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Optimism spread amid unexpected earnings for American corporations

Fri, Oct 16 2009, 19:08 GMT
by ecPulse.com analysis team

ecPulse.com

Better than expected earnings from American corporations for the third quarter, in addition to optimistic statements from monetary policy makers around the world, helped spread optimism in financial markets this week. It was obviously reflected on stock markets around the world leaded by the Dow Jones Industrial Average that jumped above the 10,000 points for the first time since November 2008, alongside Hang Seng Index that also recorded the highest level in 14 months.

The earnings season started with Intel Corp, the world's largest semiconductors maker, that surprise Wall Street with a $1.9 billion revenue or $0.33 per share as the earnings reached $9.4 billion, while net income recorded $1.9 billion. That was followed by JPMorgan Chase that recorded $0.82 per share compared with median estimates for $0.50 EPS.

It wasn't long before Goldman Sachs reported earnings which also topped estimates as earnings per share came in at $5.25 per share, more than double the estimated $2.38 per share; IBM reported $2.40 EPS nearly inline with estimates for $2.38 per share. Google Inc also witnessed an increase in EPS that at $5.13 per share.

It wasn't only corporate profits in the U.S that was the source of optimism in markets; the minutes for the last FOMC meeting when they decided to keep interest rates between 0.0% and 0.25%, said that they will end quantitative easing policy in November, besides determining a final time to stop buying mortgage backed securities and corporate debts that will end in March 2010.

As for the European Central Bank it said in its monthly report that incoming fundamentals assure sings of stability in economic conditions in the region, which encouraged that bank to see the 16-nation economy to recover gradually despite uncertainties.

Moving to the Bank of Japan that kept interest rates unchanged at 0.10%, they said that they are optimistic about the economy, but they didn’t determine when they are to exit the exceptional monetary policy that is currently followed. The BOJ also raised its assessment for the economy for the second straight month saying that thee economy started to "pick up".

Also Mr. Stevens, the governor of the Reserve Bank of Australia, said in a statement this week that the bank won't hesitate to raise interest rates after it became sure that there is no need to keep the nation's benchmark at a very low level. Australia was the first country in G20 to raise interest rates after it lifted the benchmark by 25 basis points to 3.25% last week.

For more details dear reader, join our tour through the most important economic events the world economy witnessed this week:

Japan and Asia

This week witnessed a number of important events in the Asian region. Despite the lack of fundamentals in Asia, monetary policy makers and central banks played a great role in attracting the market's attention.

Starting with the Bank of Japan, Governor Masaaki Shirakawa and his colleagues decided to keep interest rates at the low record of 0.1% for the 10th consecutive meeting. The bank said that they are more optimistic about the Japanese economy as they see it started to "pick up". On the other hand, the bank didn’t mention whether the unorthodox monetary policy will be halted by the end of this year or not.

Shirakawa said before that the need for the quantitative monetary policy, currently followed, may fade as it became easier for companies in Japan to acquire funds, but seems that the BOJ needs more time to be sure that small companies and consumers are able to allocate the needed funds before it sets an exit plan from the monetary policy which helped the economy find its way out of the financial crisis.

However, the BOJ said in the report that accompanied the rate decision that public investments are improving, while exports and production found more support from replenishing inventories locally and globally, in addition to recovery witnessed in the Chinese economy which helped spur demand for Japanese exports, especially that China replaced the U.S as Japan’s main trade partner.

As for inflation, the BOJ said that on the year consumer prices continue to decline which is adding deflation risks due to low energy and food prices that remain lower than prices witnessed last year, alongside subdued demand and economic activity. The bank added that drop in inflation will moderate over the medium and long term along with stability in crude oil prices compared with last year's record.

Still, the BoJ raised its assessment for the economy for the second straight month as it said that the economy started to "pick up" and the bank explained that public investment is advancing, while the economy is on its way to recover gradually backed by increasing exports and productivity that reflects improving economic conditions around the world. On the other hand, the bank said that business investment remains weak along with weak domestic spending and declining housing investments, while the bank explained that it was due to the weak labor sector.

Moving to another central bank, the Reserve Bank of Australia, as governor Glenn Stevens said that the economy can't hesitate in raising interest rates after the economy found its way out of recession; he added that the period of greatest weakness in the economy has passed so there is no need to keep interest rates at very low levels, Stevens said.

Worth mentioning that Stevens and his colleagues decided to raise interest rates by 25 basis points to 3.25% last week making Australia the first country among G20 to raise borrowing costs. Stevens added that the RBA needs to modify its monetary policy which means not to leave interest rates at very low levels as this is no longer needed.

Regarding Sri Lanka's Central Bank, it kept interest rates unchanged opposing forecasts for a rate cut. The bank kept its benchmark at 8.00% the lowest in three months, while it decided to keep the reverse repurchase rate at 10.5%.

Mr. Nivard Cabraal, the central bank governor, said on October 6 that there is room for more interest rate cuts if inflation remained at its low levels, keeping in mind that the central bank lowered interest rates by 50 basis points in its previous meeting.

Euro Zone

The data released this week from the euro area raised concerns that recovery may derail as it showed that the global economic recession is still weighing on the economy and the monetary and fiscal measures used can not be withdrawn soon, as the economy still needs assistance.

Perhaps the most important data this week is annual CPI for September which retreated to -0.3% from the previous -0.2% in August. The rate dropped further spurred by lower energy prices, transport industry, housing prices, and food. Oil prices slipped in September slightly after reaching 10-month high in August, causing more downside pressure on the general price level.

The ECB mentioned in the monthly bulletin released this week that inflation is expected to return to positive territories and stabilize soon, while Trichet uttered previously that price developments will remain “subdued” amid “ongoing sluggish demand.”

Although the economy has shown progress recently, but there are uncertainties linked to recovery which is expected to be bumpy; even though confidence may rise, but still volatility in data released in the coming months is expected. The ECB mentioned that the economy will recover “at a gradual pace.”

Moreover, ZEW Survey for the month of October declined after the ongoing improvement in the sectors of the economy and rise in confidence in September to one-year high. In Germany, it dropped for the first time in 3 months. Data from the fourth quarter are raising concern that figures in the next two quarters may not match the optimistic forecasts.

Friday’s data also showed that non-seasonally-adjusted trade balance for August turned to deficit of 4 billion euros from the revised previous surplus of 12.3 billion euros, lower than the estimated surplus of 5.1 billion euros. Exports from the euro area slipped 5.8% from July when it jumped 4.7%. The decline is the strongest since January, while imports fell 1.3% in August.

The dollar's plummet versus the European single currency eroded demand on European commodities. The euro has augmented 15% against the green currency in the past seven months, whereas it touched the highest in 14 months in October.

President of the ECB, Jean-Claude Trichet, mentioned that it is very important that U.S. policy makers embark on policies that can support the U.S dollar. He added that excessive currency shakiness is considered “an enemy.”  A stronger dollar is better for the U.S. economy and to the euro zone also.

However, despite the downbeat data released this week, industrial production for the month of August rose 0.9%, higher than the revised 0.2% from -0.3%. Production rose for the fourth consecutive month in August buoyed by durable goods which surged to the highest level since records began in 1990 and as output of capital goods soared.

Data this week raised concerns but still the overall picture for the European economy is cheerful if we looked at the figures recoded recently. Sectors are showing expansion and there is confidence in the economy. In the coming period, fluctuation in data is expected as the economy is still impacted by the recession but resisting any further fall due to the influential monetary measures adopted.

United Kingdom

The scenario remains the same in the United Kingdom, since the main obstacles remain in the way of an economic recovery, with rising deflation risks that were triggered from crippled demand, as a result of the fragile job market.

Meanwhile, lower income levels and dampened consumer demand aroused deflation risks, because the waned demand obligates producers to reduce prices as a way to attract consumers and stimulate profits, while the nation tries to shake off its worst economic recession since World War II.

During this week, we saw the total amount of Britons claiming for jobless benefits, climb to 1.63 million and this meant that no one is still hiring, as companies continue to deal with eroded profits, while production is negatively affected by the current economic deterioration. 

The unemployment rate for the three months ending in August was also released, as it remained unchanged at 7.9%, the highest in more than 14 years. Unemployment for the three months ending in July fell 1,000, as total unemployment in the economy stands at 2.47 million.

However, the softening of the labor market not just only weighs on economic growth but also is a major factor behind the rising deflation risks in the nation, which holds back any economic recovery, since the lack of spending in the nation, previously mentioned, is led by Britons' pockets being squeezed and thus pressuring prices.

This week, we also witnessed that the Office for National Statistics (ONS), released its CPI for September showing that the index fell to post a flat reading from the prior 0.4%; while on the index it dipped to 1.1% from 1.6 percent, marking the lowest in five years.

Accordingly, the inflation rate remains below the BoE's target rate of 2%, while the central bank stated in their last minutes released, that inflation will remain volatile in the short run, as a result of the ongoing economic recession. The BoE expects inflation to plummet below 1 percent.

The yearly CPI fell heavily as a result of food, alcohol and tobacco prices. In addition, the non-processed food prices dipped alongside energy prices, while industrial goods also took a hit as they weighed on inflation rates.
 
The decline in prices based on a monthly and yearly basis, cleared to us that fears in the nation are accurate and that there are high deflation risks in the economy, as the general price levels continue to tumble; therefore choking on a recovery for the nation.

To conclude all the major obstacles in the nation, we see that rising deflation risks, high unemployment rates, a widened budget deficit and instability in the banking system, are jeopardizing the outlook of the United Kingdom. Meanwhile, officials have been exhausting all possible measures to jolt the nation out of recession, where the central bank is already applying 175 billion pounds towards purchasing gilts.

United States

This week was marked with the results of companies’ earnings, as companies continued to announce strong results overall, however, investors were still skeptical as stock markets fluctuated heavily, though the Dow Jones Industrial Average received a strong boost, as it rallied above the 10,000 for the first time since October 2008.

Meanwhile, fundamentals released this week provided mixed signals, whereas retail sales dropped in September to signal that consumer spending is still weak and accordingly economic growth will probably remain weak over the upcoming period, the drop in retail sales was mainly attributed to declining auto sales, as the government’s “cash for clunkers” program effects faded.

Moreover, the Federal Open Market Committee released this week the Minutes for the September 23 meeting, in which the Feds decided to leave their benchmark interest rates unchanged at a record low, and signaled interest rates will remain “exceptionally low” for an extended period of time.

The FOMC Minutes signaled that the Feds expect unemployment to fall by the end of 2010 to 9.25%, while unemployment is expected to drop to 8% by the end of 2011, however until then unemployment is expected to weigh down on economic growth, and accordingly the Feds still believe that it’s too early to change their monetary policy stance from dovish to Hawkish.

Meanwhile, the consumer price index rose above expectations in September, though inflation is still under control on yearly basis, but on monthly basis inflation rates continue to rise to reflect maybe the recent improvement in economic activity, however, the outlook for inflation over the long term remains a threat, despite that the FOMC expected core inflation to remain subdued over the next two years.

Data from the manufacturing sector continued to signal that the sector is shaking off the worst slump since the early 1980s, as both the Empire manufacturing index and the Philadelphia Fed index both signaled expansion is indeed undergoing, as it seems that the manufacturing sector has been able to regain its activity, and accordingly we should expect the manufacturing sector to continue its recovery into next year.

The industrial production indicator confirmed the recent increase in activity, as it continued to signal that activity is rising in the industrial sector, while the capacity utilization index also signaled that factories are increasing their use of available resources, which comes inline with the recent development in economic activity.

Meanwhile, earnings this week from a number of major U.S. corporations signaled that companies were able to withstand the weak economic conditions, as cost reduction measures undertaken over the past period helped companies in boosting their profits, and it seems that companies will continue to announce strong earnings and that could help in extending gains in stock markets.

Banks so far have been reporting better than expected results, but as investors saw that banks relied heavily on trading activities, financial stocks dropped during the week, however, it seems that the rally that has been undergoing over the past seven months will continue, especially if earnings continue to beat median estimates.

The Dow Jones Industrial Average rose above 10,000 during this week for the first time since October 2008, as investors were encouraged by the strong earnings released so far, and it seems that stock markets will extend the rally indeed, though, we should also expect stock markets to fluctuate heavily over the upcoming period…

Published on  Fri, Oct 16 2009, 19:10 GMT