Tuesday, August 14, 2012

WEEK IN REVIEW: PERVASIVE WEAK DATA RAISE HOPES FOR BANK STIMULUS


For the week ended August 10, 2012
A number of separate reports confirmed that the European economy continues to weaken, with deepening troughs in Germany, Italy, and the United Kingdom. China reported lower export levels, slowing inflation, and sharply lower bank loan activity. Taiwan and South Korea also had steep declines in exports. The United States stood in contrast, with growing exports.
Despite the rising tide of negative economic data, markets were buoyed by better-than-expected corporate earnings and rising expectations of renewed central bank stimulus efforts to promote growth in the United States, Asia, and Europe.
US and global economic news
Germany falters as economic weakness spreadsEconomic weakness in the eurozone appears to be spreading into Germany, driving the region’s largest and strongest economy into contraction. Germany’s industrial output fell 0.9% in June in adjusted terms, after a 1.7% gain in May. German exports decreased more than expected in June as demand from eurozone trading partners declined. Germany’s factory orders also shrank 1.7% in June, twice as much as had been expected.
UK industrial production falls to 20-year low, BoE cuts forecastsThe UK economy has fallen into a steep slump, according to a number of reports. Industrial production reached its lowest point in 20 years in June, falling 2.5% between May and June, as the industrial sector was hurt by weak domestic demand and slowing exports. UK house prices fell in July, according to figures from Halifax, the country’s home mortgage lender. The United Kingdom posted its largest overall trade deficit in at least 15 years, as weak export demand is hampering efforts by the country to trade itself out of recession. The Bank of England cut its forecasts for growth and inflation, signaling that it might add economic stimulus in the near future.
Italy’s economy marks four quarters of contractionItaly’s economic output shrank in the second quarter, marking an entire year of consecutive quarterly contraction, according to Istat, its official state statistical agency. The country’s gross domestic product shrank 2.5% in the second quarter from a year earlier. Italy’s domestic economy has seen declining retail sales, record low consumer sentiment, and weak bank lending. Istat reported a 1.4% drop in industrial output in June from May and a decline of 8.2% from June 2011.
Evidence mounts of Chinese slowdown Chinese economic reports painted a clearer picture of a slowing economy in China, with new yuan loans by Chinese financial institutions down more than 40% in July from June, exports rising just 1% in July from a year earlier, and inflation slowing to 1.8% in July from a year earlier. The data are particularly worrisome because of how heavily dependent many other countries have become on China as a customer for their goods. Taiwan and South Korea reported sharply lower July exports, down 12% and 8.8%, respectively, from a year earlier.
US economic reports positive overallThe US economy, while not robust, appears to be in better shape than any other major nation’s, as data from elsewhere continue to show softening. The US trade deficit narrowed to its lowest level in two years in June, as exports reached a record high and imports eased largely because of declining oil prices. However, the trade gap with China grew because exports to China declined while imports continued to grow. The US housing market showed signs of a pickup: Three of five banks surveyed this summer by the US Federal Reserve Board said demand increased for home-purchase loans during the past three months; home prices rose by 2.5% in June from a year ago; and 11.9% of mortgage loans were 30 days or longer past due or in foreclosure at the end of June, down from 12.9% a year earlier.
US corn crop forecast down, prices much higherThe size of this year’s US corn crop is forecast to drop by 17%, and prices will rise by up to 39%, according to the US Department of Agriculture. The widespread US drought is expected to have a similar impact on the country’s soybean crop. As a result, food prices are expected to rise, including those of meats and poultry that rely on corn and soybeans for feed. The USDA also predicts that grain exporters and other US businesses that use corn will cut back on their consumption.
US and global corporate news
Freddie Mac profit reflects rising home pricesFreddie Mac, one of two US government-sponsored home mortgage market facilitators, reported a $3 billion second-quarter profit, after a $2.1 billion loss a year earlier. Freddie Mac benefited from rising home prices, which reduced the amount of money it set aside to protect against future credit losses. It also paid a $1.8 billion dividend to the US Treasury Department, which bailed it out in 2008.
HP to take $8 billion charge PC (personal computer) maker Hewlett-Packard said it plans to write down the value of its services segment by about $8 billion, acknowledging that it overpaid for its $13 billion acquisition of Electronic Data Systems in 2008. HP's services business has struggled with profitability amid the global economic downturn.
US Justice Department will not charge Goldman SachsThe US Department of Justice said it would not bring charges of financial fraud against Goldman Sachs or its employees. The decision not to prosecute was announced Thursday, after a year-long investigation could not meet the burden of proof.
Commerzbank posts profit, warns of slowdownGerman bank Commerzbank posted a much higher second-quarter profit than a year ago but warned that its second-half profit would decline because of the challenging economy and declining consumer activity.
Deutsche Telekom dials up higher earningsGermany’s Deutsche Telekom reported sharply higher second-quarter net profit as recent staff reductions led to lower expenses. However, the firm warned of ongoing business challenges, including intense competition, onerous regulations, and difficult economic conditions, particularly in Greece.
News Corp posts large loss on write-downMedia conglomerate News Corp posted a $1.55 billion loss for its fiscal fourth quarter after a multibillion-dollar write-down of its unprofitable publishing businesses. The firm plans to separate its film and television divisions from its publishing arm.
The week ahead
  • The European Union releases its flash gross domestic product data for the second quarter on Tuesday, August 14.
  • The US Department of Labor reports the July Consumer Price Index on Wednesday, August 15.
  • The United Kingdom releases its monthly retail sales report on Thursday, August 16.
  • Wal-Mart Stores announces its quarterly earnings on Thursday, August 16.
  • The Conference Board releases its leading indicators report on Friday, August 17.
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 advisor, 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 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 or of Schnack Financial Group, Inc. For a complete list of holdings for any MFS portfolio or Schnack Financial Group, Inc., please request the most recent annual, semiannual, or quarterly report. Full MFS holdings are also available on the individual Fund Profile tab in the Products and Performance section of 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; Forbes.com; CNNMoney.com; msnbc.com.
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