Strong Week for the Start of Earnings Season

Markets

For the week of Monday, July 8, 2013 through Friday, July 12, 2013:

• Standard & Poor’s 500 Index: 3.01%
• Dow Jones Industrial Average: 2.22%
• NASDAQ Composite: 3.49%

Stocks extended their winning streak to three sessions on Monday. Investors seemed more confident after a stronger-than-expected employment report Friday. Many in the market believe stronger employment makes it more likely that the Fed will scale back its easing efforts later this year. With the start of earnings season, stocks continued to rise Tuesday, pushing the tech-oriented NASDAQ Composite Index to a 12-year high.

Midweek, the markets were flat after the Federal Reserve’s latest policy-setting meeting minutes showed a divide when to end stimulus. Federal Reserve Chairman, Ben Bernanke, steered clear of Fed policy in his prepared statements, but he said highly accommodative policy was needed for the foreseeable future. Stocks climbed early Thursday and continued through the end of the week, sending both the Dow and S&P 500 to record closing highs for a second straight day.

Economic Data

• June Jobs Report:
  • Payroll employment increased by 195,000 in June, driven by the service industries including leisure/hospitality, business/professional services and retail trade, though services added jobs broadly.
    • Payroll employment from April was revised up from 149,000 to 199,000.
    • May was revised from 175,000 to 195,000.
  • The increases resulted in second quarter gains averaging 196,000 net jobs.
  • The unemployment rate was unchanged at 7.6%.
• Chain Store Sales:
  • Summer clearance and a strong Independence Day weekend caused the chain store sales index to rise 3% in the latest week.
  • Year-over-year growth was 2.9%, well above the 2.3% year-to-date average.
• Wholesale Trade:
  • Wholesale inventories dropped 0.5% in May and were revised 0.1% downward for April.
  • The inventory weakness was for durable goods, which were 0.3% lower for the month-and nondurables, which were down 0.8%.
  • The inventory-to-sales ratio fell to 1.18 from 1.21.
• MBA Mortgage Applications Survey:
  • Mortgage applications fell 4% during the Independence Day shortened week.
    • This marked the fourth straight decline.
    • Both refinance and purchase activity retracted as mortgage interest rates continued upward.
  • The average rate for a 30-year fixed mortgage is hovering around 4.7%.
  • This is a level not breached since April 2011.
• Federal Open Market Committee Minutes:
  • The minutes of the June 18-19 meeting of the Federal Open Market Committee showed that more improvement in the job market is needed before the central bank scales back its monthly asset purchases.
    • The minutes did little to provide clarity on the course of monetary policy.
  • Though the general tone of the minutes seems a touch more dovish than anticipated following
  • Chairman Bernanke’s post-meeting press conference, there was mention that half of the participants favored ending quantitative easing this year.
    • This is surprising, but we don’t expect QE to end until mid-2014.
  • It appears Fed officials are worried about the rising costs of QE, including financial instability and complicating the exit strategy.
• Jobless Claims:
  • Initial claims unexpectedly increased 16,000 to 360,000 for the week.
  • Annual auto retooling may have pushed filings higher.
  • Continuing claims rose 24,000 to 2.977 million for the week.

Earnings:

• Alcoa (NYSE: AA)
  • Excluding restructuring costs, the aluminum maker earned $76 million, or $0.07 a share, beating expectations of $0.06.
  • Quarterly revenue fell 2% to $5.85 billion because of lower aluminum prices.
    • Revenue still beat estimates of $5.83 billion.
  • Aluminum prices decreased close to 7% during the quarter and 13% in 2013, reaching a four-year low of $1,758 a ton last month.
  • Alcoa said its net loss was $119 million, or $0.11 a share, versus a loss of $2 million last year.
• Yum! Brands, Inc. (NYSE: YUM)
  • Yum! Brands, Inc. reported profits fell in the latest quarter, but that China’s sales trends were improving.
    • China is a critical division for Yum Brands and has been affected by a bird flu outbreak.
    • In June sales were down 10% at restaurants open a year, compared to the 19% drop in May.
  • Yum! earned $281 million, or $0.61 per share compared to $331 million, or $0.69 per share, last year.
    • Excluding one-time costs, the company earned $0.56 per share, beating the $0.54 expectation.
  • Total revenue fell to $2.9 billion, just short of the $2.93 billion analysts expected.
• Family Dollar Stores Inc. (NYSE: FDO)
  • Family Dollar earned $120.9 million, or $1.05 a share, compared to $124.5 million, or $1.06 a share.
  • Sales rose 9% to $2.57 billion, including a 2.9% same-store sales increase.

Interest Rates

• The two-year Treasury rate fell three basis points to 0.34%.
• The five-year Treasury rate remained flat at 1.42%.
• The 10-year Treasury rate increased eight basis points to 2.59%.
• The 30-year Treasury yield rose 13 basis points to 3.63%.

Disclosures

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