A Week in the Rearview – week ending 6/25/10
In the headlines
A look at some of the market movers over the past week:
- China announced that it would end the yuan’s peg to the dollar
- Barclay’s executives defended the deal for Lehman Brothers
- The FCC approved AT&T’s $2.4 billion asset purchase from Verizon
- A judge overturned the six-month deepwater drilling moratorium
- Hasbro addressed a possible private equity deal
- BP hit another snag in its oil collection after an undersea collision forced it to temporarily remove the cap
- The Fed kept its key interest rate near zero
- Lawmakers reached an agreement on a finalized financial reform bill
- Greece may sell off some of its 6,000 islands to help repay debts
- U.S. first quarter GDP growth was reduced again
Commentary
The market gave in to pessimism last week and by week’s end the S&P 500 had slumped 3.6%. Four straight down days had the index off nearly 4% by Thursday before it recovered slightly on Friday. The S&P is now down 3.4% year-to-date.
Early-week economic reports helped fuel the market’s slump as numbers from the housing market came in much lower than expected. Still reeling from the expiration of the government’s homebuyer tax credit, both existing and new home sales fell well short of the market’s expectations. The decline in new home sales was particularly startling as sales in May dropped 33% from April.
The press release from the Federal Reserve’s rate-setting meeting didn’t help the market’s early-week southward momentum. Though Fed officials said that the economic recovery is continuing and that the labor market is improving, it also noted a number of troublesome areas in the economy. Notably, the press release continued to state that the Fed would keep near-zero rates for “an extended period,” which highlights the Fed’s belief that the economy is still in need of significant monetary support.
Economic reports from the second half of the week were a bit more mixed. Initial unemployment claims came in at 457,000, which was not only below the prior week, but also below the market’s expectations. The consumer sentiment reading from the University of Michigan added to the good news with a higher-than-expected reading. However, first quarter GDP was once again stepped down, this time to 2.7%. The original estimate was 3.2%.
Though the week started off with a good deal of excitement over China’s decision to relax its dollar peg, the enthusiasm quickly faded as it became clear that the move wouldn’t bring any quick, drastic changes. In the U.S. it has been hoped that a revaluation of the yuan might give a boost to U.S. exporters.
Bookending the yuan announcement at week’s end was the announcement that a finalized version of the financial reform bill had been reached. The scale of the overhaul is being likened to the changes put in place following the Great Depression. Many, however, were disappointed with the final outcome as late bargaining led to an easing of some of the toughest new restrictions.
Looking ahead
Wednesday will be the close of the month and the close of the second quarter, which brings us closer to the July 12 kickoff of second quarter earnings season. While there are still a few more weeks before second quarter reports will begin to flood the newswires, the end of the second quarter may bring some companies to the fore to preannounce results.
June 30 also means the end of the month for economic reports, which means next week will have a heavy calendar. Monday will include personal income and spending and Tuesday will follow with the Case-Shiller home price index and consumer confidence. Wednesday we’ll get our first glimpse of the employment situation with the ADP employment change report.
Thursday’s reports will include initial unemployment claims, construction spending, the ISM index, pending home sales, and auto sales. The week will close out with the government’s report on payrolls, the unemployment rate, hourly earnings, and the average workweek.
After last week’s weak housing numbers, there may be some extra attention given to the Case-Shiller report as well as the pending home sales numbers. Current expectations are that pending home sales dropped 10.5% in May after increasing 6% in April, while April housing prices increased 3%.
The key to next week, however, will be the employment data. After weak private sector hiring caused a big disappointment last month, all eyes will be on the government’s payroll data. Of course, as was the case last month, the headline number won’t be the number that most market watchers will be most concerned with.
While most of the 431,000 jobs added last month represented temporary government hiring for the Census, the shedding of many of those temporary workers will create a big drag on the overall number this month. Investors will be looking past that headline number to the number of jobs added in the private sector. The ADP employment report, which the market anticipates will show 61,000 job additions, may give an early hint about what to expect on Friday.
Also on the schedule next week will be the final vote on the financial reform package. It’s largely expected that the negotiated bill will have enough votes to pass, but we could see some market reaction when the reforms are formally voted in.
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