The technical analysts voices appear to be in the ascendency at the moment with the S&P 500 now trading close to its 200 day moving average once again whilst the Dow is now close to break even for the year as is the FTSE100 and most major European indices. In the US the earnings season has made a difference given the ongoing disappointing economic data, although we must bear in mind that the earnings reports are historical whilst much of the economic data is a forward looking indicator.


The outlook remains very clouded and with the European austerity measures yet to really bite it is far too soon to consider the current rally in world equity markets as sustainable. US unemployment remains stubbornly high and the US economy is still benefitting from a massive fiscal stimulus, a good deal of which is now starting to fade which is why the more forward looking indicators point to a slowdown. We remain very uncertain as to the direction of world equity markets and it is difficult to believe yet that the fundamental picture is showing any real signs of improvement given the headwinds we face over the coming months.

The major US data announcement yesterday was the Conference Board’s Consumer Confidence index for July which declined to 50.4 from 52.9 against the consensus which was expecting a figure of 51.0. Consumer confidence in the US has slipped back significantly during recent weeks and if it remains at these depressed levels we can expect to see that reflected in spending patterns over the coming months which again does not bode well for US growth during the second half.

One glimmer of hope in the US is the housing market with activity appearing to show some signs of reaching a floor after the withdrawal of the tax credit stimulus measures. On Monday we had new home sales which after a 36.7% decline in May did at least rebound by just under 24% during June to 330,000 on an annualised basis. Other housing data relating to existing home sales and housing starts has been better than expectations this month.

The Bank of England Governor, Mervyn King has stated this morning that interest rates in the UK are set to stay low for the foreseeable future. Looking at GDP estimates and inflationary expectations we could be facing low interest rates for years rather than months. Despite the first estimate for UK Q2 GDP being substantially ahead of expectations it is difficult to see much more progress being made from this level over the coming months, and growth in the UK is still forecast by most commentators to be around the 1.3% mark for 2010. Estimates for 2011 show a little improvement on this level but not much with growth during 2011 likely to remain below 2%. These are levels that are unlikely to warrant any change in interest rates for a long time to come.

In the US today look out for the durable goods orders data for June. After a -0.6% decline last month the market is looking for a 1% improvement. The Beige book is also due for publication today and that gives some of the most up to date evidence of economic conditions in the 12 Federal Reserve districts.

Today has been all about the US again and the economic data continues to drive the market which over the last two days has put world markets back into reverse. Yesterday we had a plethora of data all of which points yet again to a slowdown in US economic growth. The Empire State manufacturing index for July was considerably worse than expected with a reading of just 5.08 (the lowest reading since Dec 2009) compared to expectations of a modest drop to 18.0 from the previous reported level of 19.57. The equivalent figure for Philadelphia only confirmed a weakening picture with the index for July dropping to 5.1 whilst the consensus was expecting a rise to 12.0. The constituents of the Philadelphia index paint a rather bleak picture with the new orders index moving into negative territory at -4.3 from 9.0 whilst current shipments declined to 4.0 from 14.2. This almost certainly means we are on course for a weaker ISM manufacturing reading next month.


One slight positive yesterday was that industrial production managed a modest gain of 0.1% during June whilst the consensus was expecting a slight decline of -0.2%. Within the same report manufacturing declined during June by -0.4% following on from a 1% improvement in May. Capacity utilisation remains very slack at just 74.1%.

With unemployment in the US continuing to be very much in focus it was interesting to see the weekly initial jobless claims data being largely ignored with a much better than expected reading yesterday of 429,000 against consensus expectations of 445,000. The reason the market chose not to look at this data was partly due to the bad manufacturing surveys. However, seasonal factors primarily related to delayed layoffs in the auto industry for re-tooling and the July 4th holiday will have distorted the picture making the reading this week unreliable.

In the US today we have had CPI data for June with the headline number showing a decline for a third month in a row of -0.1% month on month whilst the core index (less food and energy rose by 0.2%). Overall inflationary pressure remains very subdued in the US, a trend which is expected to continue over the coming months.

The week in the US has been rounded off with a poor University of Michigan consumer sentiment index reading for July which fell from 76.0 to 66.5, against expectations of a modest decline to 75.0.

After yet another glut of poor US data the Dow is down 150 points at the time of writing whilst the FTSE100 has fallen by 50 points on the day. Next week in the US the economic data is primarily focused on the housing market which we already know is in deep trouble again and we kick off on Monday with the National Association of Home Builders housing market index.

The minutes of the most recent FOMC meeting published yesterday revealed what most were expecting which was a downgrade to their growth outlook for 2010 from a range of 3.2% to 3.7% to a range of 3.0% to 3.5% and for 2011 from a range of 3.4% to 4.5% to 3.5% to 4.2%. In the grand scheme of things the downgrade is not that significant, and if the US does achieve these lower forecasts the market will have the basis to move further ahead. However, there is still considerable uncertainty around the market as to whether growth of over 3% is achievable this year. Given the Q1 figure of 2.7% and some estimates already doing the rounds of under 3% for Q2 there is a possibility that the Fed forecasts are going to need a further downward revision in the not too distant future. What we don’t want to see is a significant second half growth relapse in the US which is a real risk at present and is an event that is not priced into the market. At present most forecasters are not expecting any change in US interest rates until the latter part of 2011 at the earliest with many now predicting no change until well in 2012.


Other data news in the US published yesterday were retail sales for June which came in below expectations with a month on month decline of -0.5%. Most of this was due to a dip in auto sales which when stripped out showed a fall of -0.1% which follows on from a decline of 1.1% in May. Whichever way you cut it consumer trends in the US remain weak and it is difficult to see how the consumer will be able to pick up the baton and keep the momentum going over the coming months.

The US has a lot of data due for publication this afternoon. We start with the weekly initial jobless claims with the market looking for a number of 445,000 (last week 454,000). The Empire State Manufacturing report for New York State is due out at the same time. The market is looking for the index to drop back modestly to around 18.0 for July from the previous reported level of 19.57. Later in the day Industrial Production is due for June with the consensus looking for a month on month decline of -0.2% after the 1.2% increase reported for May. The final data of the day is the Philadelphia Fed manufacturing survey which is expected to show an improvement to 12.0 in July from the previous reported level of 8.0.

There was some relatively good news on UK unemployment yesterday with a drop of 34,000 in the number unemployed in the 3 months to May. Employment rose by 160,000 (although 148,000 of this was part time workers) over the same period but the number of people starting to look for work also increased significantly which held back the overall drop in the unemployment number. The outlook for the employment market remains clouded at present especially given the planned government cuts which according to the Office for Budget Responsibility will result in around 600,000 public sector job cuts by 2015/16.

The economic calendar for Europe is relatively quiet today with just the ECB monthly report on current economic trends due for publication.

The core UK inflation rate (excluding food and energy) remains stubbornly high and actually increased to an annualised rate of 3.1% in June from the previous level of 2.9% in May. The headline rate which does include food and energy moved down slightly to 3.2% from 3.4%. These figures remain well above the Bank of England’s target rate of 2%, but expectations are firmly in the camp of gradually declining prices over the coming months driven on by excess capacity in the economy. With a VAT hike due at the start of 2011, the Bank of England will no doubt want to see the CPI much closer to target before the inflationary impact of the VAT increase. Expectations for the timing of the first interest rate increase in the UK are still well into 2011, but this may change if the trend does not start to show a more meaningful decline.


In Europe the Centre for European Economic Research (ZEW) said that its German economic sentiment index fell to 21.2 in July from 28.7 in June. The European equivalent also fell during July to 10.8 after a reading of 18.8 in June. Both were below expectations and perhaps show the lagged impact of the European sovereign debt crisis. It is still too early to assess the impact of the austerity measures in Europe and again the lack of news flow more recently is helping the market to recover recent losses but that doesn’t mean the problem has gone away.

At the moment optimism has grasped the market and the US Q2 earnings season has every chance of keeping the momentum going in the short term. Most commentators appear to have dismissed the idea of a double dip recession as a low probability event. The next few weeks will be crucial given the fact that the economic data has in the main rolled over and to what extent the slowdown becomes something more is still an unknown and we do not believe that the idea of a double dip can be dismissed at this stage.

World markets managed a strong rally last week despite having digested a plethora of US economic data the week before which points to a slowdown in US economic activity over the second half of this year. The absence of any bad news last week undoubtedly helped the rally along, but as we move into the Q2 earnings reporting season this week attention will focus on company results and in particular outlook statements. The first report in the US comes from Alcoa after the market close today, but the real action won’t start until later in the week when the banks start to report with many of the technology companies and industrials scheduled for next week. A healthy reporting season may well help to instil confidence that a double dip is not on the horizon and possibly market expectations will start to adapt to slower growth paving the way for stability in the equity market. We remain very cautious about the market at present and although a good reporting season in the US may well help markets to recover some of the recent losses, there is still considerable uncertainty over whether the market is priced for low US growth over the second half.


In the UK today the ONS has published its final estimate of Q1 GDP which shows growth at 0.3%. More recent data suggest that the run rate during Q2 may have improved to +0.5% or +0.6%. However, that is still very small especially when you consider that according to the ONS GDP fell by 6.4% from peak to trough leaving a significant amount of lost output to make up.

This week is all about inflation with data due in the USA and Europe. In the US we get the Producer Price Index for June due for publication on Thursday with the Consumer Price Index for June due out on Friday. Both measures are expected to show modest declines of around 0.1% month on month. With so much spare capacity in the US economy and relatively weak demand it is difficult to see inflation becoming much of a threat for many months to come. Other notable US economic reports this week are retail sales for June due out on Wednesday which is expected to fall by around 0.2% following on from a 1.2% decline in May. The health of the US consumer is still very much in question and it is difficult to see consumer spending making much of a contribution to growth during the second half of this year. Also on Wednesday we get the minutes of the latest FOMC meeting which will make interesting reading. The market will be increasingly focusing on where policy makers see interest rates heading and the minutes will throw some light on any rifts occurring between the voters on how monetary policy should move over the coming months.

Thursday in the US brings the usual weekly initial jobless claims. After the decline last week to 454,000, the market is looking for a further fall to 445,000 this week. Also on Thursday we get another snapshot of the US manufacturing sector with the Empire State Manufacturing report for July. This index, which measures activity within the New York State manufacturing sector has remained comfortably within growth territory during recent months having registered 19.57 last month, with a reading of around 18 expected for July. A notable decline would almost certainly set the market back into worry mode over growth expectations for the second half. We also get the equivalent figure for Philadelphia on Thursday. The Philadelphia index surprised the market last month with a decline to just 8.0 and the market is expecting a bounce back for July to 12.0.

The week in the US ends with a dose of consumer confidence with publication of the first estimate for July of the University of Michigan Consumer Sentiment index. The last reading for June was 76.0 but with the recent decline in equity markets and ongoing weakness in the labour market a decline looks very likely. The consensus is looking for 75.0 but there is downside risk to this in our view.

In the UK tomorrow the CPI for June will be published. The month on month rate is expected to show no change bringing the year on year rate down to 3.2% from the 3.4% registered last time. The core annual rate is expected to dip to 2.8% from 2.9%. In Germany tomorrow the ZEW economic sentiment survey for July will be published. On Wednesday we get UK unemployment data and the European CPI for June as well as European industrial production for May. Thursday brings the ECB monthly economic report. Friday is relatively quiet on the economic front in Europe.

With little in the way of economic news world markets have continued to rally and this has helped the FTSE100 make its way back above the 5,000 level. What happens next is very difficult to say and the weekly initial jobless claims in the US this afternoon are likely to have a major bearing on where markets move by the close of business on Friday. After another elevated reading last week of 472,000 the market will be looking for a lower number with the consensus currently standing around the 465,000 level. A higher reading will not be taken well and after the strong market moves of the last 2 days disappointment will surely result in a sell off on the Dow this afternoon.


The US Non Manufacturing ISM data for June published on Tuesday provided further evidence that economic activity in the US has already peaked and the question now is at what level is GDP growth going to fall to. Expectations of 3% GDP growth for the remainder of the year in the US could well be optimistic especially given that the spurt in growth during Q4 2009 and Q1 2010 was primarily inventory driven which is now coming to an end leaving the US consumer to now pick up the baton.

Keeping with the US consumer the Red Book report on June retail sales published yesterday provided the market with some confidence that perhaps the US consumer isn’t dead. The report showed that retail sales increase by 3% compared to the same period last year. What the market didn’t focus on was the fact that month on month retail sales were down 0.5%. The debate over whether the US consumer will be able to maintain the momentum is likely to continue for some time and for the time being at least sentiment appears to be a little more positive than negative.

In Europe today we have both central banks meeting to discuss interest rate policy with the UK set to remain on hold at 0.5% whilst no change is expected in the European rate at 1%. Also today we have already had German industrial production for May which showed a healthy 2.6% month on month increase compared to the April number of 1.2%. In the UK we have already had manufacturing and industrial production for May. The former was up 0.3% (4.3% year on year) whilst the latter showed an improvement of 0.7% (2.6% year on year). This certainly suggests that UK GDP for Q2 is on track to show an improvement on Q1.

The economic data is driving the market far more than any other factor at present and today’s US data in the form of the Non Manufacturing ISM data is certainly in the top 3 of monthly announcements. The reading for May was 55.4 and the market will be looking for a figure close to this. A drop back to 53 or lower will almost certainly be viewed as further evidence of a slowdown in the US.


From a technical perspective the market is probably a little oversold but as we stated yesterday we would be cautious about any significant one day rallies as we have today with the FTSE100 up by the best part of 3%. If the US ISM this afternoon is broadly in line with expectations we may see the market stabilise a little but it is too soon to expect much more than this.

Yesterday in the UK we had publication of the UK CIPS/Markit report on services for June. The index fell from 55.4 to 54.4 which is the lowest level since August 2009. The business expectations element of this index suffered a big drop which is no doubt in part due to the impact of the budget. Overall the decline in this index suggests that activity is slowing and this is raising concerns over growth for the second half of the year. There is no major data scheduled for publication in Europe today.

A quiet day of trading in prospect with the US closed for the Independence Day holiday. After poor Non Farm Payroll data on Friday in the US there is very little in the way of catalysts to get any form of sustainable rally under way and any strong one day movements must be treated with suspicion at present. The market needs a reason to believe that growth in the US is sustainable at or around current levels in order to make progress. Sadly the data at present is suggesting the US is undergoing a growth relapse and possibly even a double dip although the latter is still a low probability event at the moment.


Looking through the fine details of the Non Farm Payroll data on Friday did not really provide any crumbs of comfort. The market did initially rally on the drop in the unemployment rate to 9.5% from 9.7% but the truth of the matter is that this was purely due to a drop in the labour force as people gave up looking for a job and took themselves off the register. The fact that average hourly earnings declined during May by 0.1% is a little concerning especially as aggregate hours worked dropped by 0.2% as well. If we start to see sustained pressure on wages over the coming months this could well be the catalyst for deflation in the US.

With the manufacturing sector in the US seemingly having peaked and activity across the board starting to slow, all eyes will this week be focused on the ISM Non Manufacturing index due for publication tomorrow. Over the last few months this index has remained comfortably above the key level of 50 which indicates growth. Expectations for the June reading stand at around 55 which compares to the May level of 55.4.

The US unemployment data will continue to be a critical indicator of what is happening in the US economy which makes the weekly initial jobless claims an invaluable indicator of what is going on. After last week’s disappointment over yet another high reading of 472,000, the next reading due on Thursday will be very important. If we see a further increase it will raise the possibility of the private payrolls number heading closer to a situation of very little if any job creation.

Today in Europe we have already had the Purchasing Managers Index for services for the Euro zone and Germany, both of which showed a modest improvement. Recent economic sentiment data has not shown any sudden collapse in confidence so far and overall the Euro zone does appear to be holding up relatively well against the back drop of the sovereign debt crisis. We are due to get the June Purchasing Managers Index for services for the UK today as well as May retail sales for the Euro zone. The main event of the week although some would argue it more of a non event will be the two central bank meetings on Thursday. Both the ECB and Bank of England are expected to keep rates where they currently stand and any change is unlikely to come until well in 2011. Other data worth looking out for this week is May manufacturing production in the UK and German industrial production for May both scheduled for release on Thursday. French and Italian industrial production for May will be announced on Friday.

A brief report this afternoon as today was all about the Non Farm Payroll announcement in the US. The overall decline of 125,000 was broadly as expected due to the temporary census workers coming off payrolls but the key number was the number of private payroll jobs created which was 83,000 (the consensus was looking for something over 100,000 and many were nearer to the 150,000 mark). It was interesting to see that the private payroll number of 41,000 reported last month was revised down to 33,000. The number for June is probably just enough to prevent a significant sell off this afternoon but realistically it is still very disappointing and certainly not a catalyst for any marked improvement in sentiment.


America is closed on Monday for Independence Day. Next week in the US is relatively quiet on the data front with the key data being the ISM Non Manufacturing Index for June due for announcement on Tuesday.

Investor sentiment is firmly into negative territory at present and markets are likely to creep lower ahead of the Non Farm Payroll data in the US tomorrow. The devil will be in the detail and this time all eyes will be focused on the private payroll element of the announcement. The ADP private payroll data yesterday was very disappointing with an increase of only 13,000 in June compared to expectations of 60,000, and this does not bode well for the employment report tomorrow. A Non Farm private payroll figure of less than 50,000 (May was 41,000) for June is likely to be viewed negatively but anything above 100,000 might just save the day. The headline number is likely to be negative due to the slow-down in hiring for the census work.


Chinese economic data is now grabbing the headlines. One area of the world viewed as the engine for world economic growth is starting to show signs of slowdown which is compounding the recovery fears raised by recent US data. Today in China we had the manufacturing Purchasing Managers Index for June. It fell to 52.1 from 53.9 in May. The new orders element of this index declined to 52.1 from 54.8 and the finished goods inventory rose to 51.3 in June from 49.8 in May reflecting the slow-down in new orders relative to production. Whilst growth does seem to be slowing in China it is not wholly unexpected for an economy expected to grow at an annualised pace of around 10% in 2010. This is especially so given the economic headwinds of the European debt crisis and a property bubble in China that the Chinese government is now attempting to slow. Despite these factors growth is still likely to remain at close to current levels. The greatest risk to the world economic recovery remains the possibility of a growth relapse/double dip in the US with a similar situation in Europe.

Today we have already had Purchasing Managers Index data for manufacturing in Germany, UK and Europe, all of which were broadly as expected and did not present any surprises which has helped markets to stabilise a little as the morning session has progressed. The next key numbers today will be in the US with the usual weekly initial jobless claims expected to give a number of 460,000 compared to the number last week of 457,000. We also have the important ISM manufacturing index for June. The reported figure for May was 59.7 and we can expect a fall for June judging by all of the recent manufacturing US data that has been declining from recent highs. Expectations are for a decline to 59.0, but the fall could easily exceed this.