Blue Chips Down for Sixth-Straight Week
US equities finished solidly lower, erasing Thursday's gains, with the Dow Jones Industrials posting its sixth-straight weekly loss. Uneasiness surrounding the global economic recovery remained omnipresent, exacerbated by a smaller-than-expected increase in China's trade surplus, while euro-area debt concerns remained on the minds of investors. Treasuries finished higher amid the negative sentiment and weakness in stocks, and following an unexpected increase in May import prices, while the US dollar gained ground, pressuring crude oil prices. On the equity front, Dow member Travelers Companies said that it will limit its share repurchases as a result of larger-than-expected forecasts for catastrophe losses, National Semiconductor posted mixed 4Q results, and Canada's Lululemon bested the Street's forecasts while also offering an upbeat outlook.
On Friday, the Dow Jones Industrial Average dropped 172 points (1.4%) to 11,952, the S&P 500 Index lost 18 points (1.4%) to 1,271, and the Nasdaq Composite declined 41 points (1.5%) to 2,644. In moderate volume, 1.0 billion shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil fell $2.64 to $99.29 per barrel, wholesale gasoline dipped $0.02 to $3.02 per gallon, and the Bloomberg gold spot price tumbled $12.58 to $1,531.40 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was 0.9% higher at 74.85. For the week, including dividends, the DJIA lost 1.6%, the S&P 500 Index fell 2.2%, and the Nasdaq Composite declined 3.3%.
Dow member Travelers Companies Inc. (TRV $59) is under pressure after the company said that it has limited its common share repurchases, as it estimates losses related to the numerous and severe catastrophes in April and May to be between $1.00-1.05 billion. TRV said these losses resulted from multiple tornadoes and hail storms, primarily in the Midwest and Southeast regions of the US, and were concentrated in the company’s business insurance and personal insurance segments. Shares are solidly lower.
National Semiconductor Corp. (NSM $25) announced fiscal 4Q EPS of $0.26, one penny shy of the consensus estimate of analysts surveyed by Reuters, with revenues declining 6% year-over-year (y/y) to $374 million, but above the $365 million that the Street was anticipating. The chip maker said increased sales to the industrial power market and improvements in the automotive and communications infrastructure areas more than offset flat sales in its wireless handset business and Japan sales that were lower due to the March earthquake and tsunami. NSM is trading modestly higher.
Elsewhere, Canada's Lululemon Inc. (LULU $90) is solidly higher after the apparel retailer reported 1Q EPS ex-items of $0.44, exceeding the $0.38 that analysts had forecasted, with revenues increasing 35% y/y to $187 million, above the estimated $181 million. Also, LULU said its same-store sales-sales at stores open at least a year-jumped 16% y/y. The company raised its full-year guidance and issued a 2Q outlook that topped the Street’s forecasts.
Import prices unexpectedly rise to end the week
The Import Price Index rose 0.2% month-over-month (m/m) for May, compared to the expectation of economists surveyed by Bloomberg, which called for the index to decrease by 0.7%. The increase follows the 2.1% increase seen in April, which was revised from an initially reported 2.2%. Year-over-year, import prices are higher by 12.5%, versus the 11.2% forecast of economists, and the upwardly revised 11.4% gain that was posted in April. Nonfuel prices increased to lead the gain in import prices, while fuel prices declined 0.2% m/m in May, the first decrease since September 2010, but were 42.3% higher compared to last year.
Treasuries ended higher following the data and the declines in stocks, with the yield on the 2-year note down 3 bp to 0.40%, while the yields on the 10-year note and the 30-year bond are lost 4 bps to 2.97% and 4.18%, respectively
Plethora of events overseas shapes sentiment
Sentiment overseas suffered as well, after China reported that its trade surplus widened by a smaller-than-forecasted amount in May, as exports rose at a rate that was below economists' forecasts, while imports increased at a more rapid pace than was anticipated. Traders grappled with what implications the data may have on further monetary policy tightening in China, while contemplating whether the strong imports suggest the economy continues to expand solidly. Also, the data supported the recent increase in global economic slowdown worries, as growth in exports to the US and Europe both decelerated sharply y/y, while Japanese exports dropped 9% compared to the previous month. Adding to the uncertainty, South Korea's central bank increased its benchmark interest rate by 25 basis points to 3.25%, the third increase this year, surprising economists, who forecasted the rate to remain at 3.00%. The Bank of Korea said despite the temporary sluggishness of domestic demand, the economy has maintained its underlying upward trend on the "sustained high growth of exports", and it expects inflationary pressures to continue in the coming months. Also, the Hong Kong government tightened requirements for home-buyers, demanding larger down payments and increasing barriers for foreign investors, aimed at cooling home prices.
In Europe, global economic growth concerns were also evident, while some disappointing economic news in the region added to the anxiety. French industrial production unexpectedly fell in April, along with production in the UK, which also reported that manufacturing activity dropped by a much larger amount than expected in April. As well, Italy's 1Q GDP was left unrevised at a 0.1% quarter-over-quarter (q/q) rate of expansion, and inflation readings across the pond were relatively tame, with UK producer prices coming in below expectations, while German consumer and producer prices were flat for May. The region's debt crisis remained at the forefront after the German parliament voted in favor of providing Greece with new bailout funds. The uneasiness toward Greece comes as Germany’s Finance Minister Schaeuble told lawmakers today that "We have to insist on the participation of the private sector", referring to his plan to extend Greek debt maturities by seven years, per Bloomberg. However, Bloomerg noted that European Central Bank (ECB) President Jean-Claude Trichet has shown some resistance to the plan, warning that any solution forcing private-sector involvement amounts to a "credit event", and would be an "enormous mistake". The dissension in the eurozone pressured the euro and sent yields on bonds of peripheral euro-area nations higher.
Global growth worries continue to hamper sentiment
The Dow Jones Industrials posted the sixth-straight weekly loss courtesy of growing concerns regarding the sustainability of the global economic recovery. Although the US economic calendar was relatively light, there were still some pieces of data that had an impact on the markets. The Federal Reserve's Beige Book revealed deceleration in some areas in the US and the impact of the Japanese March tragedy was felt in the auto and high-tech industries, but employment showed "gradual improvement". Moreover, Federal Reserve Chairman Ben Bernanke noted in a speech this week that US economic growth looks to have been slower than expected, while disappointing some by giving no indication that new economic stimulus efforts, known as QE3, were in the offing for the economy. However, not all of this week's data was on the negative side, with the US trade deficit unexpectedly narrowing, due to weakness in the US dollar in April. Meanwhile, crude oil prices showed some volatility, rising solidly after the meeting of ministers from the Organization of Petroleum Exporting Countries (OPEC) concluded without a decision on production quotas due to disagreements, with the markets widely expecting a quota increase. But the gains in oil prices proved to be short-lived as the soured economic sentiment trumped the support that came from OPEC’s lack of a decision.
Elsewhere, global economic events helped shape sentiment, with the trade surplus in China coming in narrower than estimated, South Korea surprisingly raising interest rates, and uneasiness toward the euro-area debt crisis focusing on Greece. However, one of the biggest global events came as the European Central Bank (ECB) signaled that a July rate-hike is likely despite the festering euro-area debt crisis, as the central bank is trying carry out its lone mandate of keeping inflation controlled.
Major US economic releases next week will include Tuesday's advance retail sales, forecasted to fall 0.4% month-over-month (m/m) in May, after gaining 0.5% in April, while sales ex-autos and ex-autos and gas are estimated to grow 0.3%. Same-store sales results-sales at stores open at least a year-reported by retailers disappointed, possibly as consumers grappled with higher gasoline prices. The retail sales report includes spending at supermarkets and gas stations.
Due to the impact on consumer spending and corporate profits, inflation readings will also be in focus, starting with Tuesday's Producer Price Index (PPI), expected to show prices at the wholesale level were flat m/m in May after spiking 0.8% in April, while the core rate, which excludes food and energy, is expected to increase 0.2%. The release precedes Wednesday's Consumer Price Index (CPI) report, forecasted to show a 0.1% m/m increase after rising 0.4% in April, while ex-food and energy it is expected to rise 0.2%. Wednesday also brings the industrial production report, expected to advance 0.3% m/m in May after being flat in April, while capacity utilization is forecasted to increase to 77.0%.
The week also includes data on the housing market with a read on homebuilder sentiment from Wednesday's NAHB Housing Market Index, while Thursday brings housing starts, expected to rise 3.3% m/m in May to an annual rate of 540,000 units after dropping 10.6% in April, while building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, are forecasted to fall 2.3% m/m at 550,000 units despite falling 4.0% in April.
Other releases on the US economic calendar include business inventories, MBA Mortgage Applications, the Empire Manufacturing Index, initial jobless claims, the Philadelphia Fed’s Business Activity Index, the Conference Board’s Index of Leading Indicators and the preliminary University of Michigan Consumer Sentiment Index reading for June. Other reports in the Americas include Canada’s manufacturing and wholesale sales, and Mexico’s industrial production.
Other international releases include euro-zone industrial production, CPI, and employment, UK housing prices, CPI, retail price index, and retail sales, Japan’s machine orders, industrial production, machine tool orders and department store sales, and Australia's business and consumer confidence, leading index, and dwelling starts. China will release PPI, CPI, retail sales, industrial production and fixed asset investment, which includes housing and infrastructure spending. The central banks of Japan and Switzerland expected to keep rates unchanged at their meetings next week.
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