The Nitty Gritty Details:
Stocks will try to extend a five-day winning streak today without much in the way of economic data or company news to provide a lift. In the absence of market-moving news this morning, traders will continue to focus on the Greek debt situation and the U.S. debt ceiling negotiations. China is also getting some media attention as speculation of an impending rate hike continues, while Moody’s suggested China has significantly understated problem loans at the local government level. European and Asian markets are doing about what the U.S. is doing – not much. Commodities are broadly higher, with reports of crop buying after the recent drop in prices pushing wheat and corn solidly higher.
Looking back at Friday, a stronger-than-expected ISM manufacturing survey boosted stocks, marking a perfect week of five gains in five days, the best weekly performance since 2009. Conversely, data from China suggested further slowing, weighing on commodity prices, while European data was also a bit on the soft side. All 10 sectors finished solidly higher, led by Consumer Discretionary which benefited from the renewed economic optimism, lower oil prices and an upside earnings surprise from a major for-profit education provider. Materials and Consumer Staples were the only sectors that failed to advance more than 1%. For the week, the S&P advanced 5.7%, bringing the year-to-date return to 7.6%.
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 Market Broken Down:
1. So, was all of the gain from the markets last week created by the Greek news? In a word, no. Four primary factors came together to create such a favorable one week run: (1) Economic data that exceeded low expectations, (2) more indication of a transition to “rebuild” mode in Japan, (3) a quiet (and less negative) week for earnings warnings and (4) a successful resolution (for now) of the situation in Greece. Clearly Greece was a part, but by no means all, of the catalyst.
2. How do economists forecast the ISM report and what explains the big disconnect between their expectations (deceleration) and the actual report this past Friday (acceleration)? Generally, economists and market participants use the regional Federal Reserve and ISM readings, weekly data on rail car shipments, business sentiment, and overseas manufacturing indicators to predict the ISM report. The June report released on Friday, July 1st was a rare event. Based on the factors noted above, the market expected a deceleration in the ISM between May and June. Instead, the June ISM accelerated and came in above the upper end of the range of expectations. The combination (market expects a deceleration and the report comes in above the upper end of the range) has occurred just 6 times in the last 120 months of ISM reports.
3. How are we framing the debt ceiling debate and what is our prediction for the most probable outcome? We assign the highest probability to the outcome that includes a completion of a deal that cuts several trillion from the deficit over the next 10 years, which would allow the debt ceiling to be increased enough to move us past the 2012 election. We assign a very small probability to outright default in the U.S., the outcome that the financial media will focus on the most.
4. The June jobs report will cap off the holiday shortened week’s economic and policy calendar. Markets are looking for a slight acceleration in private sector job creation in June after the private sector economy added just 83,000 jobs in May. June data on service sector ISM – typically a market-mover – is due out today. June data on chain store sales and layoff announcements will also be out this week. On the policy side this week, the debt ceiling debate in the United States takes center stage, as the ECB, the Bank of England, and central banks in Sweden, Australia, Mexico, Malaysia and Poland meet to set policy. It is a quiet week for the Federal Reserve.
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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