The Dow Jones closed at another new record yesterday, having surpassed the 14,000 mark for the first time earlier in the session. Markets were pushed higher by a steady inflation read and several strong earnings reports. The government reported wholesale prices falling 0.2% in June, against expectations for a rise of 0.1%. The Producer Price Index did rise 0.3% against forecasts for a 0.2% gain, but this didn't appear to faze investors.
The Dow Jones gained 20.6 points to close at 13,971.5, the S&P 500 slipped 0.15 points to end at 1,549.35. The Nasdaq rose 14.96 points to finish at 2,712.29.
American Express helped boost the Dow following a brokerage upgrade from Goldman Sachs, citing an undervaluation of the business. The credit card company rallied 4.6% to close at $64.74. Also in the finance sector, Merrill Lynch & Co was among a number of companies that topped earnings estimates, initially sending the stock higher. However, later in the day the company's chief financial officer said in a conference call that the market for subprime collateralised debt has yet to stabilise, sending shares 1.4 lower to $86.20. Elsewhere in the sector, State Street beat earnings estimates to climb 2.1% to $71.87, while Jeffries did the same to gain 3.6% to $29.75.
Coca-Cola reported a rise in quarterly profits, driven by strength in emerging markets. However, shares dropped 1.26% to $53.17. Johnson & Johnson also delivered strong earnings that exceeded estimates, but finished 1.66% lower at $62.74.
In takeover news, Lyondell Chemical rallied after chemical maker Basell said it would buy the company for $48 a share in cash. Lyondell shares surged 17.3% to $47.05 on the news. Dow Jones gained 0.9% to $24.25 after the CEO of the company agreed to News Corp's $5 billion takeover bid. However, the deal still needs approval from the Bancroft family.
US light crude oil August delivery edged $0.10 lower to $74.05 a barrel. COMEX gold for August delivery fell $0.40 to $665.90 an ounce.
Treasury prices went lower, with the yield on the 10 year note rising to 5.07% from 5.07%.
The Nikkei dropped 201.7 points to close at 18,015.6 this morning. Exporters led the fall as the yen strengthened against the dollar, eroding the value of sales in the US. Car makers also fell on news of an earthquake related shut down at Riken Corp. Riken has a 70% share of the sealant market for transmissions and a 40% share for engine piston rings.
The Hang Seng is 93.7 points lower at 22,963.6 this morning. The fall follows a report that said that China's central bank will step up efforts to cool the economy. Mainland reports scheduled for release tomorrow are expected to show gross domestic product rose at a double-digit pace for a sixth straight quarter and inflation accelerated to a two year high.
Fears of another hike in interest rates overshadowed trading yesterday as London's blue-chips ended in the red. Key UK inflation data left investors concerned over another rise in borrowing costs from the Bank of England after official figures revealed that consumer price inflation fell to 2.4% in June, higher than the 2.3% expected by economists. The FTSE 100 Index closed 38.6 points lower at 6659.1 as economists predicted a rise in borrowing costs to 6% as early as September as the Bank seeks to bring inflation under control. A strong start on Wall Street failed to lift London's leading share index, with stocks also subdued by a raft of broker downgrades.
Mining group Lonmin was the biggest faller, adding to its near 7% loss in the previous session with a further fall of nearly 4% yesterday as Goldman Sachs downgraded the stock after it disappointed the market on Monday with lower-than-expected sales forecasts. The stock was down 152p at 3833p, with other miners on the back foot including Vedanta Resources - off 44p at 1771p - and Antofagasta down 13p to 702p. Aero-engines group Rolls-Royce also suffered - down 16p to 548.5p after Credit Suisse downgraded the blue-chip stock. It said the company remained a strong long-term bet, but worried about currency headwinds.
Anglo-Dutch publisher Reed Elsevier fell 2%, or 19p, to 656p as investors digested news that it had sold the remaining parts of its Harcourt Education division for £2bn.
In the water sector, a slew of rating changes from UBS saw share price movements across the board, with a downgrade for Kelda causing the stock to slide 24.5p to 870.5p. Severn Trent was off 12p to 1343p despite an upgrade from the broker in a depressed wider market, while second-tier utility Northumbrian Water - again upgraded by UBS - also slipped into the red, to close down 0.25p at 311.25p.
Back in the top flight, sugar maker Tate & Lyle topped the risers board - one of only a handful of stocks in positive territory - after Goldman Sachs raised its rating from neutral to buy. The broker said the stock was well positioned to outperform after a disappointing first half. Shares were ahead nearly 5%, or 28p, at 600p.
The FTSE 100 is 48.4 points lower at 6,610.7 this morning. Tate & Lyle leads the fallers, down 2.25%, following the release of its AGM statement which suggests a mixed start to the year. Man Group is 1.9% lower after the net asset value of AHL Diversified Futures Ltd fell 0.45% from last week. Sainsbury tops the risers board after receiving a preliminary approach from Delta (Two) Limited, shares in the supermarket chain are 1.4% higher.
Economic report
UK Bank of England minutes (July) 09.30bst
The focus will be on how many MPC members joined the Governor, Gieve, Besley and Sentence and voted for the hike in July. In the June meeting there were two reasons cited as to why they didn’t want to raise rates. First, they argued monetary policy took time to have an effect and they wanted to wait and see how past hikes took effect. Second, the market wasn't expecting a further hike until August so they didn’t want to surprise the market and lead to 'excessive monetary tightening'. With very little data between the June and July meeting, the question is how many of them abandoned the wait and see approach? It is thought that Blanchflower and Lomax will definitely have wanted to see more data and so dissented and at least one of Bean, Barker and Tucker would rather have waited to see more information. So the expectation is for the split to be 6-3 in favour.
UK Unemployment (May/June) 09.30 bst
In the recent labor market release the claimant count measure of unemployment has declined. But this represents people choosing not to sign on. Total employment has been falling, so we need to look at the details of this release before drawing conclusions.
UK Average earnings ( May) 09.30 bst
Not that we are through the key pay months, the wage data are less of a focus. The central expectation is that pay growth remains at the weak levels seen in April but there is good chance wage growth drifts down further as public sector pay growth of sub -2 percent starts to weigh on the overall pay index.
US CPI (Jun) 13.30 bst
June core CPI is expected to rise 0.17 percent taking the year on year rate to 2.1 percent from 2.2 percent. Tenant rent is expected to rise +0.25 percent while OER could rise +0.2 percent, higher than in May but still under control. Hotel prices could fall, while auto and apparel prices may get a boost from seasonal adjustment. Medical care could rise +0.35 percent due to rising hospital costs. Assuming gasoline fell 2.7 percent while food prices rose 0.2 percent, the headline CPI is seen rising 0.04 percent, taking the year on year rate down to 2.5 percent from 2.7 percent.
US Housing starts (Jun) 13.30
Housing starts and building permits should remain soft as demand indicators have weakened, inventory levels are high, and homebuilder optimism is at a cycle low. June housing starts are seen falling o 1450k, while building permits decline to 1460k.
US Bernanke testimony 15.00 bst
Business as usual. There are not expected to be any surprises from Bernanke's testimony or the Fed's forecasts. The FOMC's thinking has moved fairly gradually, consistently calling for moderate growth (a bit below trend) and falling core inflation albeit with less confidence in the inflation forecasts, and hence the economic risk remaining weighted towards higher inflation. The FOMC will be happy to continue these slowly evolving and gradualist themes. The forecasts have generally gone the Fed's way with February's expectations turning out to be correct(4.5-4.75 percent). The only juggling of expectations at the Fed has been on housing where the earlier expectations of bottoming has given way to a more pessimistic view.
However, there will be room to cut the 2007 GDP forecast from 2.5-3 percent to 2-2.5 percent (maybe 2.25-2.5 percent as a 2 percent lower bound might signal more worry to financial markets than what the Fed thinks is justified). This lower GDP profile is explained by the weak 0.7 percent Q1 outcome, which the Fed will not expect to be repeated in the final three quarters of 2007. There is also room for the Fed to cut its 2007 core PCE inflation forecast from 2-2.25 percent to 1.75-2 percent(HSBC's forecast is 1.8 percent). This is good news. But there is also a chance the Fed decides to avoid taking a victory lap just yet, given high energy and food prices might push up core inflation in the second half. So the Fed might opt for "About 2 percent" as their official call, which is half a victory.
For 2008, the Fed's forecasts are unlikely to change, at least for growth and inflation. There is a risk that it might edge up its employment forecast to 4.75-5 percent based on the apparently more optimistic view of longer term structural productivity growth by FOMC members relative to the Fed staff forecasts.