The All-Time High Stock Market Is About To Get Served A Potent Cocktail Of Economic Data And Fedspeak



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apothecary pharmacy medicine viles chemistryFlasks for medicines, Santa Casa de Misericórdia de Porto Alegre, Brazil.

Stocks rallied and ended last week at all-time highs.

But it’s probably a mistake to suggest stocks are at an impasse. After all, the economy is just beginning to get strong enough that the Federal Reserve has only recently begun talking about scaling back its ultra-easy monetary policies.

This week, Fed Chairman Ben Bernanke heads to Washington D.C. to update Congress on the economy. We also get a load of top-shelf economic data.

On top of all of that, we’re knee deep into earnings season. This week, we’ll get Q2 results from Johnson & Johnson, Yahoo!, CSX, Bank of America, and General Electric.

Top Stories

  • Buckle Up For Another Bernanke Testimony: On Wednesday, Bernanke will be giving his semiannual monetary policy report to the House Financial Services Committee. “The Chairman will no doubt continue to stress that any decision to raise short term interest rates is still a long way off, and is essentially independent from decisions about asset purchases,” said Nomura’s economics team. “We will look to see if he clarifies the Federal Reserve‟s thinking on its policy path and the apparent gap between his comments in the post-meeting press conference and the diverging views reflected in the minutes.”
  • What Surging Mortgage Rates Mean For Housing: U.S. mortgage rates are near two-year highs, and they’ve been surging rapidly. But this doesn’t spell doom for the rebounding housing market. “”If mortgage rates were going up absent a rise in housing and loan demand, that would be a problem indeed,” said Gluskin Sheff economist David Rosenberg. “Say, for example the backup in yields was due principally to rising inflationary expectations. That doesn’t do anybody much good, that is for sure (unless you are long TIPS, gold and collectibles). But the current rise in market rates reflects the better tone to the real economy so it makes sense that the two would increase in tandem. “

Economic Calendar

  • Retail Sales (Monday): Economists estimate sales climbed by 0.8% in June, up from 0.6% in May. Excluding autos and gas, sales are estimated to have climbed by 0.4%. “June retail sales should post the largest monthly increase in four months.” said Credit Suisse’s Neal Soss. “The stronger end to Q2 would lay the foundation for a speed-up in consumer spending in Q3 (our baseline view). Auto sales should drive the gain in June, after unit sales rose to the highest level in almost six years. Underlying details also should look solid using chain store results as a guide. Gasoline should not be a large swing factor given the small uptick in prices over the month.”
  • Empire Manufacturing (Monday) and Philly Fed (Thursday): Economists estimate that the New York Fed’s and Philly Fed’s manufacturing indices slipped to 5.0 and 7.8, respectively, from 7.8 and 12.5 in June. “The net percentage of respondents noting an improvement in general business activity in the Empire State Manufacturing Survey probably widened to a four-month high of 8.5% in July, while the headline measure in the Philadelphia Business Outlook Survey jumped by five percentage points to 17.5% – its loftiest reading since March 2011,’ said Societe Generale’s Brian Jones.
  • Consumer Price Index (Tuesday): Economists estimate CPI climbed 0.3% in July, and 0.2% excluding food and energy. “We expect CPI to gain 0.5% in June, in response to a 6% gain in gas prices in seasonally adjusted terms,” said Morgan Stanley’s Vincent Reinhart. “We expect the core to rise 0.15%, lowering the year/year rate a tenth to +1.6%.”
  • Industrial Production (Tuesday): Economists estimate that industrial production grew by 0.3% in June. “In June, production seems to have bounced back slightly,” said Wells Fargo’s John Silvia. “The ISM manufacturing index jumped above the crucial 50 threshold again, with the production subcomponent posting a solid gain. However, a large drop in the Chicago PMI and no growth in average weekly hours for production workers indicate that the rise in industrial production will be subdued. In addition, a weaker global economy coupled with a stronger greenback weigh on foreign demand of American-made products.”
  • NAHB Housing Market Index (Tuesday): Economists that the homebuilding confidence index slipped to 51 in July. “So far in July, homebuilder equities have bounced around (hitting a low at the start of the month but bouncing back in the last few trading session), and homebuyer confidence has remained high despite higher mortgage rates,” said UBS Sam Coffin and Kevin Cummins. “We forecast a pause in the housing market index in July. Even so, its uptrend of the past year and a half is clearly positive for housing starts and sales.”
  • Housing Starts (Wednesday): Economists estimate that housing starts accelerated to an annualized pace of 960k in June. “With the level of permits running 71,000 above the level of starts, starts appear apt to rise further in June,” said Coffin and Cummins.
  • Beige Book (Wednesday): “We expect the Beige Book to describe continued moderate growth in the US,” said Credit Suisse’s Neal Soss. “We will be looking for any indication that the tighter financial conditions resulting from the Fed’s taper talk is impeding on business activity.”
  • Initial Jobless Claims (Thursday): Economists estimate that initial claims fell to 341k, after spiking to 360k last week. “Last week’s jump to 360k was likely due to auto-related seasonal adjustment problems.”

Market Commentary

Much has been made about the surge in small cap stocks, which is tracked by the Russell 2000.

“Client conversations this week focused on the drivers and sustainability of recent small cap performance,” said Goldman Sachs’ David Kostin. “The recently-reconstituted Russell 2000 has outperformed the S&P 500 by 580 bp in the last two months (12.1% vs. 6.4%) as both rose to new all-time closing highs.”

Small-cap stocks aren’t just smaller companies. Their risk exposures are such that they benefit more from an outperforming U.S. economy.

“Small caps’ leverage to US economic growth explains our EPS growth forecasts and much of their recent performance,” said Kostin. “Roughly 80% of Russell 2000 sales are derived domestically, compared with 66% for the S&P 500, which is more exposed to foreign economic growth and FX. Our economists expect that US GDP growth will accelerate from about 1.5% now to over 3% in 2014-2016. The high exposure to domestic growth also insulates small caps from recent investor concerns about the impact of a strong dollar and uncertain EM growth on US corporate earnings.”

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