Derivati USA: CME-CBOT-NYMEX-ICE Tbond,Tnote,Bund&CO-giu/lug2006: fuga dai Bonds (vm18) (2 lettori)
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gipa69
collegio dei patafisici
Global: Fairy Tales of the US Bond Market (Tale 2)
Joachim Fels (London) and Manoj Pradhan (London)
In the first instalment of this three-part piece, we described the backdrop and motivation for our new US bond yield model, which we employ to estimate MS FAYRE, our new proprietary estimate for the fundamental fair value for US 10-year bond yields. Today, we describe the results and discuss whether bonds are still overvalued. The full report is available on Morgan Stanley’s Client Link.
A stable long-run relationship between yields and fundamentals
To estimate the link between the bond yield and our three fundamental variables, we employ a technique called cointegration. This method is especially suited to detect long-run equilibrium relationships between variables. Several different cointegration approaches and various diagnostic checks lead us to conclude that, over the past 25 years, a combination of the three fundamental variables listed above has done well in explaining the broad evolution of the US 10-year yield (again, see the Appendix of the full report for detail).
Some simple rules of thumb derived from MS FAYRE. The estimated coefficients of our three fundamental variables tell us how a given change in the variable affects the bond yield. Specifically, we find that:
· a 100 bp increase in the fed funds rate (assuming that inflation remains unchanged) raises the 10-year bond yield by approximately 25bp;
· a 1 percentage-point increase in 1-year ahead inflation expectations raises the 10-year bond yield by some 1.4 percentage points; and
· a 1-percentage-point increase in the standard deviation of core PCE inflation raises the 10-year bond yield by around 1.4 percentage points.
MS FAYRE currently stands around 5.3%. Using the estimated relationship between the bond yield and our three fundamental variables, we can calculate the theoretical level of the bond yield at any point in time, given the prevailing levels of the real funds rate, inflation expectations and inflation volatility at that time. We call this theoretical level of the bond yield the ‘fundamental fair value’, or MS FAYRE. Both the actual bond yield and MS FAYRE have declined over the past 25 years, from extreme highs of around 15% in 1981. The lowest point for MS FAYRE was reached during the deflation scare of 2003, when a negative real fed funds rate and a dip in inflation expectations below 2% pushed the fair value down to 3.4% in the spring of 2003. Since then, MS FAYRE has risen by almost 200bp to 5.3% by the middle of 2006, reflecting a moderate elevation of inflation expectations and a significant increase in the real fed funds rate since mid-1994.
Bond conundrum not unprecedented
The 10-year yield and MS FAYRE have wandered apart at times, but deviations of one from the other tend to be corrected over time (technically speaking, a combination of our fundamental variables and the bond yield are cointegrated). Deviations can and have been corrected through a return of the actual yield to MS FAYRE, through a change in the fundamental variables that brings MS FAYRE closer to the actual yield, or through a combination of the two adjustment mechanisms. The maximum deviations of actual yields from MS FAYRE have amounted to about +/-100bp.
Buy/sell bonds when MS FAYRE is more than 50bp away. It is instructive to look at various past episodes of large deviations of actual yields from MS FAYRE. Actual yields fell significantly below MS FAYRE in 1987, 1989, 1993, 1995, 1998 and 2005, signalling a clear overvaluation of bonds. In each of these cases, a bear market in bonds followed that took actual yields significantly higher towards or through MS FAYRE. Conversely, actual yields stood significantly above MS FAYRE in 1985, 1992, 2000 and 2002, signalling a clear undervaluation of bonds. In each of these cases, a bull market in bonds followed that took actual yields towards and eventually below MS FAYRE. Medium-term buy and sell signals for bonds are typically reached when actual yields trade more than 50bp above or below MS FAYRE.
The conundrum is history now. Looking at the 2005 conundrum episode, it is interesting to note that while bond yields fell some 100bp below MS FAYRE by the late summer of that year, such deviations have occurred several times before during the past 25 years. In other words, a drop of bond yields below their fair value such as the one seen last year did not represent a break with past patterns and, as such, did not require a new paradigm to explain it. In fact, our statistical tests suggest that the relationship between bond yields and our three fundamental factors did not change significantly in recent years. And, as in previous episodes of overvaluation in the bond market, actual bond yields eventually corrected since autumn 2005, rising towards their fundamental fair value. Note that before the very recent bond rally, actual yields rose to 5.25% and thus virtually back towards our present 5.3% estimate for MS FAYRE. With bond yields fairly close to MS FAYRE at the moment, bonds are in the neutral zone from a pure fundamental valuation point of view.
In the third and last instalment of this tale tomorrow, we compare our results to separate estimates of the term premium by the Fed.
Joachim Fels (London) and Manoj Pradhan (London)
In the first instalment of this three-part piece, we described the backdrop and motivation for our new US bond yield model, which we employ to estimate MS FAYRE, our new proprietary estimate for the fundamental fair value for US 10-year bond yields. Today, we describe the results and discuss whether bonds are still overvalued. The full report is available on Morgan Stanley’s Client Link.
A stable long-run relationship between yields and fundamentals
To estimate the link between the bond yield and our three fundamental variables, we employ a technique called cointegration. This method is especially suited to detect long-run equilibrium relationships between variables. Several different cointegration approaches and various diagnostic checks lead us to conclude that, over the past 25 years, a combination of the three fundamental variables listed above has done well in explaining the broad evolution of the US 10-year yield (again, see the Appendix of the full report for detail).
Some simple rules of thumb derived from MS FAYRE. The estimated coefficients of our three fundamental variables tell us how a given change in the variable affects the bond yield. Specifically, we find that:
· a 100 bp increase in the fed funds rate (assuming that inflation remains unchanged) raises the 10-year bond yield by approximately 25bp;
· a 1 percentage-point increase in 1-year ahead inflation expectations raises the 10-year bond yield by some 1.4 percentage points; and
· a 1-percentage-point increase in the standard deviation of core PCE inflation raises the 10-year bond yield by around 1.4 percentage points.
MS FAYRE currently stands around 5.3%. Using the estimated relationship between the bond yield and our three fundamental variables, we can calculate the theoretical level of the bond yield at any point in time, given the prevailing levels of the real funds rate, inflation expectations and inflation volatility at that time. We call this theoretical level of the bond yield the ‘fundamental fair value’, or MS FAYRE. Both the actual bond yield and MS FAYRE have declined over the past 25 years, from extreme highs of around 15% in 1981. The lowest point for MS FAYRE was reached during the deflation scare of 2003, when a negative real fed funds rate and a dip in inflation expectations below 2% pushed the fair value down to 3.4% in the spring of 2003. Since then, MS FAYRE has risen by almost 200bp to 5.3% by the middle of 2006, reflecting a moderate elevation of inflation expectations and a significant increase in the real fed funds rate since mid-1994.
Bond conundrum not unprecedented
The 10-year yield and MS FAYRE have wandered apart at times, but deviations of one from the other tend to be corrected over time (technically speaking, a combination of our fundamental variables and the bond yield are cointegrated). Deviations can and have been corrected through a return of the actual yield to MS FAYRE, through a change in the fundamental variables that brings MS FAYRE closer to the actual yield, or through a combination of the two adjustment mechanisms. The maximum deviations of actual yields from MS FAYRE have amounted to about +/-100bp.
Buy/sell bonds when MS FAYRE is more than 50bp away. It is instructive to look at various past episodes of large deviations of actual yields from MS FAYRE. Actual yields fell significantly below MS FAYRE in 1987, 1989, 1993, 1995, 1998 and 2005, signalling a clear overvaluation of bonds. In each of these cases, a bear market in bonds followed that took actual yields significantly higher towards or through MS FAYRE. Conversely, actual yields stood significantly above MS FAYRE in 1985, 1992, 2000 and 2002, signalling a clear undervaluation of bonds. In each of these cases, a bull market in bonds followed that took actual yields towards and eventually below MS FAYRE. Medium-term buy and sell signals for bonds are typically reached when actual yields trade more than 50bp above or below MS FAYRE.
The conundrum is history now. Looking at the 2005 conundrum episode, it is interesting to note that while bond yields fell some 100bp below MS FAYRE by the late summer of that year, such deviations have occurred several times before during the past 25 years. In other words, a drop of bond yields below their fair value such as the one seen last year did not represent a break with past patterns and, as such, did not require a new paradigm to explain it. In fact, our statistical tests suggest that the relationship between bond yields and our three fundamental factors did not change significantly in recent years. And, as in previous episodes of overvaluation in the bond market, actual bond yields eventually corrected since autumn 2005, rising towards their fundamental fair value. Note that before the very recent bond rally, actual yields rose to 5.25% and thus virtually back towards our present 5.3% estimate for MS FAYRE. With bond yields fairly close to MS FAYRE at the moment, bonds are in the neutral zone from a pure fundamental valuation point of view.
In the third and last instalment of this tale tomorrow, we compare our results to separate estimates of the term premium by the Fed.
gipa69
collegio dei patafisici
Marc Faber:
Should you buy bonds?
Personally, I think that at present Two-Year Treasury notes, which yield around 5.1 per cent, offer an attractive alternative to equities because, in the past, when the Fed stopped raising interest rates Two-Year Treasury bond yields fell on average by 120 basis points over the next six months.
Equities may rally somewhat from near-term deeply oversold levels in the very near future as the period between July and August is characterized by some seasonal strength. However, we would use any additional strength as a selling opportunity, as the upside would seem to be very limited as substantial resistance resides on the S&P 500 at between 1290 and 1325.
While I am very negative about US bonds and the US dollar in the long run, for the next three months, US bonds could outperform equities. But why! After all US bonds and also other bonds around the world have been declining in price since the summer of 2005, and have grossly under-performed global equities since 2003. Moreover, we read every day in the media that inflation is accelerating.
Two observations! After each bubble peak some economic pain followed for the bubble sector. Japan went after 1989 into a 14 years deflationary period and economic stagnation, and the high tech sector suffered from over-capacities and weak pricing following March 2000. So, should we expect a housing slump?
Housing slowdown
There are several indications that the housing sector is slowing down rapidly and may start to have a negative impact on the economy. Housing affordability is at the lowest level in fifteen years.
The reason for housing affordability to be down so much is that while home prices rose rapidly in the last five years, income gains for the typical household - not for the hedge management community - have either been stagnating or declining altogether.
Moreover, as interest rates rose from 1% on the Fed fund rate in June 2004 to currently 5.25%, financing cost has escalated. Poor affordability aside, the inventories of unsold homes and especially of condos have been rising rapidly while home buying attitudes have been declining.
It should be noted that, in the past, housing starts have been one of the most reliable indicators of future economic activity as the home building sector has a tremendous multiplier effect. It directly impacts the appliance, furniture, home improvement, consumer electronic, and construction material industry.
Moreover, it stimulates financial intermediaries and the real estate brokerage industry and allows households to refinance and extract money from their homes by taking on additional mortgages- a large part of which was spent on consumption.
Housing multiplier
My view would therefore be that the coming housing slowdown or slump could actually significantly exceed expectations and lead to across the board economic weakness. Don't forget that if home prices no longer appreciate, home equity extraction will come to a halt.
The consumer will then likely have to begin saving again from current income. Both these factors would obviously depress consumption and retail sales. One more point! The weak sales growth at Wal-Mart seems to confirm that the typical US household is already struggling.
So, what are the investment implications? All indictors point to an economic slowdown, but what we do not know is the reaction of the Fed to such a slowdown. No further tightening or an easing of monetary polices in a few months could result in further US dollar weakness measured against gold on concerns that the Fed will rather fight economic weakness than inflation.
This would obviously not be favorable for bonds and also likely have a negative impact on equities if measured against gold. Alternatively, it is possible that sudden weakness in economic activity could lead to a further sharp decline in industrial commodity prices and, so, ease inflationary pressures and meaningfully improve sentiment toward bonds.
Should you buy bonds?
Personally, I think that at present Two-Year Treasury notes, which yield around 5.1 per cent, offer an attractive alternative to equities because, in the past, when the Fed stopped raising interest rates Two-Year Treasury bond yields fell on average by 120 basis points over the next six months.
Equities may rally somewhat from near-term deeply oversold levels in the very near future as the period between July and August is characterized by some seasonal strength. However, we would use any additional strength as a selling opportunity, as the upside would seem to be very limited as substantial resistance resides on the S&P 500 at between 1290 and 1325.
While I am very negative about US bonds and the US dollar in the long run, for the next three months, US bonds could outperform equities. But why! After all US bonds and also other bonds around the world have been declining in price since the summer of 2005, and have grossly under-performed global equities since 2003. Moreover, we read every day in the media that inflation is accelerating.
Two observations! After each bubble peak some economic pain followed for the bubble sector. Japan went after 1989 into a 14 years deflationary period and economic stagnation, and the high tech sector suffered from over-capacities and weak pricing following March 2000. So, should we expect a housing slump?
Housing slowdown
There are several indications that the housing sector is slowing down rapidly and may start to have a negative impact on the economy. Housing affordability is at the lowest level in fifteen years.
The reason for housing affordability to be down so much is that while home prices rose rapidly in the last five years, income gains for the typical household - not for the hedge management community - have either been stagnating or declining altogether.
Moreover, as interest rates rose from 1% on the Fed fund rate in June 2004 to currently 5.25%, financing cost has escalated. Poor affordability aside, the inventories of unsold homes and especially of condos have been rising rapidly while home buying attitudes have been declining.
It should be noted that, in the past, housing starts have been one of the most reliable indicators of future economic activity as the home building sector has a tremendous multiplier effect. It directly impacts the appliance, furniture, home improvement, consumer electronic, and construction material industry.
Moreover, it stimulates financial intermediaries and the real estate brokerage industry and allows households to refinance and extract money from their homes by taking on additional mortgages- a large part of which was spent on consumption.
Housing multiplier
My view would therefore be that the coming housing slowdown or slump could actually significantly exceed expectations and lead to across the board economic weakness. Don't forget that if home prices no longer appreciate, home equity extraction will come to a halt.
The consumer will then likely have to begin saving again from current income. Both these factors would obviously depress consumption and retail sales. One more point! The weak sales growth at Wal-Mart seems to confirm that the typical US household is already struggling.
So, what are the investment implications? All indictors point to an economic slowdown, but what we do not know is the reaction of the Fed to such a slowdown. No further tightening or an easing of monetary polices in a few months could result in further US dollar weakness measured against gold on concerns that the Fed will rather fight economic weakness than inflation.
This would obviously not be favorable for bonds and also likely have a negative impact on equities if measured against gold. Alternatively, it is possible that sudden weakness in economic activity could lead to a further sharp decline in industrial commodity prices and, so, ease inflationary pressures and meaningfully improve sentiment toward bonds.
gipa69
collegio dei patafisici
DAILY MARKET RECAP - 07/28/2006
Updated Each Business Day at Approximately 4:30 pm ET
Stocks close week on a positive note. The S&P 500 posted its best weekly returns in more than three years. Weaker than expected economic data renewed hopes that the Fed would end its rate hike campaign. Second quarter gross domestic product rose by a lower than expected 2.5 percent. The core consumer price component rose 2.9 percent, its fastest pace in 12 years. Second quarter's employment cost rose by a slightly higher than expected 0.9 percent. In earnings news, Chevron Texaco reported results that missed expectations.
The Dow surged 119 points to close at 11219. Financial's American Express and Citigroup along with Wal-Mart led the advance. AmEx pushed 90 cents higher to $52.19, Citigroup climbed $1.02 to $48.33 and Wal-Mart jumped 93 cents higher to $44.46. Hewlett Packard was the only stock in the index to lose ground in the index. The NASDAQ ascended 39 points to 2094. The S&P 500 ran up 15 points to 1278. The Dow Utility Index traded 2 points higher to 435 while the transports rallied 109 points to 4414. The Russell 2000 gained 14 points to 700.
Trading volume totaled about 1.6 billion on the New York Stock Exchange and 1.4 billion on the NASDAQ. There were 4 stocks higher for every 1 lower on the New York Stock Exchange. Winners doubled losers on the NASDAQ. Gold eased $1.90 to $637.10. The dollar moved lower in foreign exchange dealings for the third straight session. Oil eased $1.30 to $637.10 per barrel.
US treasury securities moved higher across the board. Sample closing yields are as follows: 90-day 4.93%, 5-year note 4.91%, 10-year note 4.99%, and 30-year note 5.07%. Next week investors can look forward to another round of earnings releases as well as July's jobs data and institute of supply management reports. Have a great weekend! Dendra Lambert
Updated Each Business Day at Approximately 4:30 pm ET
Stocks close week on a positive note. The S&P 500 posted its best weekly returns in more than three years. Weaker than expected economic data renewed hopes that the Fed would end its rate hike campaign. Second quarter gross domestic product rose by a lower than expected 2.5 percent. The core consumer price component rose 2.9 percent, its fastest pace in 12 years. Second quarter's employment cost rose by a slightly higher than expected 0.9 percent. In earnings news, Chevron Texaco reported results that missed expectations.
The Dow surged 119 points to close at 11219. Financial's American Express and Citigroup along with Wal-Mart led the advance. AmEx pushed 90 cents higher to $52.19, Citigroup climbed $1.02 to $48.33 and Wal-Mart jumped 93 cents higher to $44.46. Hewlett Packard was the only stock in the index to lose ground in the index. The NASDAQ ascended 39 points to 2094. The S&P 500 ran up 15 points to 1278. The Dow Utility Index traded 2 points higher to 435 while the transports rallied 109 points to 4414. The Russell 2000 gained 14 points to 700.
Trading volume totaled about 1.6 billion on the New York Stock Exchange and 1.4 billion on the NASDAQ. There were 4 stocks higher for every 1 lower on the New York Stock Exchange. Winners doubled losers on the NASDAQ. Gold eased $1.90 to $637.10. The dollar moved lower in foreign exchange dealings for the third straight session. Oil eased $1.30 to $637.10 per barrel.
US treasury securities moved higher across the board. Sample closing yields are as follows: 90-day 4.93%, 5-year note 4.91%, 10-year note 4.99%, and 30-year note 5.07%. Next week investors can look forward to another round of earnings releases as well as July's jobs data and institute of supply management reports. Have a great weekend! Dendra Lambert
ciciola
Nuovo forumer
ditropan ha scritto:Basta ed avanza ... grassie Gipa.
In definitiva, si potrebbe anche scalarlo...
Dieci figure di spot (se dovesse malauguratamente "dirigersi" ancora verso i massimi...) sarebbero più o meno 5/6 figure di future: giusto Andrea???
Ringrazio anch'io GIPA per il grafico...
dario
gipa69
collegio dei patafisici
Una bella risposta sui dubbi da me manifestati sul comportamento del DJ transportation e sull'andamento deil ciclo presidenziale USA.
http://www.safehaven.com/article-5623.htm
http://www.safehaven.com/article-5623.htm
gipa69
collegio dei patafisici
Friday, July 28, 2006 (10:03 PM ET)
Wall St Week Ahead: Jobs, more data and profits to drive stocks (Reuters)
By Vivianne Rodrigues
NEW YORK, July 28 (Reuters) - U.S. stocks may be set for another volatile week, when the July jobs report and other economic data could help determine the outlook for interest rates.
More earnings will pour in, with results expected from such household names as Verizon Communications Inc. <VZ> , Avon Products Inc. <AVP>, Hilton Hotels Corp. <HLT> , Cigna Corp. <CI>, Procter & Gamble Co. <PG> and Starbucks Corp. <SBUX> All belong to the Standard & Poor's 500 Index, while Verizon and Procter & Gamble also are among the 30 components in the Dow. And Starbucks is one of the Nasdaq's most recognizable members.
Stock investors will drill into the profit and outlook figures, with those exceeding Wall Street's expectations likely to set off some buying -- and possibly a rally. Disappointments, of course, are seen as a reason to sell.
But the U.S. economy will get more scrutiny from Wall Street as reports on the labor market, the manufacturing and services sectors, factory orders, personal income and spending will be on tap. And an inflation gauge closely tracked by the Federal Reserve also will be in the spotlight, analysts said.
The economic data may attract even more attention than usual since this will be the last full trading week before the Fed's next policy-making meeting on Aug. 8.
"It is no secret. The market knows the Federal Reserve's top three priorities are inflation, inflation, inflation," said Anthony Chan, chief economist of JPMorgan Private Client Services in New York.
Tension in the Middle East may still weigh on the markets. The conflict between Israel and the Hizbollah guerrillas in Lebanon, which began on July 12, drove U.S. crude oil futures up to a record $78.40 a barrel two weeks ago.
U.S. crude oil for September delivery <CLU6> settled on Friday at $73.24 a barrel, down $1.30 for the day, and down 1.6 percent for the week.
WILL THIS RALLY HAVE LEGS?
The drop in oil and a government report showing the U.S. economy slowed more than expected in the second quarter, helped spark a rally in stocks on Friday.
Gross domestic product grew at an annual rate of 2.5 percent from April through June after a blistering pace of 5.6 percent in the first quarter, the Commerce Department said in its first assessment of GDP growth during the second quarter. Economists had forecast a second-quarter GDP growth rate of 3 percent.
Analysts said the weaker-than-expected GDP numbers suggest the Federal Reserve may pause in its campaign of raising interest rates, which touched off Friday's rally.
"The question now is whether this rally in stocks can be sustained in coming weeks," said Michael Metz, chief investment strategist of Oppenheimer Holdings Inc., in New York. "It will depend on earnings, consumer confidence and on the inflation rate. August may be a volatile month for stocks."
For the week, the Dow Jones industrial average <DJI> gained 3.23 percent, the Standard & Poor's 500 index <SPX> rose 3.08 percent, and the Nasdaq Composite Index <IXIC> shot up 3.65 percent.
FACTORIES, SPENDING AND JOBS
The heavy economic agenda next week starts with a reading of regional manufacturing activity on Monday, with the release at 10 a.m. EDT (1400 GMT) of the Chicago PMI report.
The National Association of Purchasing Management-Chicago's index, also known as the Chicago PMI, probably showed that business activity in the U.S. Midwest expanded again, but at a slower pace, according to economists polled by Reuters. They expect a July reading of the Chicago PMI at 56, down from 56.5 in June. A reading above 50 indicates expansion.
On Tuesday, a report on personal income and personal consumption, or spending, for June will be released at 8:30 a.m. EDT (1230 GMT). The Reuters poll forecast: Personal income is seen up 0.6 percent in June after a gain of 0.4 percent in May, while personal consumption is forecast to rise 0.4 percent in June, matching May's 0.4 percent gain.
All eyes on Wall Street will be on the core Personal Consumption Expenditures Index, also known as the core PCE Index, which is one of the Fed's most closely watched measures of inflation. The core PCE Index is predicted to rise 0.2 percent in June, after a gain of 0.2 percent in May, according to the economists polled by Reuters. The core reading excludes volatile food and energy prices.
The Fed and the markets "will be looking at core PCE and the average hourly earnings component of the payrolls report," said Chan of JPMorgan.
U.S. domestic car and truck sales for July, which will be released throughout the day on Tuesday, are expected to have picked up speed from June, according to the Reuters poll.
The Institute for Supply Management's index of U.S. manufacturing activity, due at 10 a.m. (1400 GMT) on Tuesday, is expected to dip to 53.7 in July from June's 53.8.
The ISM's index on non-manufacturing, or services, activity in the United States will be released on Thursday, also at 10 a.m. (1400 GMT). The forecast: 57.0 in July, the same as it was in June.
Also on Thursday, a report on factory orders may show a rise of 0.9 percent in June after a gain of 0.7 percent in May, according to the Reuters poll. This report is due at 10 a.m. (1400 GMT).
The week wraps up on Friday with the U.S. nonfarm payrolls report for July, due at 8:30 a.m. (1230 GMT). The U.S. economy likely added 150,000 jobs in July, up from 121,000 in June, according to economists polled by Reuters. The unemployment rate is pegged at 4.6 percent in July, the same as in the month before. For more details, see: [ID:ECI/US]
Average hourly earnings probably rose 0.3 percent in July, the Reuters poll showed, after a 0.5 percent gain in June.
GREAT EXPECTATIONS FOR EARNINGS
Earnings expectations for the second quarter climbed in the latest week, with Reuters Estimates now projecting that Standard & Poor's 500 companies' profits grew 11.7 percent in the second quarter from the year-ago period -- up from a growth forecast of 10.7 percent last week.
The number is expected to hit 12.5 percent once all S&P 500 companies have reported.
Next week, some of the largest S&P 500 companies reporting results will include Procter & Gamble, Prudential Financial Inc. <PRU>, Time Warner Inc. <TWX> and Starbucks.
Earnings "have been better than we expected," said Scott Wren, senior equity strategist at A.G. Edwards & Sons Inc. in St. Louis. "But the market may continue to focus on the misses, while a lot of companies are still turning in good results."
(Wall St Week Ahead runs every week. Questions or comments on this column can be e-mailed to: vivianne.rodrigues(at)reuters.com)
(Additional reporting by Jennifer Coogan) ((Reporting by Vivianne Rodrigues
Editing by Jan Paschal
Reuters Messaging:
rm:// [email protected]
Wall St Week Ahead: Jobs, more data and profits to drive stocks (Reuters)
By Vivianne Rodrigues
NEW YORK, July 28 (Reuters) - U.S. stocks may be set for another volatile week, when the July jobs report and other economic data could help determine the outlook for interest rates.
More earnings will pour in, with results expected from such household names as Verizon Communications Inc. <VZ> , Avon Products Inc. <AVP>, Hilton Hotels Corp. <HLT> , Cigna Corp. <CI>, Procter & Gamble Co. <PG> and Starbucks Corp. <SBUX> All belong to the Standard & Poor's 500 Index, while Verizon and Procter & Gamble also are among the 30 components in the Dow. And Starbucks is one of the Nasdaq's most recognizable members.
Stock investors will drill into the profit and outlook figures, with those exceeding Wall Street's expectations likely to set off some buying -- and possibly a rally. Disappointments, of course, are seen as a reason to sell.
But the U.S. economy will get more scrutiny from Wall Street as reports on the labor market, the manufacturing and services sectors, factory orders, personal income and spending will be on tap. And an inflation gauge closely tracked by the Federal Reserve also will be in the spotlight, analysts said.
The economic data may attract even more attention than usual since this will be the last full trading week before the Fed's next policy-making meeting on Aug. 8.
"It is no secret. The market knows the Federal Reserve's top three priorities are inflation, inflation, inflation," said Anthony Chan, chief economist of JPMorgan Private Client Services in New York.
Tension in the Middle East may still weigh on the markets. The conflict between Israel and the Hizbollah guerrillas in Lebanon, which began on July 12, drove U.S. crude oil futures up to a record $78.40 a barrel two weeks ago.
U.S. crude oil for September delivery <CLU6> settled on Friday at $73.24 a barrel, down $1.30 for the day, and down 1.6 percent for the week.
WILL THIS RALLY HAVE LEGS?
The drop in oil and a government report showing the U.S. economy slowed more than expected in the second quarter, helped spark a rally in stocks on Friday.
Gross domestic product grew at an annual rate of 2.5 percent from April through June after a blistering pace of 5.6 percent in the first quarter, the Commerce Department said in its first assessment of GDP growth during the second quarter. Economists had forecast a second-quarter GDP growth rate of 3 percent.
Analysts said the weaker-than-expected GDP numbers suggest the Federal Reserve may pause in its campaign of raising interest rates, which touched off Friday's rally.
"The question now is whether this rally in stocks can be sustained in coming weeks," said Michael Metz, chief investment strategist of Oppenheimer Holdings Inc., in New York. "It will depend on earnings, consumer confidence and on the inflation rate. August may be a volatile month for stocks."
For the week, the Dow Jones industrial average <DJI> gained 3.23 percent, the Standard & Poor's 500 index <SPX> rose 3.08 percent, and the Nasdaq Composite Index <IXIC> shot up 3.65 percent.
FACTORIES, SPENDING AND JOBS
The heavy economic agenda next week starts with a reading of regional manufacturing activity on Monday, with the release at 10 a.m. EDT (1400 GMT) of the Chicago PMI report.
The National Association of Purchasing Management-Chicago's index, also known as the Chicago PMI, probably showed that business activity in the U.S. Midwest expanded again, but at a slower pace, according to economists polled by Reuters. They expect a July reading of the Chicago PMI at 56, down from 56.5 in June. A reading above 50 indicates expansion.
On Tuesday, a report on personal income and personal consumption, or spending, for June will be released at 8:30 a.m. EDT (1230 GMT). The Reuters poll forecast: Personal income is seen up 0.6 percent in June after a gain of 0.4 percent in May, while personal consumption is forecast to rise 0.4 percent in June, matching May's 0.4 percent gain.
All eyes on Wall Street will be on the core Personal Consumption Expenditures Index, also known as the core PCE Index, which is one of the Fed's most closely watched measures of inflation. The core PCE Index is predicted to rise 0.2 percent in June, after a gain of 0.2 percent in May, according to the economists polled by Reuters. The core reading excludes volatile food and energy prices.
The Fed and the markets "will be looking at core PCE and the average hourly earnings component of the payrolls report," said Chan of JPMorgan.
U.S. domestic car and truck sales for July, which will be released throughout the day on Tuesday, are expected to have picked up speed from June, according to the Reuters poll.
The Institute for Supply Management's index of U.S. manufacturing activity, due at 10 a.m. (1400 GMT) on Tuesday, is expected to dip to 53.7 in July from June's 53.8.
The ISM's index on non-manufacturing, or services, activity in the United States will be released on Thursday, also at 10 a.m. (1400 GMT). The forecast: 57.0 in July, the same as it was in June.
Also on Thursday, a report on factory orders may show a rise of 0.9 percent in June after a gain of 0.7 percent in May, according to the Reuters poll. This report is due at 10 a.m. (1400 GMT).
The week wraps up on Friday with the U.S. nonfarm payrolls report for July, due at 8:30 a.m. (1230 GMT). The U.S. economy likely added 150,000 jobs in July, up from 121,000 in June, according to economists polled by Reuters. The unemployment rate is pegged at 4.6 percent in July, the same as in the month before. For more details, see: [ID:ECI/US]
Average hourly earnings probably rose 0.3 percent in July, the Reuters poll showed, after a 0.5 percent gain in June.
GREAT EXPECTATIONS FOR EARNINGS
Earnings expectations for the second quarter climbed in the latest week, with Reuters Estimates now projecting that Standard & Poor's 500 companies' profits grew 11.7 percent in the second quarter from the year-ago period -- up from a growth forecast of 10.7 percent last week.
The number is expected to hit 12.5 percent once all S&P 500 companies have reported.
Next week, some of the largest S&P 500 companies reporting results will include Procter & Gamble, Prudential Financial Inc. <PRU>, Time Warner Inc. <TWX> and Starbucks.
Earnings "have been better than we expected," said Scott Wren, senior equity strategist at A.G. Edwards & Sons Inc. in St. Louis. "But the market may continue to focus on the misses, while a lot of companies are still turning in good results."
(Wall St Week Ahead runs every week. Questions or comments on this column can be e-mailed to: vivianne.rodrigues(at)reuters.com)
(Additional reporting by Jennifer Coogan) ((Reporting by Vivianne Rodrigues
Editing by Jan Paschal
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