The Nitty Gritty Details:
Wall Street opened slightly higher this morning following several well-received earnings reports, offsetting higher-than-expected wholesale inflation data. Modest gains are also a function of continued caution regarding the lack of significant progress in resolving the euro zone sovereign debt crisis. Retailer results over the past two days have provided more evidence that consumers are “hanging in” and are helping buoy investor sentiment. Asian markets closed mixed, with the Hang Seng higher and the Nikkei lower. European markets pared losses on gains in mining stocks, which are helping to offset bank losses. Commodities are broadly higher, with livestock and natural gas the lone exceptions. Crude is up about $2 on expectations for tighter inventories, while copper, silver and agriculture are solidly higher.
Looking back at Tuesday, the three-day winning streak came to an end yesterday as stocks sold off as the plans out of Europe fell short of the market’s hopes and second quarter euro zone GDP came in weaker than expected. Losses were pared by several good earnings reports, but in the end the lack of more aggressive, coordinated action in Europe caused investors to pull back on risk. Particularly damaging to stocks yesterday was a proposal from French and German leaders to implement a financial transactions tax, which caused Financials to slide nearly 2% to the bottom of the sector rankings. Consumer Staples was the only sector in positive territory with a marginal gain on a boost from a major retailer following its better-than-expected earnings and outlook. Commodities were mixed, with crude lower but grains and precious metals posting solid gains.
Around our financial planning services firm this morning, we were discussing four items that we thought would be of particular interest to our readers:
The Markets Broken Down:
1. European concerns will continue to linger. The market did not like the latest plan from German and French leaders Merkel and Sarkozy for several reasons. First of all, the size of the European rescue fund will not be increased. This facility is not big enough to rescue Spain and Italy should it be needed. While the ECB is buying some Spanish and Italian debt, the amounts are small to date. Secondly, markets were hoping for a euro bond that would enable the euro zone to raise funds using the collective balance sheet strength of its strongest nations, namely Germany and France. While this door is not completely closed, it did not open yesterday. Lastly, the proposed financial transactions tax, though not a done deal, further disappointed markets and increases the odds that Europe’s struggles continue to weigh on global markets in the months ahead.
2. What about the rumors that President Obama will be proposing a stimulus package next month that includes tax cuts? A payroll tax holiday has received support from both sides of the aisle. The White House wants to pare tax cuts for the middle class with higher taxes on the wealthy, while Republicans have remained firmly against tax increases of any kind. The deficit reduction “super-committee” will have a tough time coming to an agreement on full-scale tax reform given these philosophical differences. Some compromise is likely that may include targeted tax cuts as well as revenue raisers (like closing loopholes).
3. Treasury yields are higher by 2 to 3 basis points this morning on an uptick in PPI inflation data. Following yesterday’s increases in import prices, inflation data and inflation expectations have increased steadily since the Fed embarked on quantitative easing last year, making the hurdle high for another round of bond purchases. St. Louis Fed President Bullard said yesterday that he does not expect the Fed to announce additional bond purchases absent a return to recession or signs of deflation.
4. There is an uptick in wholesale inflation. Prices for finished goods rose 0.2% in July, while core producer prices rose 0.4%, both above expectations. Year-over-year, headline and core producer prices are up 7.2% and 2.5%, respectively. This annual increase is the highest since 2008. While consumer prices matter more to the Fed and the market, accelerating producer prices may put some upward pressure on inflation expectations. We continue to expect inflation to remain contained, though this report likely keeps the hurdle high for possible “QE3.”
As always, email me here with your questions or comments. I love to hear from you and thoroughly enjoy the “intellectual debate” with our clients and friends that these opinions generate.
Greg Powell, CIMA
Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.
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