U.S. Economic News Week Ending July 23, 2010

Stocks and bonds had a seesaw week in response to conflicting economic and earnings reports. By Wednesday, the market’s mood was dour as U.S. Federal Reserve Board Chairman Ben Bernanke shared a somber economic outlook without announcing any action plan to ease the situation. However, on Thursday and Friday the picture turned brighter, leading stock prices to rebound along with U.S. Treasury yields. At midweek, the yield on the two-year Treasury bill had hit an all-time low, and the yield on the 10-year Treasury note fell to its lowest point in a year. The week ended on an inconclusive note, with a sense of skepticism about the rigor of the much-anticipated European bank stress test.

In a very positive sign, about five in six companies in the Standard &Poor's 500 Stock Index surpassed their earnings expectations. The market’s turning point was prompted by indications of a European economic rebound as eurozone consumer confidence, retail sales, and purchasing activity all rose. By Friday morning, major U.S. stock indices were all at least 2% higher for the week. The Dow Jones Global Index advanced 2.5%.

U.S. home sales decline
Sales of existing homes in the United States slid by 5.1% in June, in the aftermath of a government tax credit program that ended in April. Year over year, existing home sales rose 9.8% in June. Housing starts also dropped 5.0% in June, to a seasonally adjusted 549,000, the U.S. Department of Commerce reported.

Weekly jobless claims rise
Initial claims for unemployment benefits jumped 37,000 to 464,000 in the week ended July 17. The four-week moving average, which smoothes volatility and can give a better view of the overall trend, rose 1,250 to 456,000.

Wages lag inflation for year
Weekly wages for U.S. workers failed to keep up with the pace of inflation over the past year, according to a report issued by the U.S. Department of Labor. Median weekly earnings rose to $740, from $734 a year earlier, an increase of 0.8%, while the Consumer Price Index climbed 1.8%.

U.S. and global corporate news
Caterpillar’s profits, sales pick up
Strong sales by industrial company Caterpillar drove a 91% increase in profits as dealers restocked their inventories of heavy machinery amid a pickup in demand for construction equipment in Asia and North America.

UPS delivers much larger profit
In an indication of  a healthy resumption of economic activity, package shipper United Parcel Services reported a 90% rise in earnings and revenue growth of 13%, driven by Asian trade flows and a moderate U.S. economic recovery. UPS and its rival FedEx are seen as key barometers of international trade flows.

Ford’s new focus pays off
Automaker Ford reported a 13% increase in second-quarter earnings as its strategy to trim the number of cars and trucks it makes and to offer more features and charge higher prices paid off. A turnaround in Ford’s North American operations was key, as the group turned in a pretax profit of $1.9 billion, reversing an $899 million loss a year earlier. This was Ford’s fifth consecutive quarterly profit and its best earnings report in six years.

3M earnings rise
Manufacturer 3M posted a 43% rise in earnings as its sales rebounded to prerecession levels, benefiting from new products along with a growth in demand in emerging markets and in its niches in automotive manufacturing and consumer electronics.

Apple profit soars
Computer and consumer electronics firm Apple recorded a 78% surge in profit on very strong sales growth, including early sales of its iPad tablet computer and its latest version of the popular iPhone. Apple’s sales revenue for the quarter rose 61%.

Nokia hurt by smartphone competition
Nokia reported a 40% decline in second-quarter profit. The world’s largest mobile-phone maker had its hands full as rival Apple’s iPhone ate away at its market share in the high-end segment.

Roche profit jumps 58%
Swiss firm Roche Holding, the world’s largest maker of cancer medicines, reported a sharp rise in profits for the first half of its year because of healthy drug sales and robust growth in the sales of the company’s cancer-fighting drugs.

Xerox earnings jump 62%
Printer and copier maker Xerox posted a 62% increase in profits, surpassing expectations on improving demand in developing markets and from small and midsized businesses. The company reported growth in all business segments.

Global economic news
European bank stress test released
All eyes were on Europe this week, as the long-awaited stress tests for 91 European banks were released Friday. The stress test results were met with initial skepticism over whether they were rigorous enough, and the tests themselves may have failed to ease uncertainty about the health of the European banking industry. All but seven of the 91 banks passed the test. The seven included five Spanish banks, one German bank, and one Greek bank. This was better than the market’s expectation that about 90% of banks would pass, as reported in The Wall Street Journal. Banks that fail the test will need to raise money from investors or governments. Most observers believe the amount of capital raised will leave banks adequately funded.

Eurozone economic activity picks up
Activity picked up in both the manufacturing and service sectors in the eurozone, according to a survey by financial information firm Markit. The preliminary composite Purchasing Managers Index (PMI) rose to 56.7 from 56.0 in June. The manufacturing and services PMIs both rose and had been expected to decline. Meanwhile, the euro has risen about 8% against the U.S. dollar in recent weeks, reflecting increased confidence in this regional economy. However, the euro’s rise makes exports from Europe more expensive in global markets.

U.K. economy grows for third straight quarter
The U.K. economy grew 1.1% from the first to the second quarter this year, and it grew 1.6% when compared with the second quarter of 2009. This is the third consecutive quarter of U.K. economic expansion after a deep recession and the fastest pace of growth since the first quarter of 2006.

German business confidence hits three-year high
German business confidence turned strongly higher in July, registering a leap of 4.4 points to 106.2 in the Ifo compound index. Economists polled by Dow Jones Newswires had expected a decline to 101.5. Business confidence in Germany is now at its highest since 2007, and the increase in confidence was the greatest since German reunification in 1990.