Economic Reports Spoil Friday's Market

Friday’s economic reports had the exact opposite effect on the stock market as Thursday’s economic data. In addition to the three monthly reports which were mildly disappointing, the International Monetary Fund’s report on the United States had the most significant impact on the stock market. The IMF’s Concluding Statement of the 2013 Article IV Mission to the United States of America brought some awful news: The IMF lowered its 2014 growth forecast for the United States from 3.0 percent to 2.7 percent. The 1.9 percent growth forecast for 2013 was unchanged. It was somewhat amusing to see the IMF offer a less-than-subtle hint to the Federal Reserve: Ix-nay on the apering-tay.

The three monthly economic reports included a disappointing Thompson Reuters / University of Michigan Consumer Sentiment Index for June. Although economists were expecting the index to remain unchanged from the May reading of 84.5, the preliminary reading for June had dropped to 82.7. Nevertheless, the May reading was a six-year high and the preliminary June reading was the second-highest in eight months.

The Federal Reserve’s monthly report on Industrial Production and Capacity Utilization indicated no change in May from April’s 0.4 percent decline to 98.7. Although manufacturing production rose 0.1 percent, the reported results fell short of economists’ expectations for industrial production to increase by 0.2 percent and for capacity utilization to rise to 77.9 percent.

The Dow Jones Industrial Average (DIA) fell 105 points to finish Friday’s trading session at 15,070 for a 0.70 percent decline. The S&P 500 (SPY) declined 0.59 percent to close at 1,626.

The Nasdaq 100 (QQQ) fell 0.64 percent to close at 2,943. The Russell 2000 (IWM) dropped 0.80 percent to 981.

In other major markets, oil (USO) jumped 1.17 percent to close at $34.73.

On London’s ICE Futures Europe Exchange, July futures for Brent crude oil advanced by 88 cents (0.84 percent) to $105.83/bbl. (BNO).

August gold futures advanced by $11.80 (0.86 percent) to $1,389.60 per ounce (GLD).

Transports backed into a tree on Friday, with the Dow Jones Transportation Average (IYT) declining 0.55 percent.

Japanese stocks rebounded on Friday as a result of encouraging outlook reports from a number of analysts, who characterized the recent stock market swoon as a healthy correction. The rally proceeded despite the fact that the yen strengthened to as much as 94.69 per dollar. The strengthened yen restrained a stock advance which had sent the Nikkei 225 Stock Average to a 3 percent jump, earlier in the day. A stronger yen causes Japanese exports to be less competitively priced in foreign markets (FXY). The Nikkei 225 Stock Average advanced 1.94 percent to 12,686 (EWJ).

The major European stock indices advanced on Friday after a report from Eurostat disclosed that the Eurozone’s annual inflation rate increased to 1.4 percent from 1.2 percent in April. Although the reading fell short of the European Central Bank’s 2 percent target, it was low enough to leave the ECB room for future accommodation efforts. The news was welcomed by investors on the same day as another report from Eurostat indicated that the number of employed persons in the Eurozone declined by 0.5 percent in during the first quarter of 2013, compared with the fourth quarter of 2012 (VGK).

The Euro STOXX 50 Index finished Friday’s session with a 0.21 percent advance to 2,667 – remaining below its 50-day moving average of 2,718. Its Relative Strength Index is 39.03 (FEZ).

In China, stocks broke out of an eight-day slump as a result of Thursday’s better-than-expected report on retail sales from the United States Department of Commerce. Because America is China’s largest export market, the news was a welcome relief from last week’s disappointing reports on the Chinese economy. The Shanghai Composite Index climbed 0.65 percent to 2,162 (FXI). Hong Kong’s Hang Seng Index advanced 0.39 percent to 20,969 (EWH).

Technical indicators reveal that the S&P 500 remained above its 50-day moving average of 1,613 after closing at 1,626. Some bears might insist that a head-and-shoulders pattern has now formed on the chart, which would signal a decline. Others may point out that the right shoulder appears to have broken above the neckline, although if the S&P 500 should close below its 50-day moving average, that will not matter. A selloff would likely ensue. Its Relative Strength Index declined from 52.03 to 49.04. The MACD remains below the signal line and both are on descending trajectories, suggesting the likelihood of a further decline. However, the MACD histogram is on an ascending trajectory, back toward the zero line.

For the day, all sectors were in negative territory, except for the utilities sector, which made a 0.14 percent advance. The financial sector took the hardest hit, falling 1.29 percent.

Consumer Discretionary (XLY): -0.32%

Technology: (XLK): -0.74%

Industrials (XLI): -0.67%

Materials: (XLB): -0.72%

Energy (XLE): -0.97%

Financials: (XLF): -1.29%

Utilities (XLU): +0.14%

Health Care: (XLV): -0.16%

Consumer Staples (XLP): -0.25%

Bottom line: The IMF report on the United States provided some disappointing GDP projections going out to 2018 – a year when economic expansion will retreat to a mere 2.7 percent from 3.4 percent in 2017. Investors should have been encouraged by the fact that the IMF gave a nudge to the Federal Reserve in advance of the June 18-19 FOMC meeting: Don’t mess with quantitative easing yet or the rest of the world will suffer the consequences.

Disclaimer: The content included herein is for educational and informational purposes only, and readers agree to Wall Street Sector Selector's Disclaimer, Terms of Use, and Privacy Policy before accessing or using this or any other publication by Wall Street Sector Selector or Ridgeline Media Group, LLC.