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Week in Review: Chinese GDP, US economic thaw spur markets

For the week ended 17 April 2014

The stock market bobbed around this week like a volatile weather pattern with a warming trend. Investors responded to contrasting warm and cold economic data and a scattered mix of quarterly earnings reports. China reported a slowdown in its annual pace of growth to 7.4% in the first quarter, down from a 7.7% pace in the previous quarter, but exceeding expectations.

US data reflected an economy recovering from a pronounced weather-related winter slowdown. Industrial output grew faster than expected in March, retail sales surged, housing starts rose, and consumer prices edged up modestly. US homebuilder confidence remained subdued, however.

Among major corporate earnings reports, Yahoo had its best quarter in more than a year, but Google, IBM and Intel all disappointed. Investment banks Morgan Stanley and Goldman Sachs had better-than-expected results. General Electric’s profit rose on strength in its industrial businesses.

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US and global economic news

China’s annual GDP growth slips to 7.4%
China’s economy grew at a 7.4% annual rate in the first quarter, its slowest pace in 18 months. The relative slowdown in the GDP growth rate was caused by a loss of momentum in investment and consumption. Global markets reacted favorably to the news because China’s GDP growth was greater than expected, yet weak enough that the door remains open for China’s government to take stimulus measures.

US reports show thawing after deep freeze
The pace of US economic activity appears to be picking up with warmer spring weather. US industrial production rose faster than expected in March, expanding 0.7%. Housing starts increased 2.8% in March to a seasonally adjusted pace of 946,000. However, this was shy of the 973,000 that had been expected. Consumer prices rose a seasonally adjusted 0.2% in March, and were 1.5% higher than a year earlier. Moderate inflation is generally seen as a positive, encouraging businesses to hire and invest. Retail sales grew 1.1% in March, the largest monthly gain in a year and a half, and February sales were revised upward to a 0.7% increase from January. Homebuilder confidence rose slightly in April but remained below the threshold of 50, meaning more homebuilders had a negative view of conditions.

US weekly jobless claims at prerecession low
The US labor market appears stronger than it has been since 2007. Initial claims for unemployment benefits rose just 2,000 to a seasonally adjusted 304,000 in the week ended 12 April. The four-week moving average of new claims fell to 312,000, and the number of people receiving benefits after an initial week fell 11,000 to 2.74 million. All measures are at their lowest since the fall of 2007.

US Fed Chair Yellen to be vigilant with low rates
US Federal Reserve Chair Janet Yellen reassured investors that the US central bank remains concerned about low inflation and labor market slack. Yellen said the Fed could be two to three years away from meeting its dual mandate of full employment and a healthier level of inflation. She spoke of the danger of persistently low inflation possibly leading to deflation. The Fed’s preferred inflation gauge, the US Department of Commerce’s personal consumption expenditures price index, was 0.9% higher in February than a year earlier.

IMF flags low inflation as concern
The International Monetary Fund’s policy committee warned of the dangers of stubbornly low price increases as a possible drag on the global economic recovery, threatening growth and making it more difficult to reduce public debt. Concern about too-low inflation is greatest in the eurozone, where annual inflation of 0.5% is far below the European Central Bank’s target of just below 2%.

Eurozone industrial output grows, but durable goods down
Industrial production in the eurozone rose by 0.2% in February from January and by 1.7% from a year earlier. Output fell in several of the region’s weakest member countries, underscoring the fragility of the eurozone’s economic recovery. Production of durable goods fell 1.2% in February from January and 0.6% from February 2013.

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US and global corporate news

Google results disappoint as pay-per-click revenue slides
Internet search giant Google reported a 3.2% increase in first-quarter net income and revenue growth of 19% from a year earlier. But the numbers were below expectations for the high-flying firm. While revenue rose, costs climbed faster, with expenses rising 23% as Google expanded its services. The biggest challenge is the sharp decline in revenue per ad click. Google’s total volume of advertising rose 26%, but pay-per-click ad revenue fell sharply. A growing percentage of Internet searches are done on smartphones, where marketers pay about 60% less per ad click than on desktops.

Yahoo rides Alibaba success to better returns
Internet giant Yahoo’s quarterly revenue grew for the first time in a year, a vindication of CEO Marissa Mayer’s efforts to turn the company around by attracting more advertisers and marketers. Yahoo also gained from its 24% stake in e-commerce success Alibaba Group, which is preparing for an initial public offering later this year. Alibaba’s quarterly revenue grew almost 66%, and its net income doubled from the year-earlier period.

Intel hurt by PC industry decline
Chipmaker Intel reported a 4.8% drop in first-quarter profit, affected by the personal computer market decline. Revenue rose 1.5%, but the firm’s gross profit margin fell to 59.7% from 62% in the fourth quarter. PC unit shipments fell along with revenue from the business unit that sells chips for smartphones and tablets. But Intel’s Internet of Things Group produced much higher revenue, and chips used in server systems for cloud services sold briskly.

IBM hardware sales take hard fall
International Business Machines posted a 21% decline in its first-quarter profit as the computing giant experienced a tenth straight quarter of declining revenue in its hardware sales business unit. Despite IBM’s prominence as a major global provider of computer hardware, software and services, it has been slow to respond to developments such as cloud computing, which allows customers to rent computing power and software via the Internet. For the quarter, IBM’s systems-and-technology business, which houses its hardware unit, posted a 23% drop in revenue. Slowing demand in emerging markets also posed a problem. Revenue in the BRIC countries fell 11%, or a currency-adjusted 6%. Overall revenue fell 2.9% and missed analyst projections.

Morgan Stanley profit soars
Investment bank Morgan Stanley reported a 56% rise in first-quarter profit, with strength across all of its major businesses. The bank’s revenue grew 10%. Its return on equity rose above 8%, approaching its goal of double-digit returns. And contrary to a number of its rivals, Morgan Stanley even reported good results from its fixed-income trading arm in a challenging environment.

Goldman Sachs earnings fall but beat expectations
Goldman Sachs reported a 10% decline in its first-quarter net income but topped estimates, driven by strength in investment banking, where revenues rose to their highest quarterly level since 2007. However, Goldman was held back by an 11% decline in fixed-income trading revenue.

BofA profits hurt by legal bills, mortgage decline
Bank of America swung to a first-quarter loss, hurt by $6 billion in legal charges and a decline in mortgage originations. The banking giant’s revenue dipped 2.7%. Excluding one-time charges, Bank of America reported higher per-share earnings than expected.

GE gains from industrial strength
General Electric posted a 12% increase in industrial profits in the first quarter on strength in sales of gas turbines, jet engines and oil industry equipment. GE’s profit surpassed analyst estimates, but revenue fell 2.1% overall and was below estimates.

The week ahead

  • The US Department of Commerce reports existing home sales on Tuesday, 22 April.
  • China reports its flash manufacturing purchasing managers’ index on Tuesday, 22 April.
  • Apple reports its first-quarter earnings on Wednesday, 23 April.
  • The eurozone reports its flash composite PMI on Wednesday, 23 April.
  • Microsoft, UPS, Verizon and Caterpillar report their first-quarter earnings on Thursday, 24 April.
  • Japan releases its consumer price index on Thursday, 24 April.

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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. 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 of

Past performance is no guarantee of future results.

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


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