Friday, July 15, 2011
A mixed batch of economic readings and a couple of impresssive earnings reports this morning should help the market reverse the choppy and negative trend of the last few days. The debt ceiling/budget impasse in DC and the related rating agency warnings remain a headwind. But the overall tone of today’s news flow, particularly on the earnings front, is quite reassuring.
On the economic front, the June CPI report was better than expected on a headline basis, as falling gasoline prices helped ease pricing pressures. The core CPI, which strips out food and energy prices, was a shade hotter than expected. Overall, the June CPI report is further proof that the Fed can stay on hold for an ‘extended period’ without worrying too much about inflation.
The Empire State manufacturing index for July came in weaker than expected, another negative read after last month’s surprise plunge. While the weak June Empire State report was offset by the subsequent strong national ISM report, it remains to be seen to what extent today’s negative read reflects enduring weakness in the factory sector. On the whole, today’s negative Empire State report is disconcerting.
On the earnings front, we are off to a good start thus far. Citigroup (C) solidly beat EPS and revenue expectations this morning, sustaining the positive bank earnings momentum created by JP Morgan (JPM) the day before. The quality of Citigroup earnings was quite good given the positive revenue surprise and lower reserve release. Google (GOOG) posted an impressive beat on Wednesday after the close, with the core search business drving most of the gains.
In a major deal in the energy space, BHP Billiton, the Australia-based mining and energy giant, is offering to pay $12 billion in cash for U.S. based E&P player Petrohawk Energy (HK) with substantial shale assets in Texas and Louisiana. This is a net positive for the broader U.S. E&P sector.
While the day’s economic reports are mixed, the earnings reports from Google and Citigroup are solidly impressive. It would not be unreasonable to expect the Google strength to rub off on the broader tech sector.
Sheraz Mian
Director of Research
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