EmailThe European Central Bank cut its key lending rate by 0.25% to 0.75%. China's central bank cut key lending rates as well, and the Bank of England increased its asset purchase (quantitative easing) program. S&P futures were originally higher as a result, but now suggest a slightly lower open.
The belief that central banks will do whatever is necessary to prevent a credit crisis and stimulate economic growth is providing key support to global equity prices. These actions are all related to disappointing economic conditions that might otherwise be producing downward pressure on prices. However, flooding markets with cheap money provides liquidity that props up the value of financial assets (at least for now).
Traders view central bank actions as downside protection that improve the risk-reward ratio on stocks. It is a key reason the US market trended higher during June.
The US economic news has become increasingly worrisome but there is some good news this morning. The ADP employment report showed a larger than expected gain of 179,000 for June. These private company data don't correlate directly with the government payroll figure, but do provide a decent indication. Expectations are that June nonfarm payrolls to be reported Friday will rise 100,000. The ADP report suggests a larger gain is possible. Payrolls were up an average of only 73,500 over the April-May period.
Less encouraging are today's same store sales data from retailers. Most retailers are reporting June sales below expectations. The two dominant ones quantitatively are Costo, which reported a modest 3.0% gain compared to an expected 4.0%, and Target, which reported a small 2.1% increase compared to an expected 3.0%. (Wal-Mart does not report monthly sales.)
June auto sales posted a gain over May, but these retail store data suggest that overall retail sales for June are likely to continue the sluggish trend of recent months. For the three months of March through May, total retail sales have been flat.
The market drifted higher intra-day on many occasions during June. July brings earnings reports starting on Monday, which could lead to increased volatility. There is still a widespread belief, however, that central banks have your backs covered in the equity markets. That may be true for now, but it would be a lot more comforting if economic and earnings trends were improving. They aren't.
Founder and Chairman, Briefing.com
