Friday 31 July Update.

US equity markets opened marginally lower today, despite the release of better-than-expected second-quarter US GDP figures.

Preliminary GDP figures released today revealed that the US economy shrank at an annualised pace of 1% in the second quarter, far better than Bloomberg’s median analyst estimate for a 1.5% contraction. Although encouraging, investors fretted about the prior quarter’s downward revision, which was amended to show a 6.4% annualised contraction as opposed to an originally reported 5.5% decline.

The data for second-quarter consumer spending data was also disappointing, showing a 1.2% annualised drop in the second quarter. This was substantially worse than Bloomberg’s expectations for a 0.5% fall and follows a 0.6% decline in the first quarter. The knock in spending was directly related to the rise in the number of jobless Americans over the review period.

‘We’re heading to a sluggish recovery,’ said Nigel Gault of IHS Global Insight. ‘We’ll get more support from government programs in the second half, but if you want a strong recovery you need a strong consumer, and we are not seeing that.’ [1]

A separate report released this afternoon revealed that the Chicago Purchasing Managers Index (PMI) rose to a better-than-expected reading of 43.4 in July from 39.9 the month before. This indicates that the pace of contraction in regional activity has continued to slow. PMI readings above 50 are expansionary.

The data also helped Wall Street relinquish earlier losses; by 3:30pm (London time) the Dow Jones Industrial Average was up by 28.42 points (+0.31%) to 9182.88, while the broader S&P 500 edged 1.85 points (+0.19%) higher to 988.6. The Nasdaq was also above its previous close at 1614, representing a 4.13-point (+0.26%) gain.

Also see Dow Jones Spread Betting.

Chevron Corp was in focus this afternoon. The second biggest US oil company unveiled a 71% plunge in second-quarter net income of $1.75 billion, or 87 cents a share. It also revealed that revenues tumbled 51% to $40 billion, as a result of declines in oil and gas prices. Although earnings were substantially worse than Bloomberg’s expectations for 92 cents a share, Chevron’s share price managed to edge 0.1% higher to $67.75.

‘They’re facing very difficult times because prices probably will head lower again,’ said Barry James of James Investment Research. ‘We don’t see any rapid recovery that’ll move energy prices back up.’ [2] Could this, perhaps, be an opportune time to short this stock?

In the meantime, shares in Constellation Energy Group fell 2% to $28.44 despite quarterly earnings that beat estimates and raising its full-year earnings forecast. Also beating forecasts was Dominion Resources, which produced a 52% rise in net income. Dominion’s shares eased 0.3% to $34.43.

Separately, there was quite a bit of attention on the ‘cash for clunkers’ program, in which US consumers can receive up to $4,500 for their gas-guzzling cars if they purchase a new fuel efficient model. White House economic advisor Christina Romer told CNBC that she could confirm that the program remains viable and operating. She said the White House would support Congressional efforts to inject a further $2 billion into the program.

[1] Source: Bloomberg News (31 July 2009)
[2] Source: Bloomberg (31 July 2009)

By Anthony Grech, Research Analyst, IG Index.

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