North American Review – US Stocks Edged Down As Data Failed to Impress

The Dow Jones Industrial Average extended its fall to end 16.80 points lower or 0.2% at 10,303.15 on Friday, while Nasdaq Composite index slipped to 2,173.48 or 0.8% lower and Standard & Poor’s 500 index settled at 1,079.25 or down 0.4%. Lingering worries about US and global economic outlook remained the negative factors that tied the indexes to the red zone on Friday.

Three sets of economic data were announced during the US session. Retail sales were up 0.4% in July, recovering from a revised 0.3% drop in June, but slightly below the consensus of a 0.5% increase. Although showing recovery, when the headline figure is stripped off its auto component, sales were merely up 0.2%, lower than the expected 0.3% rise. Further, excluding both autos and gasoline sales, retail sales actually dropped 0.1%. This does not bode well given that consumer spending is a crucial component behind economic growth.

Consumer Price Index was in line with expectations. Headline figure showed a rise of 0.3% in July while the core figure which excluded food and energy prices edged up 0.1%. Year-on-year figure on core CPI remained at 0.9%. Tame CPI has been sparking concerns over a potential deflation developing which was recently dismissed as a threat by Thomas Hoenig, the only FOMC member persisting that rates should be raised soon. On deflation, Hoenig said that he found no evidence that deflation is the most serious threat to the recovery today. In addition, the president of the Kansas City Federal Reserve Bank criticized the current Fed’s stance on interest rates as a dangerous gamble and risking another cycle of severe recession and unemployment. He viewed that highly expansionary monetary policy is not a good option to accelerate GDP growth.

The final piece of data was consumer confidence which showed an improvement from 67.8 in July to 69.6 in August against the consensus of 68.8. Still, the markets seemed unimpressed by the data and remained

Upgrades and Downgrades

Microsoft seen heading towards a lowered target of $33 at Jefferies as PC sales seen lower, but kept at BUY whereas Bank of America upgraded from Neutral to Buy by Guggenheim. Microsoft ended down 0.37% at $24.40 while Bank of America gained 1.28% to settle at $13.23. Worst performers were Motorola (-4.74%), Starbucks (-1.92%), and Intel (-1.54%).

Week Ahead

US economic data pending for release next week will focus on the housing market and industrial production. On Monday, Home Builders’ Index for August will be released with the consensus at 15 vs. prior 14. On the same day, Empire state index for August is seen expanding from 5.1 to 9.5.

Producer Price Index is due Tuesday. July’s headline index is seen unchanged after dropping 0.5% in June. The core measure is seen edging up 0.1%, at the same pace as June’s. Housing starts for July is expected to show an increase to 560,000 from 549,000 in June, while industrial production is expected to show a 0.6% gains in July against 0.1% in prior month.

No data is expected on Wednesday and Friday, but on Thursday jobless claims is seen to have moderated to 482,000 from 484,000. Philly Fed index is also due and seen to print an increase from 5.1 to 7.0 in August. The final data will be leading indicators which to show an increase of 0.2% after it fell 0.2% in June.

Overall, economic front promises brighter outlook, but should the results turn otherwise, the market sentiment will suffer again.

Earnings Focus

Wal-Mart, Hewlett-Packard, Dell, and Home Depot are due to release their earnings report next week along with several other retailers. J.C. Penney delivered a warning on Friday, saying that its customers were vulnerable to weak economic conditions. Wal-Mart and Home Depot will report on August 17th, while HP and Dell will report on August 19th.

Wal-Mart is expected to report an EPS for 2Q of 97 cents a share, up from 88 cents a share last year. Sales are seen at $105.5 billion vs. $100.9 billion. At Home Depot, net profit is seen at 71 cents, gaining from 67 cents a year earlier.

HP had already released its preliminary results for the third quarter last week, and it showed expected revenue of $30.7 billion, an 11% gains from prior year, above last year’s revenue of $27.5 billion or 91 cents a share. Adjusted earnings for the current quarter seen in the range of $1.25 per share to $1.27 per share with revenue seen between $32.5 billion to $32.7 billion. Dell is also going to release its earnings on Thursday, with the consensus on net profit at 30 cents and revenue of $15.2 billion for the second-quarter. Last year, Dell reported earnings of 24 cents per share and revenue of $12.8 billion.