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.

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