The minutes from the 24th June Fed's meeting released last night, with officials seing little reason to ramp up quantitative easing further when "the economic contraction was slowing and... the decline in activity could cease before long." Fed officials raised their forecasts for 2009 GDP growth (4th quarter to 4th quarter) to between -1.5% and -1.0%, from a range of -2.0% to 1.3%. At the same time, the forecasts for the unemployment rate were raised to between 9.8% and 10.1%, from a range of 9.2% to 9.6%.
There was also some brief discussion of how to tighten policy when the time eventually comes. The Fed apparently believes it has the tools available "to foster effective control of the federal funds rate in the context of a much expanded balance sheet." It seems the preferred exit strategy is not to reduce the supply of reserves through asset sales, but to nullify the inflationary impact by raising the interest rate paid on those reserves, so that demand increases by enough to offset the extra supply. This is also why the Fed isn't worried about the impact of a sharp drop in the market value of those assets on its net income, because it doesn't think it will ever have to sell them at a loss. It intends to hold them until maturity and "earn substantial net income" along the way.
Inflation level, somehow, happens to be ideal. While the 0.7% m/m jump in US consumer prices in June was mainly due to a 17.3% m/m spike in gasoline prices, core prices still increased by 0.2% m/m, suggesting that there are few immediate signs of either deflation or accelerating inflation. Overall, energy prices increased by a more modest 7.4%, as the jump in gasoline prices was partially offset by a 1.2% decline in gas & electricity costs (reflecting the drop back in natural gas prices). There were one or two troubling signs in the core. In particular, clothing prices rebounded by 0.7% and vehicle prices increased by 0.4%. Core inflation nudged down to 1.7%, from 1.8%. The latest drop back in the price of crude oil means that we should see some of the spike in gasoline prices reversed over the next couple of months. Which means the Fed quantitative easing policy can last, and will fully reach the real economy as time passing is passing by until the end of the year. Just to remind you, at this stage the earnings releases and the equity market reactions will make a second plan not so needed anymore as the oil prices drop combined to the yield cooling level will increase spending appetite and make July macro data readings very friendly (in August).
On the manufacturing from things keep on improving. The rebound in the Empire State Manufacturing index to -0.6 in July, from -9.4, suggests that factory sector output is very close to bottoming out. The new orders and shipments indices both improved markedly. The improvement in the employment index was only marginal but was there. Industrial production fell by only 0.4% m/m in June, the smallest monthly decline for eight months, suggesting that the recession is definitely easing. Business equipment output fell by a more modest 0.8% in June, compared with 1.9% in both of the preceding months, implying that the rate of decline in business investment has slowed. Encouraging data, confirming the road to recovery.
A few more friendly earnings to go through and you won’t stop the bullish rally before long. Indeed, today’s IBM (after the close) and JP Morgan (lunch time), in addition to the influent GE (relevant of the economic activity) should make investors forget the idea of a bear rally and will have to jump in following the much better Alcoa, Johnson, Goldman and Intel earnings. There won’t be any summer break. Not only the move was not their ideal scenario, but also the US economy might already be back on a positive note, which makes the current valorisation even cheaper. The base effect from H2 will be very friendly, even more as fund managers will start looking at 2010 pe levels. Not even talking about the M&A activity which should surge back with the feeling that the recovery is in sight, making firms jump on low yield environment to take opportunities.
Nasdaq stance is very bullish, with a gap on the downside (bar chart daily) left between in addition to the one left (1800/1824 on the cash index) when heading down (1823/1843)
Chinese Q2 GDP came out at 7.9%, vs 6.1% in Q1, better than the 7.5 /7.8% bracket of analysts expectations, lifting the yearly growth pace to 7.1%, sustaining the economic rebound and keeping China on track to achieve its targeted growth rate of 8% this year. The recovery has been driven mainly by infrastructure-centric investment spending. Construction work on most of these infrastructure projects, once started, will typically last two to three years. Therefore, as long as there are enough projects in the pipeline, the infrastructure investment is likely to be more sustainable than most expect. The government stimulus plan is to last until 2011, with an equivalent of NY City and Hong Kong to be build every year… Usual pessimistic analysts are cautioning that while the pace of Chinese economic growth was accelerating, the quality of that growth was deteriorating. "The risks of an asset-price bubble are growing as the combination of an easy credit policy and limited fixed investment opportunities have spurred purchases of equities, property, and commodities. Up to 50% of the increase in credit this year is estimated to have been used to fund this type of purchase". For the time being, it is just welcome to see China’s growth pulling a lagging world economy, let’ cross that bridge we come to it. 2011 is fiction in term of timing nowadays. By the way, China’s stock market value overtook Japan as 2ed biggest worldwide.
The Eurostoxx should head toward new high (should break 2549), while resisting on 2459, 2488 and then 2500 levels on the cash Eurostoxx. Yesterday’s volume was interesting, and might be promising business wise, let’s cross finger. Focus JP which will tell us more
ECONOMIC DATA WITH IMPACT
Nokia (11h UK time)
JP Morgan (11h30 UK)/ Marriott and Biogen earnings before US market open
Jobless Claims (13h30 UK) expected 548k from previous 565k / interesting as it was improving last week
Philadelphia Fed index (15h UK) expected –5 from previous –2.2 / should reflect an increasing manufacturing output / minor
NAHB Housing index (18h UK) expected 16 from previous 15 /will provide evidence that the recovery in housing activity is taking place, at a slow speed for now but at least the activity is no longer falling / interesting
IBM & Google after US close
POSITIVE IMPACTS
PORSCHE's families are near an agreement that would reduce Porsche's roughly €10 bn in debt (FT) / One possible outcome was combining a sale of half the company to Volkswagen for €4 bn, raising €5 bn in new capital & selling options convertible to VW shares
NOVARTIS : Q2 sales $10.55bn (10.34bn exp) / Pharma sales $7.11bn (6.86bn exp)/ Ebit $2.36bn (2.35bn exp) /Cost savings program 18 months ahead of schedule / Raised its FY forecast for its drugs unit + confirmed previous group guidance
ELECTROLUX : Q2 sales SK27.48bn (27.25bn e) / Operating SK1.05bn (604m e) / Sees some early signs moving towards the bottom
ALSTOM : Q1 sales €4.8bn (4.93bn exp) but order intake €4.8bn (4.04bn exp) / Confirms op. margin in March 2010 at around 9%
CONTINENTAL : Schaeffler is making progress in talks with banks about its debt structure (Handelsblatt)
AVIVA's regulatory capital cushion is getting stronger, and is not planning any further disposals (CEO)
SANOFI received an order from the French Ministry of Health to produce 28 m doses of vaccine against the novel A/H1N1 influenza virus + an option for an additional 28 million doses
GDF-SUEZ said that it could team up with Total, E.On and Iberdrola to build an EPR nuclear reactor, the country's third (La Tribune)
FIAT : Renault-Nissan must double its market share in Brazil to at least 10% to stay competitive (CEO,Fiat is the market leader in Brazil while Renault-Nissan ranks sixth. )
XILINX : Q1 sales $376m (379m exp) / EPS $0.21 (0.18 exp) / Sees Q2 sales $384-399m (381m exp) & Q2 GM at 61%
NEGATIVE IMPACTS
LLOYDS :Bank of Scotland has received a fresh €700m capital injection from Lloyds, as the lender is forced to bolster its reserves amid spiralling bad loans.
STORA ENSO said it would take a writedown of up to $575 m in the Q2 linked to its stake in the ailing North American NewPage biz
CASINO : Q2 revenue €6.82bn (6.8bn exp) / French sales -5% / Hypermarkets sales -9.8% / International +5.9% / Confirmed guidance
FERROVIAL (minor) : The last group bidding to buy Gatwick Airport from BAA, is refusing to raise its £1.4 bn bid to meet BAA's desired price (FT) / BAA wants £100 million more than a consortium led by Manchester Airport and a Canadian fund is willing to pay
VEDANTA RESOURCES : Indian metals producer Sterlite Industries is raising about $1.5 bn in an issue of ADR, with parent Vedanta Resources to buy $500 million
EUROPEAN CARMAKERS : The WSJ is writing about overcapacity in the European car industry saying that it has about 35% more production capacity than it needs…
TRADING IDEAS
Would wait until the weekend for further purchases, as JP today, IBM tonight, GE tomorrow should temper the bullish mood until the earnings are out given the latest run short term. A more solid trend will then gradualy take place with fundamenta l investors to step in with their 2 trillions dollars left in monetary funds. A few laggards would still be worth playing :
BUY RENAULT & PEUGEOT to play recovery on track + Killed +oil prices + switch to electrical cars ready to go very soon
BUY AIR FRANCE to play economic recovery should be highlighted by the earnings season + time is a great heeler, the crash impact will fade
BUY CHEVRON looking nice in the US
BUY FRANCETEL / SELL TELEFONICA // BUY AXA / SELL ALLIANZ // BUY PEUGEOT / SELL DAIMLER // BUY AIR FRANCE / SELL LUFTHANSA
BROKER METEOROLOGY
GAZPROM RAISED TO OUTPERFORM FROM MARKETPERFORM BY BEARSTERN
STATOIL RAISED TO HOLD FROM SELL BY CITIGROUP
SOC GEN RAISED TO HOLD FROM SELL BY CITIGROUP
TOMTOM RAISED TO HOLD FROM SELL BY DEUTSCHE BANK
RENEWABLE ENERGY CUT TO UNDERPERFORM BY BANK OF AMERICA
K+S CUT TO HOLD FROM BUY BY CITIGROUP
DATA
WTI : 60,2 (0,13 %)
Eur/$ : 1,3986 (0,13 %)
$ /Yen : 93,52 (-0,14 )
10 Yr US : 3,46 ( -1,53 bp)
10 Yr Euro : 3,30 ( 3,8 bp)
Indices : US close ; Europe close
SOX : 1,63 %;1,17%
S&P :0,53 %; 0,34 %
DOW: 0,33%; 0,19 %
NAS :0,36%; 0,27%
DJ Stoxx US Sectoral Indices : US close ; Europe close
BASIC MATERIALS : 0,81 %; 1,04 %
ENERGY : 1,37 %; 1,42 %
FINANCIAL : -0,24 %; -0,27 %
HEALTHCARE : 0,36 %; 0,00 %
TECHNO : 0,29 %; 0,21 %
TELECOM : -0,65 %; -0,52 %
INDUSTRIAL : 1,08 %; 0,87 %
UTILITIES : 0,82 %; 0,35 %
TO BE COMING
Today
Results :Carrefour sales / Accor sales / Alstom sales / Alpha Laval / Electrolux / Nokia (10.00 GMT) / Novartis / Yara / JP Morgan (10.30 GMT) / Marriott International / IBM / SonyEricsson / Google / IBM / Baxter / Biogen
Dividend :Caterpillar ($0.42)
Events :Sun Microsystems Special Stockholder Meeting to agree merger with Oracle / Banco Espirito Santo EGM / Land Securities AGM / Sun Microsystems shareholder meeting
Friday
Results : Pernod Ricard trading statement / Atlas Copco / Invensys interim / Fortum / Alleanza Assicurazioni / Sandvik (BMO) / Maroc Telecom sales / Bank of America - ML / Citigroup (12.00 GMT) / General Electric (BMO) /
Dividend :
Events: Novartis AGM / Cable & Wireless
Monday
Results : Boliden / Texas Instrument (AMC) / Halliburton
Dividend :
Events :
Tuesday
Results : Iberdrola Reenovables / Nordea / Svenska Handelsbanken / AMD (AMC) / Apple (AMC) / Caterpillar (11.30 GMT) / Dupont (BMO) / Lockheed Martin (BMO) / Merck & Co / Schering-Plough / Coca Cola Co / United Technologies (BMO) / Yahoo! (AMC)
Dividend :
Events:
Wednesday
Results :Fiat / Glaxo Smith Kline / Iberdrola / Tele 2 / TomTom / Lonza / Norsk Hydro / Sand Disk / Morgan Stanley / Boeing / Pepsi / Qualcomm / eBay (AMC) / Bank of New York / Wells Fargo / Altria (11.00 GMT) / Qualcomm / US Bank Corp / Alcon (AMC) / Eli Lilly
Dividend : London Stock Exchange (GBp 17,77778)
Events:
ECONOMIC DATA PREVIEW
Watch in the United-States the weekly release of the initial jobless claims and of the continuing claims due at 13.30 GMT, both data are expected to slightly decrease as the labour market has now reached a bottom and should slowly recovering.
Watch in France the Consumer price index for June due at 7.45 GMT. Consumer price index is expected to rise from a month ago, but from a year ago inflation should drop deeper in negative territory due to “negative base effects” underlining the deflation situation./JB
ECONOMY
United-States: Inflation reached its lowest level for almost 60 years
The consumer price index in the United-States rose from + 0.1% in April to +0.7% in June (forecast +0.6%) mainly led by the jump in energy cost ( 17.3% spike in gasoline prices). Meanwhile from a year ago US inflation reached its lowest level since 1950 dropping from -1.3% to -1.4% due to “negative base effects” as energy cost dropped sharply from a year ago. The drop of domestic demand add to the global economic downturn is increasing the pressure on prices. Nevertheless we remained in the Fed target for the core inflation which reached 1.7% in June showing that the present deflation situation (negative YoY inflation) is mainly due to the drop of food and energy prices. This is proving us that the deflation situation will not last in the United-States.
United-States: Manufacturing output contacted at a slower pace in June
US industrial production decline only by 0.4% in June(forecast -0.6%) suggesting that the recovery is slowly taking place as recession is easing. This is indeed the smallest monthly decline for eight months. Looking at the breakdown we notice that motor vehicle dropped by 2.6%, led by the crisis at Chrysler and General Motors, output of machinery dropped by 1.9%,output of computer/electronics fell by 1.1% and finally business equipment fell by a modest 1.1% suggesting that the decline of business investment might slowdown in the coming months. Meanwhile capacity utilisation reached 68.0% the lowest level on record which should constitute a ground floor.
United-States: Status quo at the Fed ( FOMC meeting June 24th).
Conscious of the gravity of the situation, the Fed showed a very strong reactivity in reducing its leading rate between 0 and 0.25%. The maximum has been done to save the economy of the Uncle Sam. Furthermore the Fed continues its quantitative easing policy. Consequently going any further in the cut of the Federal Funds rate will be useless and Fed leading rate remained unchanged.
Euro zone: inflation reached negative territory
The inflation level in the euro zone, which reached its highest level in July 2008 with 4%, decreased every month since then, led by the fall in oil and commodity prices. However, after reaching +1.1% in January, the consumer price index slightly increased in February to +1.2% YoY, because of the slight rise in energy prices at the beginning of the year. But this rise did not last as inflation declined during the following three months. Year on Year inflation retreated in June and enter into negative territory to - 0.1%. reaching a new historical low and the start of a deflation situation. This drop of inflation from a year ago is mainly led by the decline of oil prices as showed by the breakdown revealing a drop of 11.8% in energy prices. Indeed the core inflation (excluding food and energy) remained in positive territory at +1.4%. Meanwhile consumer price index rose from 0.1% in May to 0.2% in June mainly lead by the slight rise of oil in June./JB
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