Weekly wrap: A melting pot of key data releases and rewrite of US economic history – 29.07.2013
Source: Henderson Global Investors
This was a week where equities tried to advance but their bullish momentum was blocked by mixed corporate earnings, worries over economic weakness in China, the strength of the yen and more generally summer torpor in the northern hemisphere. Equities did close the choppy week higher, while safe haven assets such as US Treasuries and German bund prices fell, raising their yields.
The economic snapshot of the week revealed diverging trends around the globe. In the US data was mixed again: US home sales unexpectedly dropped 1.2% in June, but durable goods orders for the same month far outpaced the 1.3% forecast, rising 4.2%. Economic growth in the UK came in line with expectations with a 0.6% rise in the second quarter gross domestic product (GDP). Meanwhile, signalling a return to growth in European manufacturing activity, the euro flash composite purchasing managers’ index (PMI) boosted sentiment by moving back above 50 in July (a figure above 50 indicates expansion in activity) while German and French PMI releases were also upbeat. However, concerns for a weakening economy in China were elevated as the HSBC preliminary manufacturing PMI figure disappointed with a 47.7 reading as opposed to 48.2 expected. In Japan the government upgraded their economic outlook for the third straight month while consumer prices rose in June, for the first time in over a year. The 0.4% year-on-year rise was the biggest increase in five years.
As we approach the end of the month a clearer picture of corporate health has begun to take shape. Of the 240 S&P 500 companies that have reported Q2 earnings in the US, 72% beat expectations on earnings but revenue growth was behind with only 58% above expectations. The picture in Europe is slightly more disappointing as only 48% have reported earnings that beat expectations.
Rewriting US economic history
US Q2 GDP growth is to be released on Wednesday, analysts expect a 1.0% quarter-on-quarter rise (annualised), down from Q1’s growth of 1.8%. However, in an historic move this GDP release will include major revisions to the methodology of calculation going back to 1929, in effect rewriting economic history in the US, which could add the output of a country the size of Belgium’s to that of the US. Another key release is Friday’s US employment report with its implications for the unwinding of stimulus: non-farm payrolls may have added 185k jobs to the economy in July, while the unemployment rate could edge down 0.1% to 7.5%. Elsewhere, European inflation data out this week are expected to paint a stabilising picture, while confidence and business climate indicators should reinforce the upbeat mood reflected in the PMI releases of last week. Thursday sees PMI manufacturing releases from across the globe including the UK and euro area. With confidence weaker in China following last week’s poor HSBC preliminary PMI, July’s official PMI manufacturing release will be keenly watched.
The US Federal Open Market Committee (FOMC) is to hold its 2-day meeting on Tuesday and Wednesday. While no change in the pace of quantitative easing (QE) or interest rates is expected, there are hopes that forward guidance could be refined in order to clarify the FOMC’s stance on tapering QE. Two other major central banks, the European Central Bank (ECB) and the Bank of England (BoE) have rate setting meetings on Thursday where both are expected to hold rates steady at 0.5%. The latter, however, might reveal a new emphasis on guiding the markets.