Weekly Wrap

– Investor optimism shifted into high gear this week as several helpings of very positive economic data captivated markets and plenty of commentators rushed to declare a bottom. Goldman Sachs Strategist Abbey Joseph Cohen said “the new bull market has begun,” predicting the S&P500 would be at 1050-1100 by the end of 2009 (echoing Goldman’s predictions from back in late July). Corporate chieftains were waxing positive: Cisco’s Chambers said there was a “good chance this Q4 was the tipping point” headed to the upside, while AmEx’s CEO said the firm’s credit metrics are showing signs of improvement for the first time in 18 months (reversing a more pessimistic position taken back in July). Looking backwards, it all seemed like prelude for the July unemployment data, which registered its first month over month improvement in the series since April 2008, dropping to 9.4% from 9.5% in June. Nonfarm payrolls fell a less than expected 247K. Dissenting voices were heard from the usual suspects. Nouriel Roubini predicted the equity rally would be over in the next two months, saying prices have outpaced any recovery in earnings and revenue. PIMCO’s El Erian once again insisted it is too early for a vigorous economic recovery. Even President Obama hedged his rhetoric, noting that the jobs data shows the country is headed in the right direction but still warned that the recession is not over yet and stuck by the forecast that unemployment will still rise to 10%. Thanks largely to Friday’s rally on the payrolls data, stocks were up for the week: the DJIA rose 2.1%, the S&P500 gained 2.3%, while the Nasdaq edged up 1.1%.

– In other data, Monday’s July ISM Manufacturing index was better than expected, while the prices paid and new orders sub indices were both above 55, indicating growth. June factory orders data showed a third consecutive month of growth, although a smaller move up than was seen in the May data. June pending home sales were much stronger than expected and registered their fifth consecutive monthly gain.

– Commodities moved sideways most of the week in fairly tight ranges. Note that front-month NYMEX crude remained above $70 for most of the week, while gold tested but didn’t manage to hold above the $970 handle. The FTC issued new rules designed to curb oil market manipulation this week, with the new rules and fines to become effective November 4th.

– The financial sector made strong, steady gains throughout the week, propelled by the improving overall tone in markets. Quarterly results from selected European financials added to the momentum early in the week, with UK banking survivors Barclays and HSBC reporting bumper profits from investment banking, while financial services firms Axa and Zurich Financial beat profit and revenue estimates. AIG’s stupendous rise ahead of its quarterly earnings on Friday took markets by surprise (some speculated that a rush to cover large short positions helped fuel the spike). AIG rose 100% on the week, with the name trading more than 100M shares a day over the last three sessions.

– In earnings, Dow component Proctor & Gamble missed revenue estimates, although profits met expectations. Proctor’s CFO said he expects more contraction in consumer discretionary markets. Kraft also missed on the top line, while earnings were slightly better than expected. Cisco offered solid results that were more or less in line with the Street. CEO Chambers told analysts that the quarter was likely Cisco’s “tipping point,” with improved sales right around the corner. Homebuilders DH Horton and Pulte Homes both registered losses that were larger than expected. However, revenue totals at both firms beat the Street and key metrics including closings, orders and backlogs showed sequential improvement.

– In other equity news, Caterpillar told analysts that 2010 results would be better than 2009 even if the recession continues. PepsiCo finally worked out a $7.8B deal to take over independent bottlers Pepsi Bottling Company and Pepsi Americas after sweetening its offer. Pepsi launched its offer for the firms back in late May, and the two bottling companies had repeatedly turned down its offers as too low. The move will lead to the creation of one of the world’s largest food and beverage companies.

– There was no real improvement in July same-store sales data, although some moderation was seen in the y/y declines at certain companies. Comps at BJ’s, Costco and Target all declined more than expected. After improving somewhat in June, high end department stores Macy’s and Saks swung back to bigger than expected declines; Kohl’s was the only department store name to show y/y growth. Apparel companies were as dismal as ever, although comps from The Limited and Zumiez were notably better than expected (but still down sharply y/y). Apparel segment darling Aeropostale missed estimates, although it is among the few clothing retailers to show growth. Discounter TJX was a rare bright spot, with sales growth beating expectations.

– The fireworks continued in government fixed income markets this week, kicked off by the Bank of England. With the market evenly split between those expecting no change in quantitative easing and those expecting a £25B increase, the Bank of England’s decision to expand its QE measures by another £50B shocked markets on Thursday. Gilts subsequently rallied across the curve, with particularly good buying in the long end where additional Central Bank purchases are set to be concentrated. The 10-year Gilt traded roughly 10 bps rich to the 10-year Note, a reversal of almost 50 bps from early July. In a stunning about face from its unexpected decision to keep the printing presses on hold, the MPC cited the deeper than previously anticipated recession and fragility in economic conditions for the increase, notably avoiding any mention of inflation. There has always been a degree of ambiguity surrounding the aims of the BoE’s version of quantitative easing, whereas the Fed is on record stating that it aims to keep mortgage rates in check. But with its $300B worth of Treasury purchases set to be complete around the end of the month, speculation on whether the Fed chooses to follow suit will likely intensify heading into next week’s FOMC meeting.

– The payrolls data wrapped up the week in Treasuries with a bang; yields had been steadily moving higher all week long but accelerated to the upside after the payrolls release despite hints about the data from President Obama the night before. Yields moved higher across the curve and held most of the knee jerk gains. The long bond held around 4.6% and the 10-year consolidated around 3.85%. Short term yields moved up as well sending the 2-year above 1.3% for the first time since the better-than-expected May jobs report jolted markets. Similar to a previous spike in Fed fund futures, expectations of a more aggressive Fed next year are rising. After the payrolls release, March 2010 fed fund futures were pricing in as much as a 50% chance the Fed will hikes rates as much as 50 basis points early next year. Bernanke and friends have been vocal about rates remaining low for some time to come, so markets will be watching closely to see if this sentiment holds or quickly dissolves as it did back in June.

– In currency trading, pre-Lehman levels were reestablished in several key data series, boosting risk appetite and even prompting a partial return to fundamentals. In the first half of the week, this trend boosted equities and commodities, weakening the dollar and yen against the major European and commodity-related pairs, with the greenback hitting fresh 2009 lows. Leading initial sentiment was the Chinese PMI, which registered its best reading in 12 months on the back of record lending and Beijing’s 4 trillion yuan stimulus package. By midweek NYMEX Sept crude was over $71, the S&P500 headed above the 1,000 handle and GBP/USD hit 1.70, further fueling appetite for risk. Then Friday’s US payrolls data saw a glimmer of economic fundamentals returning to the fore, reversing the dollar to its best levels of the week against most major currencies.

– EUR/USD hugged the 1.4400 level throughout the middle of the week, as US data banished risk aversion and interest rate sentiment turned positive. Across the pond, the UK PMI manufacturing data moved above the pivotal 50 level for the first time since April 2008 and GBP/USD tested the 1.70 handle for the first time since last October. However, the BoE’s surprise move raising its QE program on Thursday, causing the GBP/USD to dip some 300 pips by early Friday, testing below the 1.67 level. With the decision appearing to fly in the face of a steady flow of positive economic data, conspiracy theorists were on alert as sterling slumped.

– The yen firmed earlier in the week on a potential post-election FX reserve policy shift, after a Japanese opposition leader Hatoyama (and potentially the next PM) said he would reset the country’s currency reserve management policy after taking power. Japan’s national elections take place on Aug 30th. But the yen’s strength did not survive the US payrolls data, and JPY probed a key technical point against the USD at the 96.70 area in Friday trading. Dealers believe the break of a one-year down trend line could help the USD/JPY re-establish itself above the historical pivot point of 95 level, which would likely suit the goals of Japan’s MoF and the BoJ.

– Elsewhere in Asian markets, a dose of healthy of economic data and central bank sentiment in Australia and China raised speculation that monetary authorities in both countries may be preparing to rein in liquidity operations. On Monday, the RBA left its cash rate unchanged at 3.00%, amid stronger regional and global economic growth and declining downside risks. In its quarterly report, published on Friday, the RBA lifted its 2009 GDP forecast to +0.5% from -1.0%, and echoed recent comments from Governor Stevens that Aussie unemployment will not rise as far as expected and that outlook for housing has improved. Earlier in the week, Australia’s July employment data surprised to the upside, with largest job growth since February at 32.2K v -18.8K expected and unchanged jobless rate of 5.8% v expected increase to 6.0%. Over in China, July CLSA Manufacturing PMI registered its fourth consecutive monthly expansion above the threshold 50.0 mark. Subsequently, China’s PBOC was said to be considering a fine-tuning of monetary policy so as to avert inflationary upturn while keeping prices within a reasonable range.Trade The News Weekly Update

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