Europe
European markets were drifting into positive territory after more major US corporations beat earnings expectations but soon dropped back into the negative again after Fed Chair Yellen commented on high stock market valuations following an earlier jump in UK inflation and a drop in German business confidence during June.
With inflation hitting just under the central bank target at 1.9% in the UK, the perception is that pressure will be building on the BOE to increase rates sooner rather than later. But with average earnings now lagging even further behind inflation and BRC retail sales falling -0.8% the bank may not be as eager for a rate hike as today’s rally in the pound would suggest.
Inflation was at 5% in 2011 and the Bank of England didn’t hike rates so clearly more than just one data point is needed to judge the central bank’s timing.
German ZEW economic expectations fell to their lowest reading since December 2012 at 27.1, and below expectations of 28.2 as worries about a slowdown in Europe continue to weigh on sentiment. It may take a bit more than winning the world cup for German business sentiment to turn around.
The FTSE 100 was swinging between gains and losses around the 6,750 level today after rising consumer price inflation for the month increased speculation of an interest rate hike and knocked down the house builders. Barratt Developments (LONDON:BDEV) was leading the declines with Persimmon (LONDON:PSN) not far behind. Vodafone Group (LONDON:VOD) and BT Group (LONDON:BT) pushed telecoms to the top sector spot while miners were on the rise ahead of sector earnings tomorrow.
US
With both J P Morgan Chase (NYSE:JPM) and Johnson & Johnson (NYSE:JNJ) beating both top and bottom line estimates; the Dow 30 pushed on to another all-time high despite retail sales missing expectations. Earlier gains were falling away by late morning though on the first day of congressional testimony from fed Chair Janet Yellen.
The S&P 500 had a muted positive reaction to earnings data from JP Morgan, Goldman Sachs Group (NYSE:GS) and Johnson & Johnson but investors weren’t willing to go all out in case Yellen generated some “six months”-type fireworks.
At the time of this report, the Chair was going to great lengths to avoid giving specific timing for a rate hike emphasising again that the dot chart is not be used and that a high degree of easing is need due to labour market slack. Yellen also went so far as to say certain sectors of the stock market had stretched valuations; the stocks in question clearly know who they are with Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR) both getting clobbered.
Retail sales in the US were a disappointment at 0.2% growth for the month; retail sales were actually lower in the second quarter than the first.
Lower growth, lower consumption and higher inflation is not exactly an economic combination to aim for as it will just mean more of a squeeze on the population. Consumer sentiment does seem to be improving and companies seem willing to pass higher input prices on but consumers aren’t buying.
Johnson & Johnson Profits beat earnings and revenue estimates and importantly, the company raised its full-year outlook to $5.85 to $5.92, up from $5.80 to $5.90 EPS. The pharmaceutical company is a Dow component and bellwether for the US economy so the report was being taken well by the Dow which broke to new highs.
JP Morgan profits and revenues fell over the year but to lesser extent than estimated as results were boosted by credit card sales and consumer and business banking. Investor services, fixed income and equity trading revenues all dropped substantially over the year as expected. CEO Jamie Dimon commented "Despite continued industry-wide headwinds in Markets and Mortgage, the firm has continued to deliver strong underlying performance.”
Reynolds American (NYSE:RAI) said it would acquire Lorillard (NYSE:LO) in a deal valued at about $27.4 billion.
FX
UK inflation unexpectedly rose in June from 1.5% to 1.9%, driven largely by food and clothing. Core prices rise to 2%. UK House prices rose 10.5%, led by London prices which rose 20.1% on the year. A rate hike in 2014 is far from certain but today’s higher inflation data increased the likelihood of it happening and the pound rallied accordingly.
The Reserve Bank of Australia minutes last night didn't give much extra insight over central bank policy with the bank again stating the low interest rates are assisting an Australian recovery but that it might not be enough to offset the troubled mining sector.
Specifically on FX the bank said: "The exchange rate remained high by historical standards, particularly given the declines in key commodity prices, and was therefore offering less assistance than it otherwise might in achieving balanced growth in the economy." This is similar to what the RBA's said before; the AUD/USD was lower after the statement but has not broken the recent range lows below 0.9330.
Commodities
Crude Oil prices are suffering on a number of fronts; the supply issues that could have been a problem from Iraq have not materialised, Sudan and Libya are both coming back online and both the IMF and global bank have downgraded global growth forecasts which will limit demand.
Adding to the supply-demand imbalance, the International Energy Agency in their latest report have revised down their oil demand forecast while revising up their forecast for non-OPEC supplies.
This information all points to lower prices but given that we're in our fourth week of oil price declines it may well already be that supply/demand issues are priced in and we may be poised for a bounce, at least temporarily.
China releases its quarterly GDP report at 3am BST, while some might question the way the number is calculated it still tends to move markets. Growth is expected to remain at 7.4% annually for the 2nd quarter.
China is the world's biggest consumer of copper so slower economic growth in the country points to lower demand and would likely see copper prices drop; likewise a number higher than 7.4% would possibly drive copper prices through $3.30 per pound.
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