Business Blog Posts

Federal Reserve Chairman Ben Bernanke argued last week that the second half of the year would be better than the first. But a downward revision in the central bank's forecasts for economic growth for this year and next belied a lack of conviction.

Europe's debt debacle remains a major cloud over the global growth, with the latest installment of Greece's bailout drama doing little to persuade investors that the country will be able to avoid a painful default.

In this context, the Institute for Supply Management's survey of U.S. manufacturing, often a leading indicator of broader economic activity, takes on renewed importance. Economists expect the index, due Friday, will drop to 51.9 in June following a steep seven-point dive to 53.5 in May, skirting ever close to the 50 level that separates growth from contraction.

Regional U.S. factory surveys published so far this month have augured poorly for the ISM report, and industry experts say the sector is still struggling with higher costs despite a recent pullback in energy prices.

"When I meet with member companies they often complain to me about the rising cost of raw materials," said Chad Moutray, chief economist at the National Association of Manufacturers.

"Consumers are also being squeezed, which makes it a lot harder to pass on those costs. So there's a profits squeeze."

Like the Fed chairman, manufacturers are holding out hope for a better second half. The Fed last week revised its forecast for 2011 economic growth to between 2.7 percent and 2.9 percent, from an April projection of 3.1 percent to 3.3 percent.

GREECE VOTE; JAPAN'S FACTORIES

In Europe, worries over a possible debt default in Greece have persisted, putting a damper on economic activity. An index of economic sentiment in the eurozone, to be released on Wednesday, looks set to hold steady near 105.0 for June.

The Greek parliament is expected to vote on another round of austerity measures this week, and failure to approve the plan could lead the government to run out of cash within days. That could send financial markets into a tailspin.

U.S. consumer sentiment is expected to stay largely in place, with the Thomson Reuters/University of Michigan confidence index seen edging up to 72.0 in June.

Reflecting the country's economic malaise, the U.S. labor market is not likely to fare much better either. Two years into the recovery, weekly claims for first-time jobless benefits are projected to fall by only 9,000 to 420,000, still well above levels that would suggest a solid labor market recovery.

"The bulk of the population is still not feeling any improvement," said Harm Bandholz, chief U.S. economist at UniCredit Research in New York. "The main reason for this is the sluggish labor market."

The economy added just 54,000 jobs in May, and economists fear it did not do much better in June.

Analysts will also pay close attention to data out of Japan for a sense of just how quickly the country is rebounding from the defacto recession that followed March's devastating earthquake and tsunami.

Reports Monday and Tuesday are likely to suggest Japanese industry is faring better than consumers. Retail sales are forecast to have fallen 2.6 percent from year-ago levels in May following April's 4.8 percent decline.

In contrast, industrial output is expected to jump 5.5 percent in a preliminary reading for May, up from 1.6 percent a month earlier. That could bode well for the U.S. auto sector, which has been hurt by supply chain disruptions linked to Japan's calamity.

U.S. automakers, who faced a disappointing May, report June sales Friday.

(Reporting by Pedro Nicolaci da Costa; Editing by Dan Grebler)

But gains coming from healthcare, staples or other defensive sectors that have outperformed the market in the last several months would only support the notion that the U.S. stock market needs to complete its correction phase and panic selling must occur before a more sustained comeback develops.

"We want to see more fear," said Ari Wald, equity strategist at Brown Brothers Harriman in New York.

Be careful what you wish for.

The problems that have driven the recent decline, including Greece's slow march toward a default on its debt, weak U.S. economic data and the creeping deadline to lift the U.S. debt ceiling, are far from being resolved.

HOLDING THE 200-DAY SHOWS THE WAY

Despite a drop that dragged the S&P 500 as much as 8.2 percent below its three-year high hit in early May, the index held above its 200-day moving average -- a major line in the sand as the bulls and bears battle for control of the market.

The slide had been telegraphed for weeks and the market's by-the-book performance -- pulling back to a widely followed level -- seems too well choreographed for some analysts.

"The fact that we went to the 200-day ... seems just a little too perfect," said Marc Pado, U.S. market strategist at Cantor Fitzgerald & Co in San Francisco.

He said the timing of the move was supportive, as the market creates a technical base before resuming its upward move on the back of strong earnings.

"You might get an attempt at a shakeout move," Pado said. "But sometimes the majority is right."

Even if they are right, they don't seem too convinced. So far this quarter -- on track to be the first in the red for the S&P 500 in the last year -- daily volume on the New York Stock Exchange, NYSE Amex and Nasdaq has averaged 7.22 billion shares.

That is down from the 7.94 billion shares traded daily during the first quarter, when the S&P 500 gained 5.4 percent. Commitment to the market has waned. The frantic selling, the flushing down of day traders seems absent so far in this corrective phase.

Despite holding above that level, the market has not cleared the danger zone of dipping under its 200-day average. The curve has a steep slope, as the S&P 500 took roughly two years to notch a 100 percent advance from its March 2009 lows.

The 200-day moving average now stands at 1,263.47, less than 0.4 percent below the S&P 500's close on Friday.

"Every time you test a resistance or support level, you make it weaker," said Nicholas Colas, chief market strategist of the ConvergEx Group in New York. "It's almost like a piece of metal. Every time you hit it, it grows more fragile and that's why people are really worried the third or fourth time."

After three straight days of declines, the S&P 500 fell 0.24 percent for the week and finished on Friday at 1,268.45 -- its seventh decline in the last eight weeks.

The Dow industrials lost 0.58 percent for the week, closing on Friday at 11,934.58, while the Nasdaq Composite rose 1.39 percent for the week to end at 2,652.89. The Nasdaq is just fractionally higher for the year, while the Dow and the S&P 500 are both still solidly in the black for 2011.

The next two weeks, before quarterly earnings season starts in earnest, could be marked by wild swings like the ones seen recently. On Thursday, after a market-friendly headline out of Greece, the S&P 500 posted its strongest comeback in almost a year, on days when the benchmark has fallen more than 1 percent.

From its session low on Thursday, the S&P 500 climbed more than 20 points into the close. The Dow's swing covered 233.79 points from its intraday low to session high on Thursday.

But buying interest waned on Friday. Aside from doubts about the passage in Athens' Parliament of higher taxes and service cuts, weak Italian banks also are scaring investors.

The Federal Reserve on Wednesday gave a bleak outlook on the economy, lowering its forecasts for GDP growth for both 2011 and 2012. And Fed Chairman Ben Bernanke found it hard to explain the sources of a so-called economic "soft patch" that seems to have become pervasive.

SUMMER STORM OF DATA

Besides the weekly jobless claims numbers, housing and manufacturing data will attract the most attention this week.

The S&P Case-Shiller April home prices index on Tuesday and the National Association of Realtors May pending home sales index on Wednesday could confirm the housing market's double dip.

Factory activity grew in May at its slowest pace since September 2009, according to the Institute for Supply Management, and Friday's ISM number for June is expected to drop to 51.9, indicating an even slower rate of growth.

New applications for unemployment insurance on Thursday are expected to land above 400,000 for a 12th straight week, according to economists polled by Reuters.

Personal income and consumption, out Monday, are expected to tick higher in May. Consumer confidence, out Tuesday from the Conference Board, is forecast at a June reading of 60.5, just a touch lower than May's 60.8, a Reuters poll showed. Despite a recent string of weak data in May, a sharp drop in crude oil prices is expected to buoy consumer confidence.

(Reporting by Rodrigo Campos; Additional reporting by Edward Krudy; Editing by Jan Paschal)

Adding to the Socialist Prime Minister George Papandreou's dire problems, the conservative opposition rejected on Sunday appeals from the government and senior European Union politicians to do its duty and support the medium-term plan.

Parliament is due to start debating on Monday the program of tax increases and spending cuts worth 28 billion euros over five years. Papandreou needs parliamentary approval this week to secure the next payment under a 110-billion euro ($156 billion) EU/IMF bailout.

In an interview published on Sunday, Deputy Prime Minister Theodor Pangalos was optimistic about winning the first round of general votes on tax and spending targets plus the creation of a privatization agency, despite discontent within his PASOK party.

But he was more cautious about whether the government could push through further enabling legislation on individual budget measures and privatization of specific state assets.

"I think the package of short and medium-term measures with which we basically hope to establish the framework to undertake reforms will be approved without difficulty," Pangalos told Spanish newspaper El Mundo in an interview published on Sunday.

However, he said approval of specific laws to enact fiscal reforms and privatizations of public companies may be more difficult to achieve. "That's where we may have problems. I don't know whether some of our Members of Parliament will vote against it. It's possible," he said.

Without the money from the IMF and European Union, Greece faces the prospect next month of becoming the first euro zone country to default, sending shockwaves through a fragile global financial system.

But many ordinary Greeks, who have lost jobs or seen their real income decline by nearly one-fifth over the last two years, have reacted angrily to measures they say fail to target wealthy tax evaders who they regard as responsible for Greece's plight.

Papandreou's PASOK party has seen its slender majority whittled down by five defections over the last 13 months, leaving it with 155 seats in the 300-member parliament.

Two of its legislators have already announced they will not support the deal in the coming week, and a third reiterated on Sunday he would do so only if new Finance Minister Evangelos Venizelos gave him assurances.

"I have submitted a 16-point paper to Venizelos... and I expect specific answers, on which (my stance) will depend," lawmaker Panagiotis Kouroublis told state radio NET on Sunday.

NATIONAL STRIKE

Ramping up pressure on the government, unions have called a two-day national strike starting on Tuesday. Many companies, including the main electricity group PPC which is slated for partial privatization next year, have already started rolling strikes.

Pangalos, who after a cabinet reshuffle this month shares his deputy premier's title with Venizelos, said he believed the conservative New Democracy opposition party would vote in favor of some of the measures.

But New Democracy leader Antonis Samaras turned a deaf ear to the appeals from home and abroad to support the package, saying the painful measures would only deepen Greece's worst recession in 37 years.

"You can't ask for more taxes in an already overtaxed country, in a market that has been sucked dry, with economic activity at zero and a huge recession," he said in a statement.

Greek ministers and policymakers had urged legislators to do their duty and approve the austerity package, adding to calls from European leaders to avoid a crisis in the 17-member euro zone.

German Finance Minister Wolfgang Schaeuble urged the Greek parliament to approve the measures, warning that the EU would not relax this condition for the disbursement of the next 12-billion euro aid tranche.

"The stability of the entire euro zone would be in danger and we would need to quickly ensure that the risk of contagion for the financial system and other euro area countries would be contained," he told German Sunday newspaper Bild am Sonntag.

Venizelos, a Socialist party baron given the finance portfolio in the cabinet reshuffle, clinched the agreement of EU and IMF inspectors on Thursday to a package of measures which the government hopes can put its finances back on an even keel after it failed to meet targets under its international bailout program.

The steps include a one-off solidarity levy on income, an increase in heating fuel tax, and the introduction of income tax even for low earners on salaries of between 8,000 and 12,000 euros a year.

Protests were expected later on Sunday in Syntagma square outside parliament, where demonstrators have camped for more than four weeks to show their anger at the government. (Additional reporting by Tracy Rucinski in Madrid; ; editing by David Stamp)

Pangalos added, however, the government may have a hard time passing specific fiscal reform laws.

The Greek parliament is due to vote next week on measures that include 6.5 billion euros ($9.3 billion) of extra austerity steps for this year and savings of 22 billion euros for 2012-2015 to cut deficits and keep qualifying for EU/IMF aid.

Greek ministers and policymakers have urged parliament to pass the unpopular measures, which international lenders have demanded in return for staving off bankruptcy.

"I think the package of short and medium-term measures with which we basically hope to establish the framework to undertake reforms will be approved without difficulty," Pangalos told Spanish newspaper El Mundo.

However, he said approval of specific laws to enact fiscal reforms and privatizations of public companies may be more difficult to achieve.

"That's where we may have problems. I don't know whether some of our Members of Parliament will vote against it. It's possible," he said.

Still, Pangalos -- who after last week's cabinet reshuffle shares his deputy title with Finance Minister Evangelos Venizelos -- said he believes the conservative New Democracy opposition party will vote in favor of some of the measures.

Greece's ruling Socialist government, with 155 seats in a 300-strong parliament, needs approval for the austerity steps in order to receive a vital 12 billion euro EU/IMF loan tranche.

Athens accepted a package of 110 billion euros of EU/IMF loans in May 2010 but needs a second bailout of a similar size to meet its financial obligations until the end of 2014, when it hopes to return to capital markets for funding.

($1 = 0.698 Euros)

(Reporting by Tracy Rucinski; Editing by David Hulmes)