S&P record. GDP slumps. BOJ passes and preps for helicopter money. Eurobanks graded on a curve. Earnings good for tech and bad for oil. This ABInBev-SABMiller Bud’s for you.
Financial Review by Sinclair Noe for 07-29-2016
DOW – 24 = 18,432
SPX + 3 = 2173
NAS + 7 = 5162
10 Y – .06 = 1.45%
OIL + .24 = 41.38
GOLD + 15.80 = 1351.40
The S&P 500 index hitting a record intraday high for the seventh time this month as gains in tech heavyweights Alphabet and Amazon more than made up for losses in energy shares. The S&P 500 index rose as much as 0.3 percent, touching an all-time high of 2,177.09, and completed its fifth straight month of gains. For the week, the Dow fell 0.75 percent, the S&P edged down 0.07 percent and the Nasdaq rose 1.2 percent. In July, the Dow rose 2.8 percent, the S&P climbed 3.6 percent and the Nasdaq gained 6.6 percent.
The U.S. economy grew far less than expected in the second quarter. Gross domestic product increased at a 1.2 percent annual rate after rising by a downwardly revised 0.8 percent pace in the first quarter. The economy was previously reported to have expanded at a 1.1 percent pace in the first quarter. This is the first estimate on second quarter GDP, but economists had forecast growth rising at a 2.6 percent rate.
Inventory investment fell for the first time in nearly five years. Once the impact of a downward inventory adjustment is considered, the underlying pace of growth looks healthier than the headline GDP number. Excluding inventories, the economy grew at a 2.4 percent rate. Consumer spending, which makes up more than two-thirds of U.S. economic activity, increased at a 4.2 percent rate – the fastest since the fourth quarter of 2014. In the second quarter, income at the disposal of households after adjusting for inflation increased to a $13.92 billion rate from a $13.81 billion pace early in the year.
An index that measures what it costs a business to employ a worker — how much Americans earn in wages and benefits — rose 0.6% in the second quarter. The ECI has risen 2.3% in the past 12 months, the fastest pace since early 2015. In the first quarter, wages increased 0.6%. Benefits increased 0.5%.
The Bank of Japan held interest rates steady and offered up only a mild dose of stimulus. The central bank announced it would purchase ¥6 trillion-yen ($57 billion) worth of exchange-traded stock funds annually, an increase from the prior amount ¥3.3 trillion-yen. The size of a key lending program was also doubled to $24 billion. But those moves were far less than expected. And the Bank of Japan left interest rates at 0.1%, which disappointed many investors.
After more than three years of pumping out wave after wave of cheap money that’s failed to secure its inflation target, the Bank of Japan policymakers declared it was time to assess the impact of their policies. Maybe that’s an admission that their policies aren’t working; maybe it is an acknowledgement that they are running out of tools. Or maybe it’s just uncertainty of diving into negative interest rates.
Or maybe this is the setup for an experiment in helicopter money, which is very different from quantitative easing. QE means new money is swapped for assets in the reserve accounts of banks, leaving liquidity trapped on bank balance sheets. This frees up new money for borrowing, which increases money circulating through the economy – at least in theory. QE still requires borrowing to take place, and if there is no demand for borrowing, QE won’t really work. Money is created when loans are made, and it is extinguished when they are paid off. When loan repayment exceeds borrowing, the money supply “deflates” or shrinks. The alternative is to do what governments arguably should have been doing all along: issue the money directly to fund their budgets. Having exhausted other options, some central bankers are now calling for this form of helicopter money. The problem, at least one of the problems, is that helicopter money is illegal under Japanese law. That doesn’t mean it won’t happen. It just means they will need to devise creative ways to fly the helicopter.
The Nikkei Stock Index closed 0.6% higher after a volatile session. The yen jumped and Japanese government bond yields rose the most in eight years, lifting global sovereign borrowing costs. The dollar’s fall against the yen, its steepest in a month and fourth steepest this year, pulled it down against other currencies, putting the trade-weighted dollar exchange rate on course for its biggest weekly fall in two months.
The University of Michigan Index of Consumer Sentiment hit 90 in July, down from 93.5 in June’s final reading. The monthly survey of 500 consumers measures attitudes toward topics like personal finances, inflation, unemployment, government policies and interest rates.
Meanwhile of poll of British consumers saw the biggest drop in consumer confidence in 26 years in July, following the Brexit vote. A separate survey of manufacturing companies, also published on Friday, paints a similar picture. Manufacturers said that the sector’s recovery was under threat and business confidence had fallen in every region of England and Wales. The report on household reactions to the Brexit vote adds to evidence that consumers could rein in spending amid higher uncertainty about jobs, pay and the UK’s economic health.
Eurozone flash inflation increased to 0.2% in July to top the 0.1% pace seen in June and expected by economists. Eurozone flash GDP rose 0.3% in the second quarter to match estimates. The pace was only half of the growth rate from the first quarter. Inflation was at 0.2% for the quarter, and the unemployment rate was unchanged at 10.1%. European stocks were mixed across the continent after the data dump.
The European Banking Authority and the European Central Bank released the results of stress tests on the region’s major banks. The tests look at 51 major lenders, but they do not assign a pass or fail grade – rather they identify common equity tier 1 capital ratio, a measure of its resilience. The legal minimum for all banks is a CET1 ratio of 4.5 percent, plus 3.5 percent of risk-weighted assets in subordinated debt, as well as a series of buffers, which are made up of common equity. So, 8 percent is where they should be, but they are grading on a curve.
The European Central Bank, which supervises 37 of the lenders in the test, has said it will use a 5.5 percent ratio in the stressed scenario as an informal benchmark for lenders’ resilience. The final requirement set will move up or down from that level to take account of banks’ individual business models. The worst performer was Italy’s Banca Monte dei Paschi, with a negative 2.2 CET1 ratio. Monte Paschi Friday approved a plan to tap investors for the third time in two years by selling stock to replenish capital. While Monte Paschi is seeking to raise funds through private means, Italy has held talks with the European Commission seeking approval to back the bank’s recapitalization with state funds.
After the closing bell Thursday, Alphabet, the parent of Google posted earnings and revenue that beat estimates. Also, Amazon.com reported record profit for the third consecutive quarter- beating estimates – but a wave of spending could stop that streak. Amazon was long known for spending its way to a loss no matter how much revenue it brought in, but the second quarter was its fifth straight that showed a profit. Apple, Microsoft and Facebook, as well as Alphabet and Amazon, all blew past Wall Street expectations for both profit and revenue. As good as the quarter was for big tech, it was bad for big oil.
Exxon Mobil, the world’s largest publicly traded oil producer, posted a lower-than-expected quarterly profit due to weak crude prices and refining income. Net income slumped to $1.7 billion, or 41 cents per share, in the second quarter, from $4.19 billion, or $1 per share, in the year-ago period. Analysts expected earnings of 64 cents per share.
Chevron, the second largest U.S.-based oil producer, posted a second-quarter loss, its largest since 2001. It was Chevron’s third straight quarterly loss, the longest slump for the company since at least 1989. The company lost $1.47 billion, or $1.07 per share, in the quarter, compared with a net profit of $571 million, or 30 cents per share, in the year-ago period. Excluding one-time items, Chevron earned 35 cents per share. By that measure, analysts expected a profit of 32 cents per share.
Crude oil for September delivery dropped under $41 a barrel. Prices are down almost 8% for the week, and down 16% for the month. The U.S. oil benchmark is now down 20.6% from its recent high of $51.23 in June. That reflects a bear market, which is defined as a downturn of 20% or more.
NextEra Energy agreed to buy Energy Future Holdings’ Oncor Electric Delivery Co. LLC, adding the largest electric transmission operator in Texas in a deal valued at about $18.4 billion. The agreement is part of a reorganization plan designed to allow Energy Future to emerge from bankruptcy after restructuring $50 billion in debt. A takeover by Florida-based NextEra would require the approval from the court handling Energy Future’s Chapter 11 case and from Texas regulators.
SABMiller’s board unanimously recommended Anheuser-Busch InBev’s improved $104 billion takeover offer. Chinese regulators approved the merger, the last regulatory hurdle to the deal. The mega merger still requires shareholder approval. AB InBev gave in to some investors when it raised its bid once more this week to factor in the pound’s plunge in the wake of the U.K.’s Brexit vote that put minority and institutional shareholders at a disadvantage.