A Week in the Rearview – week ending 8/27/2010
In the headlines
A look at some of the market movers from the week:
- BHP continued to face major hurdles in its hostile bid for Potash Corp
- Mortgage fraud is starting to rear its ugly head again
- Dell and HP battled for the right to acquire 3Par
- The Federal Reserve is trying to delay a court-ordered release of documents from the financial crisis
- Dell released its Aero smartphone in the U.S.
- Standard & Poor’s downgraded Ireland’s debt by one notch
- Fed chief Ben Bernanke reiterated that the Fed is ready to act should the U.S. economy need more stimulus
- Revised second-quarter GDP numbers showed much slower growth
- Johnson & Johnson continued to be racked by recalls
- Intel lowered its revenue forecast for the third quarter
- U.S. consumer sentiment rose less than expected
- Housing data continued to be worrisome
Commentary
The markets slid again this week, with the S&P 500 posting a 0.7% drop for the week. A 1.7% jump on Friday wasn’t enough to counteract three down days earlier in the week, including a 1.5% dip on Tuesday. This is the third week in a row that the index has dropped and it’s looking like August will close with a loss after July’s big gains. Year-to-date the S&P is down 4.5%.
No head-scratching is needed to figure out the reason for the week’s poor performance. Though it was a rather light economic calendar, most numbers released during the week came in below the market’s expectations. Early-week reports on the housing market missed estimates by significant margins, with the weightier existing home sales measure coming up nearly 20% shy of the expected mark.
In addition, the 0.3% gain in durable goods orders fell well below the 3% expectation. The “ex-transportation” measure of durable goods — which excludes the often-volatile auto sales — was even uglier, posting a 3.8% decline versus a 0.5% expectation. The University of Michigan’s report on consumer sentiment also missed estimates.
The revised estimate of second quarter GDP growth came in at 1.6%, above the 1.4% pre-release estimate. The higher-than-expected release, however, was cold comfort as growth was revised down from the original 2.4% estimate.
If there was any shred of hope from the numbers this week, it was from the initial unemployment claims desk. Initial claims clocked in at 473,000, below the 485,000 expected as well as the 504,000 registered last week. The measure remains elevated though, and it’s been tough to read too much into the week-to-week changes given the volatility.
The only event that seemed to be able to revive investor optimism at all came at week’s end with Federal Reserve Chairman Ben Bernanke’s speech in Jackson Hole. Without committing to any specific course of action, Bernanke asserted that the Fed still has tools available to prop up the economy should the situation call for it. This refuted comments earlier in the week from Nouriel Roubini and others that suggested the Fed was out of “policy bullets.”
Bernanke also had some optimistic comments about the economy. He noted that while growth has been slow and unemployment has been high, he sees there appears to be a shift underway from government stimulus and inventory restocking to consumer spending and business investment. If true, that would be good news for the economy, but it also suggests that Bernanke is in no rush to unleash any major Fed stimulus quite yet.
Looking ahead
If second-quarter earnings announcements still held any sway last week, that will continue to wane in the coming week. The only earnings news that is likely to register in the broad markets is guidance changes for the third quarter.
Far more important in the week ahead will be the economic announcements. With the close of August coming on Tuesday, the week’s reports will include he all-important employment numbers.
The focal point of the week will be Friday’s nonfarm payrolls report from the government, along with the unemployment rate, hourly earnings, and average workweek. Overall payrolls are expected to decline by 118,000, though that drop will be driven by more departing census workers. Private payrolls are expected to expand by 42,000 after a 71,000 gain in July. Average workweek is expected to hold steady, while hourly earnings are seen growing 0.1%.
There will be plenty of other economic news for investors to key in on prior to Friday though. On Monday, personal income and spending for July will be released and both are expected to show growth rates above June’s levels. On Tuesday, consumer confidence will be released along with the minutes from the most recent Federal Reserve rate-setting meeting.
Wednesday and Thursday will bring ADP’s employment numbers, construction spending, the ISM index, auto sales, initial unemployment claims, productivity, factory orders, and pending home sales. Notable in that group will be the ADP report — which may show 13,000 jobs added versus last month’s 42,000 — the ISM index, and initial unemployment claims.
If next week’s reports come in around current expectations, it seems that investors may have more fuel for the recent weeks’ pessimism. Upside surprises, particularly in the employment figures, could help change sentiment. At the same time, if investors start to sense that recent declines have overshot the change in economic outlook, buyers could step in even if next week’s data is lukewarm.
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