Few Fundamentals turned Investors' Focus on Companies' Earnings, as the Earnings Season Continues to Impress

Saturday, April 24, 2010

Few fundamentals were released from the U.S. economy throughout this past week, and accordingly investors turned their focus to equity markets, where several U.S. companies announced their financial results for the quarter ending March 2010, the data though signaled that economic activity continues to improve as the recovery prevails, while most of the earnings released so far signaled strong performance by U.S. companies.

The start dear reader was with the leading indicators index which was released for the month of March, where the index is believed to measure future economic activity in the upcoming 3 to 6 months, the leading indicators expanded by 1.4% from the prior revised estimate of 0.4% and well above estimates to signal that the U.S. economy continues to walk down the path of recovery.

The U.S. economy continues to show more signs that the worst recession since WWII is coming to an end, though the economy is still facing some challenges ahead including elevated unemployment and tightened credit conditions, as both continue to weigh down on income and spending levels, yet so far income and spending remained resilient, where both continued to rise at a moderate rate.

Meanwhile, the producer price index was also released to show that inflationary pressures are still under control, though headline inflation seems to be picking up amid the recent increase in energy prices, however, core inflation remains rather subdued, where the core PPI increased by an annualized 0.9% only, though headline PPI increased by an annualized 6.0%.

The Federal Reserve Bank expects inflation to remain subdued over the upcoming period, as elevated slack levels in economic activity continue to push prices lower, while the outlook for inflation remains stable and that will help the Feds in their case, as they are trying to make sure that the recession is finished once and for all, and that the economy can fulfill its long term growth potentials.

Moreover, data from the housing market provided hope for investors and confirmed the Feds’ earlier statement in the Beige Book, as they noted an increase in housing market activity. The existing home sales index increased well above expectations in March by 6.8% to an annual rate of 5.35 million units, while the new home sales index also confirmed this improvement by showing a significant rise of 26.9%.

The durable goods orders index showed some disappointment after dropping by 1.3% opposing expectations for a rise, however, durables that exclude transportation increased well above expectations.

Meanwhile, U.S. companies continued to impress over the course of this week, where major companies from different sectors announced strong results, as most companies managed to beat expectations, and that provided a strong base for stock markets to extend the rally, where the Dow Jones Industrial Average continued to trade above 11000, while the S&P 500 index extended its gains above 1200.

The U.S. dollar on the other hand fluctuated against its major counterparts, where pessimism from Greece’s debt problems supported the U.S. dollar and helped it to gain against major currencies, especially the Euro, while gold and oil also fluctuated throughout the week, though both headed generally lower as a result of the dollar’s strength.