Intel INTC (+1.7%) provided solid leadership in the Dow and NASDAQ, especially in the early going. The top four performing stocks in the Dow were Cisco Systems CSCO (+2.8%), Intel, Microsoft MSFT (+1.2%), and Hewlett-Packard HPQ (+1.2%). It was clearly a “Tech” moment, but it helped push the S & P up to 1100, which has caused the market angst over the past two sessions. This is the area of the downtrend line off of the April through June peaks and its 10-week moving average. The 200-day still looms large at 1111. Intel had some tough opponents on the day, starting with a larger-than-anticipated decline in June Retail Sales. It wasn’t as bad as it might have seemed, although it was off 0.5% after falling 1.1% in May. Expectations were for a dip of 0.3%. It was pretty much autos, as the retail sales ex-autos were in line with expectations, down 0.1% If you take out gasoline sales, which were also down a touch, retail sales actually edged up by 0.1%. This was slightly better than the unchanged reading anticipated. Import prices were a surprise, dropping 1.3% in June after slipping 0.5% in May. Expectations were for a decline of just 0.4%. Fuel imports were off 4.0%, accounting for the decline. The rally in the Dollar contributed to the decline in commodity prices, also hurting basic material and construction import prices. A smaller report out a little later in the morning, Business Inventories, rose just 0.1% for May versus expectations for a 0.2% increase. This falls in line with our expectation that companies have not started an “inventory rebuild cycle” in earnest. They did increase inventories in the first quarter, but most of the regional data suggest that the effort was only to have enough product on hand to meet demand, not add to expectations for future sales.
The real negative for the market was the FOMC minutes. This is where having an open and transparent Fed may not be the best idea. In the FOMC meeting, officials discussed the “what if” scenario. What if the economy were to worsen? The Fed admitted that the recovery had begun to soften in the second quarter, citing the European fiscal crisis as the main culprit. This led to a discussion of perhaps needing to increase stimulus where appropriate. With the Fed funds rate already at zero, additional action would have to be rather radical, and that is not something the market likes to hear. Between the weaker retail sales figures and the Fed’s cautious statement on the economic recovery, the timing was appropriate for some of the major financial firms to cut their expectations for 2nd quarter GDP. We had questioned the likelihood of GDP coming close to the 3.0% consensus weeks ago, after the regional June Fed surveys showed declines in inventory, rather than an inventory build. This will detract from GDP, so something in the low 2s is much more likely. Given yesterday’s data, Macroeconomic Advisors cut its 2nd quarter forecast to 2.1% from 3.2%, Moody’s Economy.com cut its number to 2.0% from 2.9%, JP Morgan slashed its target to 2.2% from 3.2%, and Barclays remained optimistic at up 3.0%, but that was still down from 3.5% previously, all according to MarketWatch.com.
In reality, this revision shouldn’t come as a surprise. The data to date support a “low-2%” GDP report for the 2nd quarter. However, the inventory rebuild that never happened in Q2 should benefit Q3. This means that factories will continue to produce to meet production, but probably won’t add to inventory until we see signs of increasing economic growth. For that to happen, we’ll need to see jobs. In order to get jobs being produced in the private sector, we’ll need one of two things (or preferably both). One could be a directed stimulus program. For example, one idea that has been floated about is to give a year off from paying the corporate side of the employer tax for new hires only. Another potential tax break is to allow for accelerated depreciation of assets purchased by a certain date. That spurs the purchase of trucks, machinery, technology, etc. The demand for these goods ends up pushing manufacturers to increase production, especially since they have little in inventory. The other component comes from the financial sector. Get financial reform done! Banks are still putting billions away into reserve accounts. In fact, when I was on Kudlow & Co. last week, Larry Kudlow said that the latest estimate was that $1 trillion was in bank reserves. Broaden what instruments can be used as reserves, not just US Treasuries. Take away incentives to hold cash. Believe it or not, if the Fed were to increase the Discount rate, banks may be forced to seek out higher yielding investments. We’re not talking about inflation-fighting levels on rates, but just a 50 basis point uptick. If banks see opportunity in lending and the rules and regulations for financial reform are laid out, they will begin to lend. The combination of these two factors could lead to a pick-up in jobs by Q4, which would be aided by the positive seasonal activities.
Today, it’s all going to count. We’re up against some technical resistance. We’ve got a few key earnings reports due out, including JP Morgan & Chase JPM (-0.3%), Google GOOG (+0.4%), and even Fairchild Semi FCS (+4.1%). I don’t think anyone is too concerned about the PPI numbers, expected to slip 0.1% and the core to rise 0.1%. Weekly Jobless Claims can always get attention with a big, unexpected move. Estimates are for 445,000 versus last week’s 454,000. There are some big numbers. Industrial Production (est. -0.1%) and Capacity Utilization (est. 74.1%) for June are expected to show how growth had slowed to near neutral month-over-month levels. Two regional surveys, the NY Fed (expected 18.0 versus 19.6) and the Philly Fed (expected 10.0 versus 8.0) are July numbers, so they should carry some weight. Today should be a busy and interesting day. The market is already up 7% in a couple of weeks. It needs to keep the good news flowing to make more headway.
Intel INTC (+1.7%) provided solid leadership in the Dow and NASDAQ, especially in the early going. The top four performing stocks in the Dow were Cisco Systems CSCO (+2.8%), Intel, Microsoft MSFT (+1.2%), and Hewlett-Packard HPQ (+1.2%). It was clearly a “Tech” moment, but it helped push the S & P up to 1100, which has caused the market angst over the past two sessions. This is the area of the downtrend line off of the April through June peaks and its 10-week moving average. The 200-day still looms large at 1111. Intel had some tough opponents on the day, starting with a larger-than-anticipated decline in June Retail Sales. It wasn’t as bad as it might have seemed, although it was off 0.5% after falling 1.1% in May. Expectations were for a dip of 0.3%. It was pretty much autos, as the retail sales ex-autos were in line with expectations, down 0.1% If you take out gasoline sales, which were also down a touch, retail sales actually edged up by 0.1%. This was slightly better than the unchanged reading anticipated. Import prices were a surprise, dropping 1.3% in June after slipping 0.5% in May. Expectations were for a decline of just 0.4%. Fuel imports were off 4.0%, accounting for the decline. The rally in the Dollar contributed to the decline in commodity prices, also hurting basic material and construction import prices. A smaller report out a little later in the morning, Business Inventories, rose just 0.1% for May versus expectations for a 0.2% increase. This falls in line with our expectation that companies have not started an “inventory rebuild cycle” in earnest. They did increase inventories in the first quarter, but most of the regional data suggest that the effort was only to have enough product on hand to meet demand, not add to expectations for future sales.
The real negative for the market was the FOMC minutes. This is where having an open and transparent Fed may not be the best idea. In the FOMC meeting, officials discussed the “what if” scenario. What if the economy were to worsen? The Fed admitted that the recovery had begun to soften in the second quarter, citing the European fiscal crisis as the main culprit. This led to a discussion of perhaps needing to increase stimulus where appropriate. With the Fed funds rate already at zero, additional action would have to be rather radical, and that is not something the market likes to hear. Between the weaker retail sales figures and the Fed’s cautious statement on the economic recovery, the timing was appropriate for some of the major financial firms to cut their expectations for 2nd quarter GDP. We had questioned the likelihood of GDP coming close to the 3.0% consensus weeks ago, after the regional June Fed surveys showed declines in inventory, rather than an inventory build. This will detract from GDP, so something in the low 2s is much more likely. Given yesterday’s data, Macroeconomic Advisors cut its 2nd quarter forecast to 2.1% from 3.2%, Moody’s Economy.com cut its number to 2.0% from 2.9%, JP Morgan slashed its target to 2.2% from 3.2%, and Barclays remained optimistic at up 3.0%, but that was still down from 3.5% previously, all according to MarketWatch.com.
In reality, this revision shouldn’t come as a surprise. The data to date support a “low-2%” GDP report for the 2nd quarter. However, the inventory rebuild that never happened in Q2 should benefit Q3. This means that factories will continue to produce to meet production, but probably won’t add to inventory until we see signs of increasing economic growth. For that to happen, we’ll need to see jobs. In order to get jobs being produced in the private sector, we’ll need one of two things (or preferably both). One could be a directed stimulus program. For example, one idea that has been floated about is to give a year off from paying the corporate side of the employer tax for new hires only. Another potential tax break is to allow for accelerated depreciation of assets purchased by a certain date. That spurs the purchase of trucks, machinery, technology, etc. The demand for these goods ends up pushing manufacturers to increase production, especially since they have little in inventory. The other component comes from the financial sector. Get financial reform done! Banks are still putting billions away into reserve accounts. In fact, when I was on Kudlow & Co. last week, Larry Kudlow said that the latest estimate was that $1 trillion was in bank reserves. Broaden what instruments can be used as reserves, not just US Treasuries. Take away incentives to hold cash. Believe it or not, if the Fed were to increase the Discount rate, banks may be forced to seek out higher yielding investments. We’re not talking about inflation-fighting levels on rates, but just a 50 basis point uptick. If banks see opportunity in lending and the rules and regulations for financial reform are laid out, they will begin to lend. The combination of these two factors could lead to a pick-up in jobs by Q4, which would be aided by the positive seasonal activities.
Today, it’s all going to count. We’re up against some technical resistance. We’ve got a few key earnings reports due out, including JP Morgan & Chase JPM (-0.3%), Google GOOG (+0.4%), and even Fairchild Semi FCS (+4.1%). I don’t think anyone is too concerned about the PPI numbers, expected to slip 0.1% and the core to rise 0.1%. Weekly Jobless Claims can always get attention with a big, unexpected move. Estimates are for 445,000 versus last week’s 454,000. There are some big numbers. Industrial Production (est. -0.1%) and Capacity Utilization (est. 74.1%) for June are expected to show how growth had slowed to near neutral month-over-month levels. Two regional surveys, the NY Fed (expected 18.0 versus 19.6) and the Philly Fed (expected 10.0 versus 8.0) are July numbers, so they should carry some weight. Today should be a busy and interesting day. The market is already up 7% in a couple of weeks. It needs to keep the good news flowing to make more headway.