By Wasif Latif
Vice President, Equity Investments

Foreign central bank easing announced this week failed to spark fireworks in world stock markets.

Investors appeared to view the combined announcements of the European Central Bank (ECB), the Bank of China and the Bank of England, all of which lowered interest rates or expanded bond purchases this week, as a sign that monetary authorities are concerned that recessionary conditions in Europe and the slowdown in China may worsen.

Domestically, signs of a decelerating U.S. economy continue. This week’s ISM Manufacturing Purchasing Managers Index survey came in at a disappointing 49.7 (readings below 50 indicate contraction vs. expansion), far below consensus and the worst reading since the summer of 2009. Following a relatively strong winter, the employment picture has also slowed dramatically, as evidenced by Friday’s subpar announcement that only 80,000 jobs were added in June, not enough to put a dent in the current 8.2% unemployment rate.

Europe continues to struggle with its slow-motion sovereign debt crisis. Although we were encouraged by the ECB’s drop in its key policy rate to 0.75%, we suspect the institution will face tough going in its efforts to get the region’s generally undercapitalized banks to make loans. Italy and Spain’s 10-year bond yields are rising and approaching 6% and 7%, respectively, levels that could create solvency problems for these two major countries if they persist.

It appears that the worldwide economic slowdown is having an effect on corporate profits. The second-quarter earnings season begins next week, and we note that year-over-year growth is expected to decelerate from 13% in the first quarter to about 2% in the second quarter. Analysts have been busy slashing their expectations recently, and we would not be surprised to see a year-over-year decline in earnings for the S&P 500 index in the coming quarters.

Reacting to slowdown concerns, the S&P 500 index declined 0.55% on the week to close at 1,355. U.S. Treasury bonds rallied, with the yield on the 10-year falling falling 0.09% to close at 1.55%. Gold declined by 0.8% to close the week at $1,584 an ounce.

Economic Releases Scheduled for Next Week:

Consumer credit
Initial jobless claims
Producer price index
University of Michigan Consumer Confidence Survey

This material is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing.



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