Month: August 2016

A superb jobs report rallied the market to end the week on a high note. 255,000 new jobs were created in July, far surpassing the 185,000 predicted. Unemployment held steady at 4.9 percent and wages also increased 0.3 percent from the month earlier, faster than expectations. Strong employment data increased the Atlanta Federal Reserve’s GDP Now model its third quarter GDP growth forecast to 3.8 percent. Economists are conservatively forecasting around 2.4 percent growth.

Friday’s labor reports pushed stocks out of their three-week trading range and on to new all-time highs, despite subdued trading earlier in the week.  For the week, the S&P 500 gained 0.4 percent and the Nasdaq rallied 1.1 percent. The Nasdaq returned 0.6 percent.

Pharmaceutical giants dominated this week’s earnings reports. Shares of Pfizer (PFE) fell as the company reported a 23 percent drop in profits, citing lower demand for some of its older prescription medications. The world’s largest generic drug manufacturer Teva Pharmaceutical (TEVA) beat market expectations in earnings per share (EPS) and revenues. Shares rallied on the news, but pulled back when Teva announced its purchase of Anda, the generic drug distribution division of Allergan (AGN) for $500 million. Bristol-Myers (BMY) has yet to report, though shares plunged double-digits following news that its Opdivo cancer drug, used to treat several different forms of cancer, failed in a lung cancer trial. BMY’s loss was Merck’s (MRK) gain as its competing drug Keytruda targets the same market. Shares of MRK were up as much as 8 percent during the day.

The record-shattering release of the “Overwatch” video game helped Activision Blizzard (ATVI) handily beat expectations. 3D Systems (DDD) also easily beat analysts’ forecasts as demand for its software and medical solutions far outpaced estimates. Chesapeake Energy (CHK) fell 3 percent following poor earnings and a planned $800 million increase in asset sales. Proctor & Gamble (PG) reported EPS of $0.74, beating expectations. Shares saw a small gain on the week.

Chinese and U.S. manufacturing Purchasing Managers Index (PMI) for July came in less than forecast. Light vehicle sales for July rose 6.5 percent over the previous month, to an annualized sales pace of 17.9 million. If this pace can hold, it could be a record year for auto sales. The weekly mortgage application index showed a 3.5 percent decline as interest rates moved higher. On Thursday, the weekly unemployment claims number was slightly higher than expectations at 269,000. Consumer spending was up 0.4 percent in June, in line with expectations and matching the prior month’s growth. Oil prices fell below $40 early in the week and rebounded late. A surprise decline in inventory caused a spike in prices, but some oil market analysts claim this was due to inventory shipping to a new storage facility.

Overseas, India enacted a new Goods and Services Tax (GST) designed to replace the incongruent mix of local and state taxes. It is a major step forward for Prime Minister Modi’s reform agenda both economically and politically, as it required a constitutional amendment to pass. Estimates vary, but one HSBC report believes the new law will boost long-term GDP growth by 0.80 percentage points each year. In Japan, the government approved another stimulus plan totaling $73 billion in hopes of jump-starting that nation’s sluggish economy. The program includes infrastructure projects, asset purchases and direct payments to low-income families. A new cabinet member also proposed wage targeting as a way to generate inflation, sparking concern from investors.

The Royal Bank of Australia cut its key interest rate to a record low 1.5 percent. As anticipated, the Bank of England (BoE) also cut interest rates to help the UK economy and allay uncertainty over Brexit. In addition to lowering rates to 0.25 percent, the BoE restarted its quantitative easing program with a plan to purchase corporate bonds.

This week begins a new month of trading, and bulls will try to keep up the five-month win streak for the S&P 500 Index. Money flowed into equities at the fastest pace in more than a year last month and this optimism should continue in the upcoming week as stocks ride the wave of stellar earnings, accommodative central banking policies and generally positive economic news.

Midway through this earnings season, more than 80 percent of S&P 500 companies have beaten expectations. The technology sector led the way in July, rising 7.81 percent on the back of strong reports from Alphabet (GOOG), Microsoft (MSFT), Apple (AAPL) and Facebook (FB). Healthcare was strong as well, rising 4.86 percent.  Energy was the only sector to significantly decline, while defensive utilities and consumer staples sectors saw small dips as investors rotated into more volatile sectors.

Earnings season is still in full swing, but the blue chip names are fewer and further between. Technology and health care firms scheduled to report this week include Activision Blizzard (ATVI), 3D Systems (DDD), Pfizer (PFE) and Teva Pharmaceutical (TEVA). International mining company Rio Tinto (RIO), Chesapeake Energy (CHK) and Proctor & Gamble (PG) will also report this week.

Central banks could play a pivotal role in the currency markets over the next 10 days. The Royal Bank of Australia will meet on August 2^nd. While the odds of an Australian rate cut are nearly 70 percent, most analysts are not concerned about that country’s impact on the broader economy.

On August 4, the Bank of England’s (BoE) will make its interest rate decision, with a cut being a near certainty. Although the BoE did not take any action at its last meeting in the wake of the Brexit vote, it released a statement indicating that the central bank was ready to step in if necessary to combat any economic weakness. Finally, on August 11, the Reserve Bank of New Zealand will meet. Rate cuts are also possible. A cut for all three banks would be bullish for the equity markets and the U.S. dollar.

In the U.S., the monthly non-farm payroll and unemployment report for July will provide a major data point later this week. Following disappointing second quarter GDP, investors are keen to see if this weakness extended into July. The consensus calls for the unemployment rate to remain at 4.9 percent and 185,000 new jobs.

Manufacturing Purchasing Managers Indexes (PMI) for July were mixed, with the U.S. showing an uptick in manufacturing and China a downtick. Light vehicle sales for July will be out on Tuesday. The weekly mortgage application index and crude oil inventories will be available on Wednesday. Larger-than-expected inventories will pressurize oil prices which was already trading at $40 on Monday. Over the weekend, Saudi Aramco slashed its prices on Asian oil in an attempt to increase market share. A dip back into the $30s is possible this week.