Economic data and Q2 corporate results support US equity markets

Last week’s economic calendar provided a solid stream of encouraging data for investors. Monday’s Chicago PMI Report for July was a solid 58.6, though modestly below expectations that were calling for 61. Pending Home Sales for the period rose 1.5%, significantly stronger than the previous month’s -0.7% and consensus that had been calling for +0.9%. Tuesday’s PMI Manufacturing Index report for July was 53.3. Consensus was calling for 53.2 while June’s reading was 52. ISM Manufacturing was 56.3, matching consensus. A weak spot in the economic landscape came in the form of Personal Incomes and Outlays and Construction Spending on Tuesday. Incomes were flat, while spending rose a scant 0.1%. Construction Spending actually contracted in the month by 1.3%. The ADP Report for July reflected a net gain of 178k jobs, but more importantly, June’s figures were revised from +158k to +191k. Adding additional near term lift to crude, the EIA Petroleum Status Report for the week ending 7/28 reflected a draw across all three verticals. Finally, on Thursday and Friday, economic data rounded out a solid week of better than expected results. Weekly Jobless Claims were 240k versus 244k consensus, Factory Orders were 3.0% versus consensus of 2.7%, while June was revised higher to -0.3% from -0.8%. The July Employment Report was icing on the cake. Initial actual results for July were +209k versus consensus of +178k while June was revised higher to +231 from the initial reading of +222k. As impressive as those results were for June and July in terms of employment gains, the data within Friday’s report was equally encouraging. The official unemployment rate ticked down to 4.3%, private payrolls were +205k, manufacturing payrolls jumped by 16k while June’s were revised a substantial 11k higher to 12k, the participation rate rose 1 tenth of a percent to 62.9, and Average Hourly Earnings were a solid 0.3%. Average Weekly Earnings were also solid at 2.5% and the Average Work Week remained constant at 34.5%.

US equity markets remain in a confirmed uptrend despite recent and notable index divergence between the Nasdaq and Dow Industrials in recent weeks. That uptrend is finding confirmation in Q2 results which have provided better than expected earnings and revenue growth in over 65% of the cases thus far. Additionally, in an interesting development on Friday, though volume on both the Nasdaq and NYSE slipped, the leading edge of the market’s modest tick higher was led by small caps, in the form of the Russell 2000. That dynamic runs counter to recent trends. On Friday while the Nasdaq and S&P rose 0.2%, the Dow rose 0.3% and the Russell 2000 gained 0.5%. Clearly the prospects of a renewed risk-on mentality, if Friday’s trade holds, is a reflection of investor confidence. One sector that quietly garnered increased investor enthusiasm last week was home builders.