MARKET TAKES A BREATHER

Stocks opened down this morning (Dow -67 pts; SPX -.47%). At the sector and industry level, most everything is in the red. Attention is focused on individual companies reporting earnings, some of which are up nicely. European stock markets closed down by about one-third of a percent in the wake of a European Central Bank (ECB) policy meeting (see below). Asian markets traded higher overnight. The dollar is flat at the moment, and commodities are mostly lower. WTI crude oil is up about .6% to trade around $56.24/barrel. Bonds are trading broadly lower as yields tick upward. The 10-year US Treasury Note yield is hovering around 2.07%.

Factory orders for big-ticket manufactured goods were surprisingly strong in June, led by commercial aircraft and autos. In fact, orders for vehicles and auto parts shot up 3.1%, the biggest monthly gain since July 2018. Durable goods orders excluding defense equipment & aircraft rose 1.9% in June from prior month levels. Gains are a welcome surprise after a pretty rough spring. Corporate capital spending has been slowing over the past year, with factory orders down and inventories climbing. June’s rebound may very well be the beginning of a turnaround.

The ECB’s policy-making committee declined to lower interest rates as investors had expected (see Tuesday’s market update). ECB President Mario Draghi explained that chances of an economic recession in Europe are “pretty low.” Still, he said monetary stimulus is needed to support economic growth. So the ECB is walking a thin line between hawkish and dovish policy. Bond traders were caught off-guard and now wonder if maybe the US Federal Reserve will do the same thing when it meets next week (i.e. no rate cut but lip service to economic weakness & risk). Investors generally expect the Fed to act with an “insurance” rate cut to ensure the economic cycle can continue. Bloomberg economist Cameron Crise says, “For my money, the most likely outcome at this juncture is something akin to 1998, when a dose of FOMC insurance re-steepened the curve after a brief (and shallow) inversion to extend the expansion by another couple of years.”

Raytheon (RTN) reported strong second quarter results, beating Wall Street revenue & earnings forecasts. Demand for missile systems is particular strong, and the ratio of new orders to shipped orders climbed to 1.32. Management raised its 2019 revenue & profit forecasts. The stock is up 4% this morning. The company is on track to merge with United Technologies (UTX) next year.

Dow Chemical (DOW) is down 2% after reporting mixed second quarter results. Sales were lower than expected due to lower prices and volumes in some segments of the chemicals market. There was some good news in the form of cost cuts to help maintain profit margins, but it’s clear that the business outlook isn’t positive. Management announced a 20% reduction in planned capital spending. “Looking ahead, we still see global growth, but the pace of that expansion has slowed, as buying patterns remain cautious due to ongoing trade and geopolitical uncertainties.” The CFO explained that consumer-facing end markets are holding up well, but commercial end markets (and especially China) are slowing.

Align Technologies (ALGN) disappointed investors with its earnings report. Sales of the company’s flagship Invisalign product fell short of expectations. Management called out two reasons for weakness: competition is heating up, and consumer spending in China is slowing. The outlook remains “more cautious.” The stock plunged 26% this morning.


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