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Week in Review: Markets gain ground in quiet week

For the week ended 31 July 2015

  • US GDP grows at 2.3% pace in Q2
  • Fed remains tightlipped on rate plans
  • Rising US home prices weigh on affordability
  • Teva–Allergan is latest health care merger
  • Profits tumble at large oil firms

Financial markets took a break from recent volatility, and global stocks generally climbed back after a string of daily losses ended Monday. Little significant economic news was reported globally, while US data releases were mixed.

The yield on the 10-year US Treasury note dipped to 2.20% Friday, and the yield on Germany’s 10-year bund stood at 0.65%. Oil prices remained weak, with US West Texas Intermediate and international Brent crude oil priced near $48 and $53 per barrel, respectively.

US and global economic news

US GDP rises 2.3% in Q2
US gross domestic product grew at an annualized pace of 2.3% in the second quarter, missing the median economist forecast of 2.6%. First-quarter GDP was revised up to 0.6% growth from the 0.2% contraction reported previously. Steady momentum in GDP could lead the US Federal Reserve to raise interest rates this fall. Growth was driven by a pickup in consumer spending and strengthening labor and housing markets.

Fed changes nothing, indicates little
The Fed’s two-day July meeting ended Wednesday with no policy action and only minor changes in the post-meeting statement. Though the Fed has provided few hints about its plans to raise interest rates, an initial hike is widely expected in September or December. Short-term rates have been near zero since December 2008.

US labor costs barely budge
The employment cost index rose a seasonally adjusted 0.2% in the second quarter, the smallest quarterly gain since recordkeeping began in 1982. Sluggish wage growth could cause the Fed to wait longer before raising interest rates.

Housing indicators turn downward
US home prices continued to rise but pending home sales fell and the home ownership rate sank to a 48-year low. The S&P/Case-Shiller Home Price Index rose 4.4% in the 12 months ended in May, up from 4.3% in April. With prices rising at roughly twice the rate of overall consumer prices, housing has become less affordable. Pending home sales declined 1.8% in June after five straight monthly increases. The home ownership rate dropped to 63.5% in the second quarter, the lowest since 1967.

Key US durable goods orders gauge rises
US nondefense capital goods excluding aircraft, a key proxy for business spending plans, increased 0.9% in June after falling 0.4% in May. Economists had expected a 0.4% increase in June. Overall durable goods orders rose 3.4%, driven by an 8.9% jump in orders for transportation equipment.

US consumer attitudes lag
The University of Michigan consumer sentiment index fell to 93.1 for the final July reading, down from 96.1 in June and below the median economist forecast of 94.0. The Conference Board’s index of consumer confidence dropped to 90.9 in July from a downwardly revised 99.8 in June. The current reading is the lowest since September 2014, and the monthly decline was the steepest since August 2011.

Weekly US jobless claims increase slightly
Initial US jobless claims rose 12,000 to 267,000 for the week ended 25 July. The four-week moving average fell 3,750 to 274,750. Continuing claims climbed 46,000 to 2.26 million for the week ended 18 July.

Russia cuts interest rate for fifth time
Russia’s central bank cut its key interest rate by one-half percentage point to 11%, the fifth rate cut this year. The central bank is focused on ending Russia’s first recession in six years, but must strike a balance between stimulating the economy and containing consumer price inflation, currently at 15.8%, fed by the ruble’s 19% fall versus the US dollar since mid-May.

US and global corporate news

Teva to buy Allergan’s generics business for $40.5 billion
Teva Pharmaceutical Industries plans to buy the generic drug business of Allergan. The deal would turn Israel-based Teva into a leading global pharmaceutical firm. The acquisition is the largest corporate deal in Israel’s history and comes after a snag in Teva’s hostile bid for Dutch firm Mylan.

BP posts loss, moves forward from Deepwater disaster
British oil giant BP posted a $6.3 billion second-quarter loss. The company was hurt by low oil prices and a $10 billion pretax charge to settle claims related to the 2010 Deepwater Horizon oil rig disaster in the Gulf of Mexico.

Exxon profit cut in half
Exxon Mobil reported its worst quarterly performance in six years as sharply lower oil prices reduced earnings by more than 50%, despite steady cost cutting.

Chevron profit plunges 90%
Oil company Chevron’s profit dropped 90% as persistently low oil prices erased earnings. Production rose 2% from a year earlier.

Shell cuts jobs as earnings fall
Royal Dutch Shell said it would cut 6,500 jobs in response to the deep slump in global oil prices. Other oil companies including Italy’s Saipem have recently announced job cuts. Shell’s profit fell by 33% from the year-ago quarter.

Facebook profits fall, revenue growth strong
Social media pioneer Facebook’s second-quarter profit fell 9% from a year earlier, but its revenue rose 39% as its subscriber base grew 13% to 1.49 billion people who log on at least monthly. With an operating margin of 55%, the firm is focused on long-term growth through new initiatives, such as Instagram, Facebook Messenger and WhatsApp.

The week ahead

  • US manufacturing gauges are released on Monday, 3 August.
  • China’s composite purchasing managers’ index is reported on Tuesday, 4 August.
  • The European Union composite PMI is released on Wednesday, 5 August.
  • The Bank of Japan announces monetary policy on Thursday, 6 August.
  • The US Department of Labor publishes its monthly employment situation report on Friday, 7 August

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

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