apply to autos in June.
Nondurable retail sales rose 0.4 percent in June after
an upwardly revised increase of 0.5 percent in May. Sales at gasoline
service stations were the main contributor to the increase, climbing
1.3 percent. However sales in apparel stores dropped 1.9 percent and
drug and proprietary stores were down 0.8 percent.
The bottom-line
on the consumer? The retail sales
chart above clearly depicts a decided moderation in the pace of consumer
spending despite the June pickup in auto sales. The three-month moving
average of retail sales shows that the underlying trend is simply lower
than it was several months ago. The Fed’s past six interest rate hikes
are undoubtedly reducing housing demand, leading to weakness in durable
goods such as furniture and appliances.
Higher energy prices have to be affecting consumer
spending also. When consumers spend a few cents more per gallon on their
weekly fill-up, the extra money going to gasoline expenditures may not
even be noticeable. It could be the cost of a coke or a candy bar. But
gasoline prices have surged in the past couple of months. The money
going to gas is tangible to consumers — who now have less discretionary
income for other purchases.
Higher energy prices are
bound to choke off some consumer spending. In addition to higher rates,
energy prices may be cooling down the economy this summer. It is debatable
whether the Fed has completed its tightening rounds, and the pickup
in retail sales is certainly going to be worrisome for policy makers.
Energy
is the culprit
As expected, the producer price index rose 0.6 percent
in June after it was unchanged in May. June's increase was caused by
a 5.1 percent surge in energy prices. Gasoline prices soared 11.8 percent
while heating oil prices rose 8.4 percent. Natural gas costs increased
by a record 5.7 percent, surpassing the previous record increase in
January 1997. Food prices continued to decline, helping to put a damper
on the index. As a result, the PPI was up 3.8 percent in June relative
to a year ago, about the same as May.
Excluding the volatile food and energy sector, the
core PPI declined 0.1 percent. Analysts had expected an increase of
0.1 percent. Car prices declined 0.5 percent after rising 0.9 percent
in May. Tobacco prices dropped 1.8 percent and paper products declined
1.3 percent. The PPI excluding food and energy is up 1.4 percent when
compared with last year.
Market players have focused their attention on the
PPI at earlier stages of production for hints at the direction of future
price movements. The intermediate materials index turned up 0.9 after
falling 0.1 percent in May. Energy prices, which were up 4.7 percent,
bear the brunt of the blame for the increase. Intermediate goods prices
excluding food and energy rose 0.2 percent in June after a 0.1 percent
increase in May. At the same time, crude materials prices jumped 5.8
percent led by a jump of 13.8 percent in crude oil prices and a 23.9
percent increase in the cost of natural gas. Yet crude goods prices
excluding food and energy fell 1.3 percent in June after sliding 0.3
percent in May.
The Labor Department reported June import and export
price data earlier this week. Import prices jumped 0.8 percent in June,
following on the previous month's 0.6 percent increase. Once again,
higher oil prices are behind the accelerated price hike. Yet, non-oil
import prices were unchanged for the month and are only 1.1 percent
higher than a year ago. Export prices slipped 0.1 percent, reversing
the previous month’s increase. Export prices are up 1.9 percent from
a year ago. On the whole, these figures are relatively favorable, as
they are no longer accelerating.
The bottom-line
on inflation? The inflation news
was relatively favorable for June with the exception of energy prices
where the bulk of the problems remain. Financial market players liked
the data because it indicates that the Fed doesn’t have a lot further
to go in terms of its tightening cycle. But make no mistake, the Fed
is not done. Most economists are predicting at least one more 25 basis
point rate hike. But these inflation figures won’t settle the debate.
Industrial
production cools down
The index of industrial production rose a weaker than
expected 0.2 percent in June after a larger increases of 0.5 percent
and 0.8 percent, respectively, in May and April. Production of both
consumer goods and construction supplies declined on the month. However,
business equipment posted another healthy gain of 9.2 percent when compared
with last year. If the growth is coming from capital spending, that
could help to boost productivity in the future.
The capacity utilization rate slipped to 82.1 percent
in June but is significantly higher than a year ago. The old rules of
thumb suggest that inflationary pressures begin to develop after the
operating rate hits 83 percent.
THE BOTTOM LINE
The bulk of this week's economic data was released
as everyone was headed out for the weekend. The data were mixed suggesting
that inflation, with the big exception of energy prices, is muted. However,
retail sales surprised. These data are subject to large revisions in
both size and direction of change and should be treated carefully. On
a trend basis, consumer spending does seem to be growing more slowly,
and that is exactly what the Federal Reserve would like to see. Its
interest rate increases are finally working. It is too soon to tell
what the picture will look like by the time the Fed meets on August
22. There will be a lot of economic data between now and then.
In between, investors will listen very closely to Fed
Chairman Alan Greenspan's testimony on Thursday, looking for clues to
monetary policy direction.
Looking Ahead: Week of July 17 to July 21
Market News International
compiles this market consensus which surveys about 20 economists each
week.
Monday
Business
inventories should increase 0.4
percent in May, slightly faster than the pace set in April. Sales are
expected to jump 0.8 percent, reversing April's 0.6 percent drop. This
could lead to a decline in the inventory-to-sales ratio.
Tuesday
The consumer
price index is expected to increase
0.5 percent. This incorporates a boost in energy prices. Excluding energy,
the CPI should post a gain of 0.2 percent, in line with the past several
months.
Wednesday
The consensus shows the May international
trade balance on goods and services
is expected to reveal a shortfall of $30.5 billion compared with a $30.4
billion trade deficit in April. Economists are predicting increases in
both exports and imports.
Thursday
Market participants are expecting new
jobless claims to drop to 315,000
in the week ended July 15 from last week's 319,000 level. Claims are
likely to be rather volatile in the next several weeks since summer
factory shutdown schedules are not exact from year to year.
Market players are looking
for housing starts
to decline about 1.6 percent to a 1.575 million-unit rate, less than
the previous month’s decline.
The Philadelphia Fed’s business
outlook survey is expected to rise
to 5 in July from June’s level of 1.7. This would show pretty healthy
production activity in this Fed district.
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