US equities finished the week mixed on the heels of a disappointing US 4Q GDP report. The Dow was pressured by disappointing earnings reports from Dow members Chevron and Procter & Gamble, but talk of a possible IPO filing by Facebook helped the Nasdaq to squeak out a modest gain, and the S&P 500 was nearly unchanged. Meanwhile, Ford Motor posted results that missed expectations and Amgen offered a mixed report, while Starbucks’ outlook and concerns over commodity costs overshadowed its better-than-expected results. Treasuries pared early losses and finished mostly higher, while a favorable read on US consumer sentiment had little effect. Gold ended the day higher, crude oil prices ticked lower, and the US dollar lost ground.
The Dow Jones Industrial Average fell 74 points (0.6%) to 12,660, the S&P 500 Index inched 2 points (0.2%) lower to 1,316, and the Nasdaq Composite gained 11 points (0.4%) to 2,817. In moderate volume, 850 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil edged $0.14 lower to $99.56 per barrel, wholesale gasoline jumped $0.07 to $2.92 per gallon, and the Bloomberg gold spot price gained $9.70 to $1,739.60 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.7% to 78.86. For the week, including dividends, the DJIA was down 0.5%, the S&P 500 Index added 0.1%, and the Nasdaq Composite gained 1.1%.
Dow member Procter & Gamble Co. (PG $64) reported fiscal 2Q earnings ex-items of $1.10 per share, compared to the $1.09 consensus estimate of analysts surveyed by Reuters, with revenues increasing 4% year-over-year (y/y) to $22.1 billion, below the $22.2 billion that the Street had anticipated. Also, PG lowered its full-year guidance and issued a 3Q outlook that missed analysts’ forecasts. PG traded lower.
Fellow Dow component Chevron Corp. (CVX $104) posted 4Q EPS of $2.58, below the $2.84 that the Street had expected, with revenues rising 11% y/y to $60 billion, compared to the $71 billion that analysts were anticipating. The company said its upstream energy earnings—production and exploration—increased 18.4% y/y to $5.7 billion, while its downstream energy earnings—refining—fell over 100% y/y to a loss of $61 million. The loss in its downstream results reflected weaker refining product sales margins. CVX finished solidly lower.
Ford Motor Co. (F $12) announced 4Q profits ex-items of $0.20 per share, missing the $0.27 estimate on the Street, but revenues, which rose 6.5% y/y to $34.6 billion, topped the $32.3 billion that analysts had projected. The disappointing results came as higher costs, including commodities, as well as weakness in Europe weighed on the automaker’s profits. Also, the company said the Thailand flooding hampered its results in its Asia/Pacific/Africa segment. Shares were lower.
Amgen Inc. (AMGN $68) reported 4Q EPS ex-items of $1.21, one penny below the Street’s expectations, but revenues increased 3% y/y to $4.0 billion, above the $3.9 billion that analysts were looking for. AMGN was slighly higher.
Starbucks Corp. (SBUX $48) achieved fiscal 1Q earnings of $0.50 per share, one cent north of analysts’ forecasts, with revenues growing 16% y/y to $3.4 billion, exceeding the $3.3 billion that the Street had expected. The coffee retailer said its same-store sales—sales at stores open at least a year—rose 9%, driven by increases in traffic and the average ticket. However, shares were lower as the company’s guidance, although increased, appeared to disappoint analysts, along with concerns about its profit margins from continued commodity cost pressures.
Citing people familiar with the matter, the Wall Street Journal reported that Facebook Inc. could file papers for an initial public offering (IPO) as early as next week, while also stating that the social networking site is close to choosing Morgan Stanley (MS $19) as the lead underwriter for the offering. Spokespersons from both companies declined to comment on the report.
GDP report raises concerns about sustainability of growth, but consumer sentiment rises
The first look at 4Q Gross Domestic Product, the broadest measure of economic output, rose at a less-than-expected rate of 2.8% quarter-over-quarter (q/q) annualized rate of growth, compared to the 3.0% increase forecasted, while accelerating compared to the 1.8% rate in 3Q. Also, personal consumption grew 2.0%, while faster than the 1.7% rate in 3Q, was below the 2.4% estimate. Measures of inflation were mixed, with the GDP Price Index of 0.4% well below the 1.9% anticipated, while the core PCE Index, which excludes food and energy, increased 1.1%, above expectations of a 0.9% increase.
Despite the accelerated pace of growth, traders were disappointed by not only the miss at both the headline and consumption levels, but also because the majority of the growth came as businesses rebuilt inventory levels. Inventory restocking added 1.9% to GDP, and is seen as potentially an unsustainable source of growth unless end-demand follows, and on that basis, the lower rate of personal consumption than forecasted raises concerns. Real final sales of domestic product, a measure of GDP less the change in private inventories, rose 0.8% in 4Q, compared to an increase of 3.2% in 3Q. Consumers shifted spending toward durable goods, as purchases of automobiles and parts added 0.8%, while spending proportionally less on services, which added only 0.1%, down from the 0.9% contribution in 3Q, driven in part by lower utility bills due to unseasonally warm weather.
Looking at other components of the report, government expenditures subtracted 0.9% from growth due to a sharp 12.5% decline in defense spending. Business spending on equipment and software continued to add to growth, although at a slower pace, and residential housing construction picked up nicely, growing 10.9% after falling by 1.4% during calendar year 2011.
However, the final University of Michigan’s Consumer Sentiment Index showed consumers’ psyches were unexpectedly revised higher for January, adjusted from an initial 74.0 reading to 75.0—the highest since February 2011—after posting 69.9 in December. Economists had expected the index to be unrevised. The unexpected favorable adjustment came as both the economic outlook and the current economic conditions components of the survey were revised higher. On inflation, the 1-year expectation was adjusted to 3.3% from 3.2% in the preliminary reading, while the 5-year inflation outlook was revised lower to 2.7% from 2.8%.
Treasuries pared early losses to finish higher. The yield on the 2-year note was flat at 0.22%, the yield on the 10-year note was 4 basis point (bp) lower at 1.90%, and the 30-year bond rate fell 3 bp to 3.06%.
Greek uncertainty remains
Sentiment overseas remained cautious as Greece continued negotiations with its private sector bondholders. Earlier this week, Greece rejected an offer from its private creditors as they asked for an interest rate of 4% in exchange for the restructuring of their current debt holdings, but yesterday reports surfaced that the bondholders were willing to lower their rate demand. An agreement on a debt-swap that will allow Greece to lower its debt burden could go a long way in the troubled nation receiving the next installment of bailout funds and the avoidance of a default. Comments from EU Commissioner Olli Rehn, that he believes a deal between Greece and its private bondholders could be reached today or over the weekend, had little effect on the uncertainty. Meanwhile, after the close of business across the pond, Fitch Ratings downgraded the sovereign credit ratings of five eurozone members, including those of Italy and Spain. Fitch cited concerns over the “divergence in monetary and credit conditions across the eurozone,” as well as the vulnerability of the countries noted in its downgrade to further monetary shocks.
On the European economic front, German import prices rose inline with expectations, Spain’s retail sales fell more than expected, and Switzerland’s leading indicators declined more than expected.
Further east, volume remained lighter than usual, with markets in China and Taiwan remaining closed for the Lunar New Year holiday. Economic news was light as well, with consumer prices in Japan declining inline with economists’ expectations for December, while the nation’s large retailers’ sales decreased by a smaller amount than anticipated for the month.
Markets mixed as Street hit with plethora of data from multiple fronts
The US equity markets diverged as traders digested a flurry of mixed data, while the global equity markets were held in check by continued uncertainty regarding a debt default of Greece, as the troubled nation continued negotiations with its private sector bondholders. Meanwhile, the US economic calendar was mixed with durable goods orders coming in much stronger than expected and the Index of Leading Economic Indicators rising for the eighth-consecutive month, while jobless claims rose more than expected and new home sales unexpectedly declined.
Moreover, the Federal Reserve’s monetary policy meeting concluded with policymakers appearing more worried about the risks to the economy despite the recent signs of improving US economic growth. The Fed said that conditions are likely to warrant an exceptionally low level for the fed funds rate at least through late-2014, extending the timing from the mid-2013 period described at the last meeting, while leaving the door open for potentially more monetary policy easing. Also, the Central Bank reduced its economic growth forecasts, while providing individual policymakers’ interest rate forecasts and offering a long-run inflation target of 2% for the first time in history.
Elsewhere, 4Q earnings season shifted into high gear, with Apple Inc. (AAPL $446) blowing away analysts’ expectations to help the Nasdaq finish higher on the week. However, Dow member Caterpillar Inc’s (CAT $110) much stronger-than-forecasted earnings report was offset by disappointing reports from AT&T Inc. (T $29), Verizon Communications Inc. (VZ $38), and Travelers Companies Inc. (TRV $58).
US jobs and state of manufacturing globally in January on tap
Markets will have plenty on their plate next week amid earnings season rolling on and a steady stream of economic releases. Releases will include Tuesday’s S&P/CaseShiller Home Price Index, forecasted to show prices fell 0.5% m/m in November and 3.2% y/y, after declining by 0.6% m/m in October. Wednesday brings the ISM Manufacturing Index, with the Bloomberg survey of economists expecting the reading to increase to 54.5 in January from 53.9 in December, with 50 the level that separates contraction from expansion in the manufacturing sector. The companion ISM Non-Manufacturing Index will be reported on Friday, forecasted to rise to 53.2 from 52.6.
The week will also be chock full of jobs data, including weekly jobless claims, the ADP Employment Change and the employment component of the ISM reports. Additionally, Friday brings nonfarm payrolls, which are expected to grow by 150,000 jobs in January, after rising by 200,000 in December. Meanwhile, private-sector payrolls are projected to increase 170,000, after advancing by 212,000 the prior month. The unemployment rate is forecasted to remain at 8.5% and average hourly earnings are anticipated to rise 0.2% m/m.
Investors have also been heartened by the European debt crisis stepping back from the cliff and the absence of the elevated volatility that characterized 2011. Economic data has painted a picture that could continue to brighten, led by manufacturing, which tends to shift along with changes in the business cycle. Industrial production gained 0.4% in December and durable goods orders bounced 3.0%, but capacity utilization remains below its longer-term average, indicating continued mild inflation. However, the more than three-month string of better-than-expected economic data has pushed investor sentiment toward the extreme optimism zone, typically a near-term bearish indicator. Other reports on the US economic calendar include personal income and spending, Chicago Purchasing Manager Index, Consumer Confidence, MBA mortgage applications, construction spending, vehicle sales, non-farm productivity and unit labor costs, factory orders, as well as retail same-store sales results for January.
International releases will include manufacturing PMIs globally, including Japan, the eurozone, the UK, Brazil, Australia, China and South Korea. Meanwhile, the first hard economic data on January will come in the form of exports from Brazil and South Korea.
Other releases from the Americas will include Canada’s employment, November GDP, industrial product and raw material prices, Brazil’s industrial production, as well as Mexico’s consumer confidence. Europe will announce the UK and eurozone services PMIs and consumer credit, as well as the eurozone unemployment rate, PPI and retail sales and UK home prices. Data from the Asia/Pacific region will include Japan’s household spending, jobless rate, industrial and vehicle production, housing starts and vehicle sales, Australia’s home prices, new home sales, building approvals and services PMIs for both Australia and China, China’s leading index and industrial profits and South Korea’s industrial production. China and Taiwan’s stock markets will re-open for trading after a week-long holiday.