Economic data out on Thursday will probably be overshadowed by a busy day on the earnings front. Initial claims came in stronger than expected but may disappoint in coming weeks. China data coming out later tonight may show that government stimulus measures are starting to support economic growth.
Jobs Data Will Remain Strong, for Now
Initial claims for unemployment came out stronger than expected with just 361,000 people filing for unemployment. This beat expectations for 375,000 though total benefit rolls increased by 53,000 to 2.42 million. Despite the positive surprise this morning, claims have been dangerously close to the psychological 400,000 level for more than a month.
I wrote last week about the huge statistical adjustment in the recent jobs data, something that could send weekly initial claims up and monthly employment reports down in the near future. After this week, and seasonal adjustments stop supporting the data, there is an increased chance that we break this level. While this would not be a deal-breaker for the economy, it would be a strong reason for investors to take some profits after a 9.7% rebound since the beginning of June. Other economic reports, particularly manufacturing and services, have come in weak lately and the risk is firmly to the downside for the market.
General Electric (GE) is closely related to the pace of general economic growth through its diversified business lines. GE Capital accounted for the largest portion of 2011 sales with 33% of the total while energy infrastructure (31%), aviation (13%), healthcare (13%), home & business solutions (6%) and transportation (4%) helped to diversify sales. The company managed to grow revenue at 2.5% over the same period last year and beat earnings expectations by a penny to $0.38 per share. The shares trade for 14.7 times trailing earnings and pay a 3.24% dividend yield. The National Traffic and Safety Board reported Wednesday that the failure of a GE engine on a Boeing (BA) 787 Dreamliner last month was an isolated incident and not a sign of quality or safety issues.
Ford Motor (F) beat on earnings by $0.02 to $0.30 per share but still saw EPS decrease by 11.7% from the same quarter last year. Auto demand has been strong as consumers put off purchases during the recession and the age of cars on the road reach historic highs. Ford announced yesterday that it had agreed to buy the remaining stake in a heavy-truck maker in China. The company is expanding aggressively in China with five new plants and 15 new models in the country by 2015. The shares trade for 7.4 times trailing earnings and pay a 2.2% dividend yield.
Inventories Signal a Possible Slowdown
Wholesale inventories will also be reported today and will probably show another increase from last month. Inventories have been increasing steadily with a 0.3% gain in May, while sales have been slightly more volatile. Sales increased in each month between February and April but slid 0.8% in May. If the trend in higher inventories and weaker sales continues, this could be taken as a sign of weakness to come. Unit labor costs, reported yesterday, surprised the market expectations of 0.4% with a 1.7% increase in the second quarter.
China Still Focus for the Moment
China reported last night that inflation fell for the fourth straight month to an annual rate of just 1.8% giving policy makers more room for further stimulus should previous attempts not support the economy. Later tonight will bring important reports from the world's second-largest economy with industrial production and fixed asset investment. Lending data over the last two months has beaten expectations and may be a precursor to a modest pickup in the economy for the second half of the year.
Starbucks (SBUX) missed earnings estimates by $0.02 on a slowdown in same-store sales in the United States but is was the cut in fiscal 2013 guidance that sent the shares down 9.4%. The company expects to earn between $2.04 and $2.14 for the year, well below earlier expectations of around $2.28 per share. Shares trade for a relatively expensive 26.3 times trailing earnings and pay a 1.5% dividend yield. The company took out a big investment in mobile payment processor Square Incorporated with a $25 million stake and a commitment to use the company's application in its shops.
McDonald's (MCD) missed earnings estimates for the second quarter on weakness in the general economy and consumer spending. Revenue came in basically flat over the year, the first time in nine years that the company failed to report an increase in sales. While revenue dropped in other regions, the real shock was the 1.5% drop in sales in the Asia Pacific, Middle East and Africa region. Earnings came in at $1.32 per share, down 2.2% from the same period last year. Shares trade for 16.4 times trailing earnings and pay a 3.2% dividend yield.