Week in Review: Investors cautious, economic concerns ease somewhat

U.S. economic news

Trade deficit narrows in July
The nation’s trade deficit fell 14% in July to $42.8 billion from $49.8 billion in June, according to a report from the U.S. Department of Commerce. The figure is well below the $47.3 billion gap that had been forecast by economists. Led by aircraft and capital goods, exports reached a record $153.3 billion in July, up 2% from June and 18% from one year earlier. Imports fell 2% from June to $196.1 billion. A smaller trade deficit is potentially good news for the economy because it suggests trade will have less negative impact on growth in the third quarter than it had in the second quarter.

Credit card debt plummets
According to the U.S. Federal Reserve Board, revolving credit outstanding (almost entirely credit card debt) fell $4.4 billion to $827.8 billion in July from June. That figure represents a decline of 15% from the peak of $973.6 billion reached in August 2008.

Unexpected gas glut
Gasoline stockpiles increased by a record 5% during July and August. Supplies typically fall 6% in these two months. One benefit to gas buyers from the unexpected surplus: prices at the pump have remained largely the same during the summer months. The extreme gains in gasoline supplies are a result of record refinery output and high imports more than making up for robust consumption.

Fed’s Beige Book reports uneven growth and signs of deceleration
The Fed reported in its Beige Book survey of economic conditions in the central bank’s 12 districts that recovery is occurring unevenly across the country. The report stated that regions dependent on manufacturing and farming were making the most progress while those reliant on housing were struggling. The report also said that while the U.S. economy maintained its expansion overall, five Fed districts have experienced “mixed conditions or a deceleration in overall economic activity” in mid-July through the end of August. The other seven regions all reported modest growth or conditions that were improving.

New unemployment claims fall
The U.S. Department of Labor reported that applications for unemployment benefits fell by 27,000 to 451,000 in the week ended September 4. Economists had predicted a much smaller drop of just 2,000 claims. While total initial jobless claims are still much higher than they would be in a healthy economy, they are now at their lowest level since July 10.

U.S. and global corporate news

Bristol-Myers Squibb announced that it is acquiring biotechnology company ZymoGenetics for $735 million. The deal is the latest in a series of small-to-midsize acquisitions and partnerships that Bristol has made over the past few years in an attempt to strengthen its product lineup.

British Airways and American Airlines, which won approval for their joint venture in July, will start their alliance on flights across the Atlantic in October. The two airlines will align their frequent-flier programs, allowing travelers to earn and use their miles on both airlines.

Talbots reported a profit of $941,000 for the quarter ended July 31, a considerable turnaround from a prior-year loss of $24.5 million. The women’s clothing and accessories retailer cited lower costs and resistance to markdowns as reasons for its improved earnings. Despite posting a profit, net sales decreased 1.3% to $300.7 million and same-store sales fell 1.4%, following a 25% drop in same-store sales one year earlier.

McDonald’s said same-store sales rose 4.9% in August from a year earlier, narrowly falling short of analyst estimates. Analysts projected global sales would increase 5%. The world’s largest restaurant chain reported that sales increased 4.6% in the United States, thanks in part to the popularity of its higher-margin smoothies and frappes.

Global economic news

OECD predicts slowdown in global economy
The Paris-based Organization for Economic Cooperation and Development projected that the pace of global economic expansion during the second half of 2010 will be slower than previously estimated. In its short-term forecast for the Group of Seven leading industrial nations, the think tank said annualized growth in G-7 gross domestic product will slow to 1.4% in the third quarter and 1% in the fourth quarter. That comes on the heels of growth of 3.2% and 2.5% in the first and second quarters of the year, respectively. Saying there is great uncertainty surrounding the world economy in the months ahead, the OECD added that central banks around the world may need to be prepared to provide additional economic stimulus.

Bank of Canada lifts benchmark rate
Canada’s central bank increased its benchmark interest rate for the third time this year, raising its target rate for overnight loans between commercial banks to 1% from 0.75%. Canada’s increases are the first among Group of Seven countries following last year’s global recession. The country seems to be recovering from the global economic downturn faster than most countries, as Canada has already returned to pre-recession employment levels. In addition, “consumption and investment have ‘evolved’ as anticipated and are expected to remain buoyant,” the Bank of Canada said.

Ireland’s state-owned bank to be split
Ireland’s troubled banking system became the latest victim in Europe’s continuing economic crisis, as the government said it would break up the weakest of its major banks to try to prevent a run by depositors. Anglo Irish Bank, which was nationalized by Ireland’s government last year, will likely be divided into a government-backed bank that would hold customer deposits and an “asset recovery” bank that would hold the bank’s increasingly bad loans. The intention is that eventually the recovery bank’s assets will be sold off in whole or in part. The move is being made as Ireland attempts to restore the reputation of its financial system.

Stay focused and diversified
In any market environment, we strongly believe that investors should stay diversified across a variety of asset classes. By working closely with your financial adviser, you can help ensure that your portfolio is properly diversified and that your financial plan supports your long-term goals, time horizon, and tolerance for risk. Diversification does not guarantee a profit or protect against loss.

The information included above as well as individual companies and/or securities mentioned should not be construed as investment advice, a recommendation to buy or sell, or as an indication of trading intent on behalf of any MFS product.

Securities discussed may or may not be holdings in any of the MFS funds. For a complete list of holdings for any MFS portfolio, please see the most recent annual, semiannual, or quarterly report. Full holdings are also available on the individual Fund Profile tab in the Products and Performance section on mfs.com.

Past performance is no guarantee of future results.

Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; boston.com.

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