Wednesday’s Drivers Indicate Deterioration Ahead for Stocks
Stocks look unsure today, with the SPDR S&P 500 (SPY) off fractionally mid-morning. There’s little catalyst to drive the broader market with conviction today. We have just three mild mannered economic reports reaching the wire, and with Europe on vacation and the market otherwise numbed to ongoing economic weakness there, global markets seem numb as well. However, the news has been bad enough to eventually be absorbed, especially regarding what the Bank of England and a major Chinese real estate developer reported today. So, late market deterioration, probably at a slug’s pace, should follow through to the close or at least through the week. Though, we remain in the heart of a light trading season here, with few real news drivers on the schedule this week.
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The Bank of England (BOE) added a most unsavory ingredient to stock action this morning when it cut its economic growth outlook. Within its Inflation Report, the bank said that growth would likely be less than it previously thought over the next few years. Perhaps even more troubling was its description for the economy as “uncertain”. For the second quarter, the BOE sees 0.7% contraction. The BOE believes GDP has now contracted for three consecutive quarters in the U.K. and expects euro area GDP likely contracted in Q2 as well. That news is souring European shares today. Still, the iShares MSCI United Kingdom Index (EWU) was up a half of a percentage point in the early going.
EURO STOXX 50: -0.6%
S&P/ASX 200: +0.5%
Hang Seng: Unchanged
FTSE 100: -0.3%
Nikkei 225: +0.9%
The state of the Chinese real estate market had some light shed on it Wednesday. China’s leading residential real estate developer, China Vanke, reported its first half results. The developer said small enterprises have reduced new construction in the second half of the year. Vanke said starts were down 15% in the second quarter, year-to-year, and its realized prices were down 11% in the first half. The iShares FTSE China 25 Index (FXI) was still up by a half point in the late morning.
U.S. Economic Drivers
With interest rates edging higher in a slow summer week, the Weekly Mortgage Applications Survey indicated mortgage activity declined in the period ending August 3. The MBA’s Market Composite Index declined 1.8% on a seasonally adjusted basis. The Refinance Index fell 2% as the Purchase Index (applications for home purchases) decreased 1%. It seems house hunters have gotten spoiled due to week after week of new record low mortgage rates. It looks like they’ll wait out rates as a result. Nonetheless, record low mortgage rates have done relatively little for home sales. See our latest report on that issue here.
The Productivity and Costs Report for the second quarter produced an increase against Q1. Nonfarm business productivity increased 1.6% against a prior period decline. That said, the decline from Q1 was revised higher to negative 0.5% from minus 0.9%. And productivity also exceeded economists’ expectations for a 1.3% Q2 increase. The productivity gain came on a 2.0% rise in output and a 0.4% increase in hours worked. Unit labor costs jumped 1.7% against expectations for a 0.9% increase. In the first quarter, labor costs increased 5.6%, revised upward from 1.3%. While this data is aged now, it reflects a better view of Q2 than most other data. Though, somehow, I feel like Boeing (BA) is solely responsible for it!
New petroleum inventory data reached the wire this morning. The data for the week ending August 3 showed crude oil inventory decreased by 3.7 million barrels. That followed last week’s reported dramatic draw from crude oil inventory and total motor gasoline stocks. Gasoline stores fell by 1.8 million barrels in this latest period. This has the price of oil and gasoline higher today. Nearest term contracts for WTI Crude and Gasoline RBOB Futures are up 0.33% and 0.15% in mid-morning. The iPath S&P GSCI Crude Oil TR Index ETN (OIL) was up 1%.
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