Economic Slowdown Powers Rally

Elena
28 Jul, 2006
New York City

Stocks rallied at opening, following second-quarter GDP data release. The Commerce Department said GDP growth slowed to a 2.5% annual rate from 5.6% in the first quarter, feeding hopes that the Federal Reserve may not continue raising interest rates further. The GDP report said core consumer prices surged 2.9%, while the department''s employment cost index rose a stronger-than-forecast 0.9%.

[R]9:45AM Stocks rallied on GDP data.[/R]
Stocks rallied at opening, following data release which showed a sharp slowdown in second-quarter GDP growth. The major averages moved firmly into the positive territory, with the tech-heavy Nasdaq up more than 1%.

The Commerce Department said GDP growth slowed to a 2.5% annual rate from 5.6% in the first quarter. Although the reading drove concerns that the economy could be headed for a downturn, it fed hopes that the Federal Reserve may not continue raising interest rates further. The GDP report said core consumer prices surged 2.9%, while the department's employment cost index rose a stronger-than-forecast 0.9%.

The disk drive sector turned in one of the market's best performances, with Seagate Technology ((STX)) helping to lead the sector higher with an advance of 5.5%. Some computer hardware stocks also posted strength, supported by considerable gains for Lexmark ((LXK)). Strength also emerged in the brokerage sector, with Lehman Brothers ((LEH)), Bear Stearns ((BSC)), and Goldman Sachs ((GS)) standing among gainers. The housing, banking, and gold sectors moved to the upside as well. Meanwhile, health insurance stocks extended yesterday’s decline when Aetna ((AET)) dragged the sector lower. On Friday Coventry Health Care ((CVN)) was a notable decliner, falling 4.8%, despite strong Q2 earnings. In the first hour of trading, the Dow Jones industrial average gained 76.68, or 0.69%. The Standard & Poor's 500 index was up 7.37, or 0.58%, and the Nasdaq composite index climbed 15.18, or 0.74%. The economic data lifted bonds, with the yield on the 10-year Treasury note sliding to 5.01% from 5.04% late Thursday

[R]Economic growth declined more than expected.[/R]
Economic growth slowed more than expected in the second quarter, according to a report released by the Department of Commerce on Friday. At the same time, the report showed an acceleration in the pace of inflation. The report showed that second quarter GDP grew at an annual rate of 2.5 percent compared to the 5.6 percent rate of growth seen in the first quarter. Economists had been expecting a more modest slowdown to 3.2 percent. The Commerce Department said that the slowdown in GDP growth compared to the first quarter was primarily due to a slowdown in the pace of consumer spending on durable goods as well as a downturn in spending on equipment and software. The slowdown also reflected decelerations in exports and consumer spending on non-durable goods, a downturn in federal government spending and a larger decrease in residential fixed investment. As mentioned above, the report also showed that the pace of price growth accelerated in the second quarter, with consumer prices, excluding food and energy prices, rising at an annual rate of 2.9 percent in the second quarter compared to a 2.1 percent rate of growth in the first quarter. Despite the faster pace of inflation, traders have responded positively to the report, as the slowdown in the pace of economic growth has added to speculation that the Federal Reserve will pause its interest rate raising campaign in the near future.


[R]9:00AM Stock futures pointed to a higher opening on robust earnings.[/R]
Stock futures rose Friday morning as energy companies reported robust earnings growth, but Commerce Department’s report on second-quarter GDP is expected to set the tone for trading.

Oil field services company Baker Hughes Inc. ((BHI)) and independent oil and gas producer Anadarko Petroleum Corp. ((APC)) said quarterly profit surged, helped by surging crude oil prices. Integrated oil company Chevron Corp. ((CVX)) reported Q2 net income growth of $1.97 per share, compared with $1.76 per share in the year-ago period.

Investors will look closely at the GDP price deflator, a measure of inflation which is forecast to rise 3.5%. The Commerce Department''s advance estimate of second-quarter GDP growth is due at 8:30 a.m. S&P 500 futures were up 0.4 point, above fair value. Dow Jones industrial average futures rose 2 points, and Nasdaq 100 futures dipped 0.5 point.

In corporate news, Wal-Mart Stores Inc. ((WMT)) decided to sell its underperforming German stores to the country''s leading retail chain, Metro, marking a major retreat that will cost Wal-Mart about $1 billion. Bristol-Myers Squibb Co. ((BMY)) said it is the subject of a criminal antitrust probe over a pending deal with a generic drug maker involving its best-selling product, Plavix. Shares of the drug maker dropped 8%.

FPL Group Inc. ((FPL)) said that its second-quarter net income climbed 17% to $238 million, or 60 cents a share versus $203 million, or 52 cents a share a year ago. Excluding items, net income advanced to $262 million or 66 cents a share, from $255 million, or 66 cents a share in the prior-year comparable period. The company incurred 7 cents a share of unprecedented storm disallowance expenses in the second quarter. The company, which is a corporate parent of utility Florida Power & Light, added that its revenue increased to $3.81 billion vs. $2.74 billion last year.

ITT Corp. ((ITT)) said that second-quarter net income increased 2.3% to $140.9 million, or 75 cents a share, from $137.7 million, or 73 cents a share a year ago. Excluding items, income in the latest quarter was 80 cents a share. Revenue added 11% to $2.07 billion. The company lifted its full-year earnings outlook excluding special items to $2.95 to $3 a share, from its previously issued guidance of $2.91 to $2.97 a share.

Office Depot, Inc. ((ODP)), office products retailer, said that its second-quarter net income climbed 18% to $118 million, or 41 cents a share, from $100 million, or 31 cents a share, a year ago. Excluding one-time charges related to exit expenses and other operating items, earnings totaled 43 cents a share. Revenue rose 4% from a year ago to $3.5 billion thanks to the solid sales in North America.

Waste Management Inc. ((WMI)), solid waste hauler, said that its second-quarter net income declined to $417 million or 76 cents a share, from $527 million, or 92 cents a share, a year ago. Excluding adjustments for favorable tax audit settlements and other one-time issues, the company would have earned 45 cents a share vs. adjusted 38 cents a share last year. Revenue in the quarter grew 4% to $3.41 billion. The company authorized an additional share buyback of $350 million in fiscal 2006.

Coventry Health Care Inc. ((CVN)), health insurer, said that its second-quarter net income rose to $135.5 million, or 84 cents a share, from $129.5 million, or 79 cents a share, last year. The most recent quarter results include a 1 cent loss associated to Coventry''s Medicare Part D products. Revenue increased to $1.94 billion from $1.65 billion a year ago. The company expects third-quarter earnings per share to be in a range of 90 to 92 cents on revenue of $1.90 to $1.95 billion. For the full year, the company projects earnings of $3.44 to $3.50 a share.


[R]8:00AM Crude oil prices advanced.[/R]
Oil prices moved higher on Friday, on news that OPEC has no power to stop price surges caused by geopolitical tensions. The ongoing violent conflict in the Middle East also added to fears of possible supply disruptions in the region, as well as a U.S. government report showed a surprising decline in natural gas inventories last week on stronger demand.

Light, sweet crude for September delivery was up 16 cents to $74.750 a barrel in midmorning Asian electronic trading on the Nymex. At London''s ICE Futures exchange, Brent crude for September rose 32 cents to $75.33 a barrel. In other Nymex trading Friday, gasoline futures remained steady at $2.2960 a gallon, while heating oil futures rose 0.75 cent to $1.9871 a gallon. Natural gas futures were up 4.5 cents to $7.168 per 1,000 cubic feet.

Late Thursday, Venezuelan Oil Minister Rafael Ramirez said he would be discussing oil prices with other members of the OPEC in Qatar. He said the limits of worldwide refining capacity and of OPEC members to lift output made it difficult to counteract the surge in prices and suggested that oil prices could reach $100 a barrel ‘given certain factors.’


[R]7:00AM Asian markets closed mixed.[/R]
Asian-Pacific benchmarks finished mixed on Friday in a light trading session, with many traders away for summer holidays. The Japanese Nikkei advanced 1.07% to close up at 15,342.87 points, boosted by stronger-than-expected earnings from leading tech companies. The strength in the tech sector was contributed by Sony Corp., up 4.1%, Canon Inc., up 1.3%, and NEC, surging 5.6%. Across the region, Hong Kong’s Hang Seng gained 0.23%, with China Mobile rising 3.3%. South Korea’s Kospi ended almost flat as profit taking in the automotive sector offset earlier gains. The index edged up 0.1%. Taiwan’s Weighted Index closed up 0.3%, lifted by construction-related companies and electronic firms. Australia’s index declined 0.88%.

European stocks pulled back at mid-day trading Friday, dragged by surging oil prices and concerns about U.S. economy. Strong crude oil prices of $74.72 a barrel hurt airline companies like Lufthansa and British Airways. Resource stocks like Rio Tinto and Anglo American also moved to the downside. Among European movers German supermarket chain Metro gained d 2.3% after it agreed to buy the German operations of Wal-Mart Stores Inc. U.K. insurance company Prudential dropped 2.9% due to a first-half loss for its internet banking operation, Egg. The German DAX 30 lost 0.2%, followed by the French CAC 40 and London FTSE 100 which also fell 0.2%.