7/13/2012
By Carlos Guillen, Research Analyst

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Quite impressively, equity markets made a nice bounce of short term support, with the Dow Jones Industrial Average up over 196 points or 1.57 percent, after ramping lower during the last six days. But justification for the upturn is rather difficult to pin point as consumer confidence continues to slip and economies around the world decelerate.

One good reason to have been discouraged today was that consumer sentiment data failed to meet expectations and fell to the lowest level so far this year. The University of Michigan Consumer Sentiment July preliminary result landed at 72.0, which was lower than the Street's expectation of 73.5 and represented the second consecutive monthly decline. Consumer sentiment has declined from the 73.2 reached in the prior month and has confirmed the end of a rather encouraging trend that had lasted for nine months. Consumer appear to be losing confidence at a pretty rapid pace; hopes had been high in the Spring, but the mounting evidence of cooling economies around the world is just impossible to ignore.

Moreover, after four straight months of slowing jobs growth and wage gains below inflation rates, consumers are seeing a much cloudier outlook and may hold back on spending. Even gasoline prices have stopped declining, so this component of consumer spending incentive is no longer there. According to the report, the index of consumer expectations declined to 64.8 from 67.8, and only 19 percent of consumers expected to be financially better off in the coming year, the lowest proportion recorded by the survey. Americans were also gloomy about their longer-term prospects with 39 percent anticipating their situation would be better in five years. With consumer spending representing 70 percent of gross domestic product, and given that all other legs of the economy are at a stall or declining, the risk of achieving no growth this year is certainly increasing.

Another report today showed prices paid to producers unexpectedly rose in June as food costs picked up. According to the Labor Department, the Producer Price Index (PPI) increased by 0.1% in June after declining 0.1% in May, landing above the Street's estimate of a 0.6% decline. However, eliminating the noise effects of food and energy, PPI increased by 0.2%, in line with the Street's estimate of 0.2%.

Perhaps the best bad news today was that Chinese gross domestic (GDP) product landed below expectations, serving to increase the likelihood of some form of government intervention to stimulate the economy. China's GDP increased 7.6 percent in the second quarter, under the Street's consensus of 7.7 percent, representing sixth quarter of slowing growth, making it the weakest pace since the global financial crisis. The encouraging aspect of the weakening growth was that it serves to put pressure on Chinese officials to boost stimulus to secure a second-half economic rebound, which in turn assists equities here at home

While slowing growth is certainly not a reason to feel cheery, at least it served to lift markets today on the hope that governments will step up effort to stimulate economies into growth mode again.

Carlos Guillen
Wall Street Strategies