Market Perspective for August 10, 2015

It could be an important week for the commodity markets as oil prices are closing in on their 52-week lows. Energy shares have weighed heavily on broad equity indexes and are a big reason why the indexes have tread water for more than six months. Nevertheless, investors weren’t concerned with energy this morning; equities opened the week with an advance after Asia and Europe rebounded.

While there isn’t a lot of economic data out this week, one important figure to be released on Tuesday is unit labor costs. This shows the total cost of labor for businesses, including healthcare. In the first quarter, unit labor costs increased a substantial 6.7 percent, sparking a sell-off in bonds and a spike in yields as investors priced in an early Federal Reserve rate hike. For the second quarter, economists are forecasting a 0.1 percent decrease in unit labor costs. The range of estimates goes from negative 1.2 percent to positive 3.7 percent. If the number is well into positive territory, expectations for a September rate hike will harden. As it is, speculators are starting to bet heavily on a 50 basis point rate hike in September due to the strong economic data and comments from Fed officials. Besides unit labor costs, July retail sales, June wholesale inventories, June business inventories and July producer prices will be out.

Over the weekend, China announced weak trade figures and producer price deflation. Exports fell 8.3 percent from year ago levels and more importantly, imports slumped 8.1 percent. The slump in imports is a sign the economy is growing slower than official figures report. China is also trying to rebalance its economy towards a service and consumer-led economy.  While the trade balance should be improving, imports and exports have been falling together. Producer prices are even worse, with the price level now back to 2009 levels during the global economic recession. Price declines accelerated in July, with producer price deflation hitting 5.4 percent. Chinese investors bid up the Shanghai market by nearly 5 percent in anticipation of more government bailout measures. Later this week, China reports fixed asset investment and industrial production for July. Elsewhere, the EU will report inflation and GDP growth in the second quarter.

Retail earnings season kicks off this week with reports from Macy’s (M), Nordstrom (JWN), Kohl’s (KSS) and J.C. Penney (JCP). The next month will see heavy reporting by the sector and with retail sales also due, it will be an important week for funds such as Fidelity Select Retailing (FSRPX) and SPDR Retail (XRT).

Cisco (CSCO) is also releasing its earnings report. The tech giant is expected to report earnings of 56 cents per share and $12.65 billion in revenue. Chinese Internet giant Alibaba (BABA) delivers its earnings report as well. It’s expected to report earnings 41 cents per share on sales of $3.4 billion. BABA missed earnings estimates by nearly 30 percent in the previous quarter.

As mentioned, the oil market and Federal Reserve interest rate policy will be two of the big areas to watch this week. Aside from these two, investors will also be looking at the “old economy” industries. Last week, companies such as Disney (DIS) and Time Warner (TWX) were hit by weak earnings and concerns that new competitors such as Netflix (NFLX), along with non-traditional entertainment such as gaming and streaming media, could damage returns. Consumers and the overall economy benefit from this competition, but causes indexes such as the Dow Jones Industrial Average to struggle. Shares are likely to rebound this week as value investors move in, but a reversal in performance is still in doubt.

Finally, a third bailout deal for Greece is expected this week, possibly as soon as Tuesday. This won’t be the final step as finance ministers from the Eurozone countries will need to detail the actions Greece must take based on the framework.  Thereafter, the Greek parliament must approve the agreement. If all goes well, Greece will avoid a default later this month and avoid another crisis for the time being.

Market Perspective for August 7, 2015

The S&P 500 Index came into Friday trading with a roughly 1 percent loss on the week, while the Dow Jones Industrial Average fell back into negative territory for the year. Biotechnology slid on Thursday and pulled the healthcare sector down for the week; energy also fell as oil prices approached their 2015 lows.

Momentum names suffered from disappointing earnings reports this week as well. The second quarter earnings season has seen investors at their most discriminating since 2012, rewarding companies that beat expectations and harshly punishing those that did not. Yesterday, Keurig Green Mountain (GMCR) fell 30 percent on poor earnings and guidance. Tesla (TSLA) lost 11 percent for similar reasons. Fitbit (FIT), which is up from its IPO price less than two months ago, slid 15 percent. The Planet Fitness (PLNT) IPO on Thursday was also a disappointment, with shares falling 9 percent from its initial IPO price.

Speculators in the futures market are upping their bets on a September rate hike. The overall probability of a hike as of Friday morning was 93 percent. Speculators even dropped their odds of a 0.25 percent increase and raised the odds of a 0.75 percent hike, a nearly impossible outcome, but reflective of the rising confidence of an imminent increase.

It was one week ago that the Atlanta Fed President Lockhart said economic data would have to fall for him to oppose a September rate hike and nothing occurred over the past few days to dissuade that decision. Personal income was up strongly in June and consumer spending was consistent with prior quarters. Auto sales climbed to a 17.6 million annualized rate in July, well ahead of estimates and the 17.1 million figure from June. The ISM Services climbed to 60.3 percent, exceeding estimates of 56.5 percent. Any number over 50 indicates expansion.

Today’s government reported job growth was a bit slower than expected, but unemployment held steady at 5.3 percent in July and wages were up 2.1 percent over last year. The U.S. dollar immediately rallied on the news. Next week, the government will report unit labor costs for the second quarter.