U.S. stocks declined for second day after wholesale prices accelerated from an already hot pace in July – and well-faster than analysts had expected – and housing starts fell to the lowest level in 17 years.
Again, like clockwork, financials and consumer discretionary shares led the market lower falling 3.05% and 2.24%, respectively. As we’ve discussed, one only needs to look at these two sectors to learn the direction of the overall market. When this trend begins to break, it may signal the moment financials and consumer discretionary shares begin their sustained moved higher.
It’s tough when you’ve got these two indicators (inflation and housing) posting bad numbers as higher levels of inflation keep real incomes from rising (amazingly though this figure remains flat, not declining, as the broadest measure of incomes continue to grow at a nice nominal clip) and poor housing market results keep financial-sector concerns alive.
I will point out though that housing construction declines did ease in the second quarter as the drag on the GDP figure was half what it has been of late. It will just take some time to work off the excesses of the previous years; it’s as simple as that. On inflation, the numbers look ugly, and we have our concerns on this front, but the decline in oil prices of late should help inflation pressures ease – that is not a forgone conclusion though as I’ll discuss below.
Market Activity for August 19, 2008
In earnings news, Hewlett-Packard posted another great quarter – releasing results after the bell yesterday – as operating profit jumped 21%, revenue grew 10% and the firm issued strong guidance. Information technology posted the second-best profit performance of the 10 major industry groups for Q2 as operating profit rose 14.8%. This trailed only the energy sector, which posted operating profit growth of 17.9%.
Three of the 10 major industry groups enjoyed double-digit profit growth last quarter – consumer staples being the third. Another three industries posted profit growth in the range of 6%-9.5% -- health-care, industrials and utilities. Three industries reported profits declined in the March-June period – financials (down 94%), consumer discretionary (down 55.8%, much of this due to Ford, GM and housing-related retailers) and telecoms (down 1.9%)
On the economic front, U.S. producer prices (PPI) accelerated in July coming in at twice the rate expected on a month-over-month basis and jumping 9.8% from the year-ago period – fastest rate in 27 years. PPI rose 1.2% in July, an increase of 0.6% was expected, and the year-over-year reading surpassed the expected 9.3% increase. Even excluding energy, producer prices were up 0.6% over the past 30 days and 5% year-over-year.
Most concerning to me is the pace of core intermediate goods, which accelerated to 2.0% on a month-over-month basis and 10.2% year-over-year. (That’s up from the 8.4% pace hit in June.) For clarity, core intermediate goods are those factories use to produce finished product and it excludes energy. There is a real possibility that this segment funnels down to the consumer. If won’t occur in full, as productivity improvements and firms’ desires to keep market share hold consumer prices back, but it may be enough to drive the figure even as commodity prices have declined in a substantial way.
Many were probably looking past this reading as dollar strength and oil’s decline lead most to believe inflation will moderate – the drop in commodity prices, which began to take place in mid-July, did not occur in time to help ease the July PPI reading, but should help the August reading. With energy prices off 22% from the high, it will undoubtedly help. Still, this core intermediate goods segment will be something to watch over the next few months.
In separate report, July housing starts fell to a 17-year low. Building permits, a sign of future construction, also fell.
Starts fell 11% to an annual rate of 965,000, the lowest level since March 1991, followed a 1.084 million pace in the prior months. The report will reinforce the concern that stricter lending rules, rising borrowing costs and foreclosures will keep home sales depressed and cause builders to hold off on new construction. But this is what needs to occur when inventory levels are so elevated – this figure really needs be cut in half from the high hit in March. It will simply take time, but demographics and household formation will eventually take care of this issue.
Construction of single-family homes fell 2.9% in July (down 39.2% from July 2007) to 641,000 at an annual rate – also the fewest since 1991. Work on multi-family homes plunged 24% from the prior month after getting a boost in June from that change in New York City building codes that we discussed yesterday.
Have a great day!
Brent Vondera, Senior Analyst
Again, like clockwork, financials and consumer discretionary shares led the market lower falling 3.05% and 2.24%, respectively. As we’ve discussed, one only needs to look at these two sectors to learn the direction of the overall market. When this trend begins to break, it may signal the moment financials and consumer discretionary shares begin their sustained moved higher.
It’s tough when you’ve got these two indicators (inflation and housing) posting bad numbers as higher levels of inflation keep real incomes from rising (amazingly though this figure remains flat, not declining, as the broadest measure of incomes continue to grow at a nice nominal clip) and poor housing market results keep financial-sector concerns alive.
I will point out though that housing construction declines did ease in the second quarter as the drag on the GDP figure was half what it has been of late. It will just take some time to work off the excesses of the previous years; it’s as simple as that. On inflation, the numbers look ugly, and we have our concerns on this front, but the decline in oil prices of late should help inflation pressures ease – that is not a forgone conclusion though as I’ll discuss below.
Market Activity for August 19, 2008
In earnings news, Hewlett-Packard posted another great quarter – releasing results after the bell yesterday – as operating profit jumped 21%, revenue grew 10% and the firm issued strong guidance. Information technology posted the second-best profit performance of the 10 major industry groups for Q2 as operating profit rose 14.8%. This trailed only the energy sector, which posted operating profit growth of 17.9%.
Three of the 10 major industry groups enjoyed double-digit profit growth last quarter – consumer staples being the third. Another three industries posted profit growth in the range of 6%-9.5% -- health-care, industrials and utilities. Three industries reported profits declined in the March-June period – financials (down 94%), consumer discretionary (down 55.8%, much of this due to Ford, GM and housing-related retailers) and telecoms (down 1.9%)
On the economic front, U.S. producer prices (PPI) accelerated in July coming in at twice the rate expected on a month-over-month basis and jumping 9.8% from the year-ago period – fastest rate in 27 years. PPI rose 1.2% in July, an increase of 0.6% was expected, and the year-over-year reading surpassed the expected 9.3% increase. Even excluding energy, producer prices were up 0.6% over the past 30 days and 5% year-over-year.
Most concerning to me is the pace of core intermediate goods, which accelerated to 2.0% on a month-over-month basis and 10.2% year-over-year. (That’s up from the 8.4% pace hit in June.) For clarity, core intermediate goods are those factories use to produce finished product and it excludes energy. There is a real possibility that this segment funnels down to the consumer. If won’t occur in full, as productivity improvements and firms’ desires to keep market share hold consumer prices back, but it may be enough to drive the figure even as commodity prices have declined in a substantial way.
Many were probably looking past this reading as dollar strength and oil’s decline lead most to believe inflation will moderate – the drop in commodity prices, which began to take place in mid-July, did not occur in time to help ease the July PPI reading, but should help the August reading. With energy prices off 22% from the high, it will undoubtedly help. Still, this core intermediate goods segment will be something to watch over the next few months.
In separate report, July housing starts fell to a 17-year low. Building permits, a sign of future construction, also fell.
Starts fell 11% to an annual rate of 965,000, the lowest level since March 1991, followed a 1.084 million pace in the prior months. The report will reinforce the concern that stricter lending rules, rising borrowing costs and foreclosures will keep home sales depressed and cause builders to hold off on new construction. But this is what needs to occur when inventory levels are so elevated – this figure really needs be cut in half from the high hit in March. It will simply take time, but demographics and household formation will eventually take care of this issue.
Construction of single-family homes fell 2.9% in July (down 39.2% from July 2007) to 641,000 at an annual rate – also the fewest since 1991. Work on multi-family homes plunged 24% from the prior month after getting a boost in June from that change in New York City building codes that we discussed yesterday.
Have a great day!
Brent Vondera, Senior Analyst
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