[B]Equity markets were hammered as a combination of weaker than expected earnings and a disappointing consumer sentiment index, hurt investor sentiment.[/B] Bank of America’s 8% drop led financials lower, erasing the S&P 500 index’s weekly gains amid concerns the economy is expanding too slowly to spur corporate growth. Adding to the jitters was a morning report that showed consumer sentiment dropped to its worst level since March 2009. The S&P 500 lost 13 points or 1.3%.
[B]The US economic data has clearly soured over the last couple of months. [/B]The end of the tax credits has taken a toll on housing, but the sector that seems to be the main culprit in the slowdown is manufacturing, which had been a bright spot. On Thursday the US reported the largest drop in manufacturing output of the year (-0.4%). The NY and Philly Fed surveys indicate the manufacturing weakness has continued into early July. Drilling a bit deeper, it seems that manufacturing weakness is particular acute in the consumer goods sector. Auto output was cut 1.9% in June and overall consumer goods production fell 0.6%. The output of appliances, furniture and carpeting fell by 1.7%. However, the output of business equipment remained strong. The 0.9% increase follows a 1.4% increase in May. Computers and semiconductor output was the strongest and this is consistent with the recent corporate guidance. The CEO of Novellus was quoted on the news wires near midweek suggesting that businesses are engaged in a major overhaul of their PCs. Bookings, he said, we up 20% in Q2 over Q1 and shipments trailed, which suggests output will remain strong.
[B]Weakness of the US consumer is one challenge; potential deflation is a greater threat.[/B] The June CPI was reported Friday and it is post the third consecutive monthly decline. Last June saw a 0.7% jump in the CPI. This will drop out of the year-over-year calculation. The year-over-year rate will fall sharply from the 2% level of May to something closer to 1.1-1.2%. Core CPI is considerably less volatile. Excluding the 0.1% decline in Jan, the month-over month moves have been between 0.0 and 0.2 since August 2008. Q3 09, the core CPI rose 0.4%. In Q4 09 it rose 0.3%. In Q1 10 it was flat. Even if one makes allowances for the impact of the weakness in the housing market, nearly every inflation gauge is at undesirably low levels that are arguably too close to deflation. This is rivaling the slowing economy as a major talking point. Look for Bernanke to be peppered with questions in next week testimony about how the Fed can combat deflation and avoid Japan’s fate.
Analysis provided by Exto Capital