THE MONTH IN BRIEF July brought a new twist on an old story: headlines from Europe actually helped foster an overall stock market advance. The S&P 500 rose 1.26% on the month, and much of the gain was linked to European Central Bank President Mario Draghi’s July 26 pledge that the ECB would do “whatever it takes” to save the euro. After that statement, Wall Street seemingly forgot about the wave of poor-to-mediocre domestic indicators that had held stocks down for most of the month.
DOMESTIC ECONOMIC HEALTH There wasn’t much to cheer about in the June employment report. Unemployment remained at 8.2%, and the economy had added only 75,000 new jobs per month in Q2 2012 compared to 226,000 a month in the previous quarter. About a third of the 80,000 jobs added in June were temporary. There was one positive note: the ranks of the long-term unemployed had thinned to 5.4 million down from 6.3 million a year ago.
Consumer spending was flat for June, even as consumer incomes rose 0.5%. (The economy had grown 1.5% in Q2 compared to 2.0% in Q1.) Consumer confidence polls diverged: the University of Michigan’s July survey hit a 2012 low of 72.3, but the Conference Board’s July survey showed 3.2% improvement to 65.9, its first gain in five months. U.S. retail sales dropped for a third straight month in June (-0.5%), a phenomenon unseen since 2008. There wasn’t much movement in consumer or producer prices. The Consumer Price Index was flat in June while the Producer Price Index rose just 0.1%; annualized consumer inflation was running at 1.7% in June, the same as in May. Had growth returned to the manufacturing sector? According to the Institute for Supply Management, no. Its July manufacturing PMI came in at 49.8, after a June mark of 49.7. The service sector had fared better in June; the ISM PMI for that sector had come in at 52.1. June’s durable goods orders topped forecasts, rising an impressive 1.6%.
GLOBAL ECONOMIC HEALTH A day after he assured the world that the ECB would pull out all the stops to preserve the eurozone, Bloomberg reported that Mario Draghi was meeting with the head of Germany’s central bank to arrange a round of sovereign debt purchases. Yet even as markets waited for an ECB announcement at the start of August, a Bundesbank source commented to CNBC that “monetary policy should strictly focus on its primary mandate to preserve price stability” – a comment that dampened some enthusiasm. Still, it looked like the risk of a quick “Grexit” had passed – as July ebbed into August, Greece’s government agreed to accept the austerity measures required to qualify for the next installment of its EU/IMF rescue loan. Across the euro area, inflation held steady at 2.4% in June, though joblessness had ticked up to 11.2%; eurozone sovereign debt had risen to 88.2% of GDP. Assorted purchasing manufacturer indices looked weak. China’s official PMI hit an 8-month low of 50.1% in July as HSBC’s China PMI rose slightly to 49.3. Taiwan’s PMI came in under 50 in July, and manufacturing gauges in India and South Korea respectively registered their biggest monthly drops since September and December. The eurozone Markit PMI dropped to a 37-month low of 44.0 in July.
WORLD MARKETS The “Draghi rally” certainly helped indices in Europe, though its effect was less pronounced in other regions. Data from the New York Times tells the tale for July: FTSE 100, +1.15%; DAX, +5.55%; CAC 40, +2.97%; FTSEurofirst 300, +4.11%; Hang Seng, +1.83%; TSX Composite, +0.59%; Bovespa, +3.21%; S&P/ASX All Ordinaries, +3.58%; Shanghai Composite, -5.47%; Nikkei 225, -4.48%. The MSCI World Index rose 1.20% for July, while the MSCI Emerging Markets Index advanced 1.61%.
COMMODITIES MARKETS Wheat futures soared 17.30% in July while corn futures gained 26.86%. Energy futures also did well on the NYMEX last month: natural gas went +13.63%, RBOB gasoline +5.41%, heating oil +5.10% and crude oil +3.65. Among metals, gold gained 0.39% and silver 1.09% while copper dipped 2.26%. Cotton prices were virtually flat in July (-0.01%). The U.S. Dollar Index was up 1.17% last month. On July 31, gold settled at $1,610.50 on the COMEX, oil at $88.06 on the NYMEX; at the pump, regular unleaded was averaging precisely $3.50 a gallon.
REAL ESTATE Housing sector analysts had gotten used to the S&P/Case-Shiller Home Price Index bringing depressing data and gloomy analysis, so the May edition was a real surprise – prices rose in all 20 metro markets with a 2.2% composite gain. (In fact, it was the best month the index had seen in over a decade.) Existing home sales, however, slipped badly in June (-5.4%) along with new home sales (-8.4%) and pending home sales (-1.4%). Housing starts were up 6.9% in June to a three-and-a-half-year peak, with single-family starts increasing 4.7%. Mortgage rates reached historical lows – again. In Freddie Mac’s, July 26 survey, the average interest rate on the 30-year FRM was 3.49% compared to 3.66% on June 29. Those eyeing refinancing watched the 15-year FRM’s average rate dip to 2.80% on July 26, down from 2.94% in the final June survey. Between June 29 and July 26, average rates for 5/1-year ARMs moved from 2.79% to 2.74% and average rates on 1-year ARMs went from 2.74% to 2.71%.
LOOKING BACK…LOOKING FORWARD The Dow ended July at 13,008.68, the S&P at 1,379.33 and the NASDAQ at 2,939.52. The gain in the blue chips is relatively impressive given the fact that the Dow had many more down days than up days last month.
% CHANGE Y-T-D 1-MO CHG 1-YR CHG 10-YR AVG
DJIA +6.48 +1.00 +7.22 +4.89
NASDAQ +12.83 +0.15 +7.10 +12.13
S&P 500 +9.68 +1.26 +7.18 +5.13
REAL YIELD 7/31 RATE 1 YR AGO 5 YRS AGO 10 YRS AGO
10 YR TIPS -0.69% 0.33% 2.44% 3.10%
Sources: bloomberg.com, usatoday.com, bigcharts.com, treasury.gov – 7/31/12 Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends.
As August began, Wall Street hoped for promising announcements from the Federal Reserve and European Central Bank – two entities not known for sudden bold moves. The Fed offered carefully placed hints of possible future action in its August 1 policy statement, noting that it “will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery.” That language is just a tiny bit stronger than that seen in prior FOMC statements, and bulls are taking it as a signal that the fall may bring a new stimulus of some sort. Meanwhile, it could be that August simply continues what we have seen in June and July: stocks persistently advancing in spite of the pressures on U.S. consumer spending, global manufacturing and the European banking sector and bond market.
UPCOMING ECONOMIC RELEASES: Coming up in August, we have: the July employment report and July’s ISM service sector index (8/3), June wholesale inventories (8/9), July’s retail sales and PPI and June business inventories (8/14), July’s CPI and industrial output data and the latest NAHB housing market index (8/15), July housing starts and building permits (8/16), the initial August consumer sentiment survey from the University of Michigan plus the July edition of the Conference Board’s Leading Economic Indicators index (8/17), the release of the July 31 FOMC minutes (8/21), July existing home sales (8/22), July new home sales and June’s FHFA housing price index (8/23), July’s durable goods orders (8/24), June’s Case-Shiller home price index and the Conference Board’s August consumer confidence poll (8/28), July’s pending home sales, another estimate of Q2 GDP and a new Fed Beige Book (8/29), July consumer spending data (8/30), and a report on July factory orders along with the month’s final University of Michigan consumer sentiment survey (8/31).inventories (8/9), July’s retail sales and PPI and June business inventories (8/14), July’s CPI and industrial output data and the latest NAHB housing market index (8/15), July housing starts and building permits (8/16), the initial August consumer sentiment survey from the University of Michigan plus the July edition of the Conference Board’s Leading Economic Indicators index (8/17), the release of the July 31 FOMC minutes (8/21), July existing home sales (8/22), July new home sales and June’s FHFA housing price index (8/23), July’s durable goods orders (8/24), June’s Case-Shiller home price index and the Conference Board’s August consumer confidence poll (8/28), July’s pending home sales, another estimate of Q2 GDP and a new Fed Beige Book (8/29), July consumer spending data (8/30), and a report on July factory orders along with the month’s final University of Michigan consumer sentiment survey (8/31).
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