Even though the week started off on a positive note, at least as measured by the major stock market indices, those gains were given back on Tuesday.
Although the domestic economy continues to look up and the eurozone appears to be on an upswing, the Organisation for Economic Co-operation and Development (OECD) trimmed global growth expectations to 3.4% from 2014 from its November outlook of 3.6%. For 2015, the OECD kept its forecast at 3.9%. One of the key drivers behind the negative revision is the drag of the Chinese and Japanese economies, as well as tighter credit conditions that will weigh on several emerging economies. Recent data from Markit Economics points to a sluggish Chinese economy, while Japanese manufacturing output and new business fell sharply following a recent increase in sales tax. How prolonged the Chinese and Japanese drags will be on overall global demand is the big question.
Digging into the OECD's forecast, it has the U.S economy growing 2.6% in 2014 and 3.5% in 2015, while the eurozone is expected to grow 1.2% this year before strengthening to 1.7% next year. Favorable moves in both ISM indices --- manufacturing and services -- confirm the domestic economy is on firmer footing. The fact that more people are falling out of the labor force, as revealed by Friday's April employment report that also confirmed wage stagnation, is raising questions over the consumer's ability to spend. Also weighing on that outlook is the sharp increase in beef and pork prices, cocoa and coffee, sugar and other inputs and foodstuff ingredients.
While those moves have been sharp and quick, comments from Tyson Foods (TSN) suggest the worst time for beef prices will come during the June-to-October period.
Despite concerns over the economy, many see GDP bouncing back in the current quarter after the dismal 0.1% initial print for the March quarter. According to CNBC, the average of nine forecasts point to 3.8% growth in the current quarter, with four of the nine forecasts calling for 4%-plus growth. While there is no doubt the economy will snap back following the severe winter weather in the March quarter, a snapped rubber band shoots higher only for a brief period of time. Looking at the first half of 2014, if the first quarter remains unchanged, or is revised up slightly, average growth in the first half would be in line with the 2-2.5% range the economy has averaged since 2009. Don't be surprised if, in a month's time, negative chatter about the tone or vector of the September quarter is heard.
Tyson Foods was touched on above, but it was hardly the only company issuing earnings and commentary that bears noting. Even though Veeco Instruments (VECO) reported its strongest orders in LED equipment in some time, the company guided to sequentially lower revenues. Mosaic (MOS) also reported a challenging environment, given steep year-over-year price drops in crop nutrients, which is not good for Potash (POT), CF Industries (CF) and Agrium (AGU).
Whole Foods Market (WFM), which saw a drop in same-store sales and trimmed its 2014 outlook, is seeing greater competition in the growing organic, natural and other specialty-nutrition categories. That bad news is good news for United Natural Foods (UNFI), which caters to WFM competitors such as Safeway (SWY), Giant, Kroger (KR), Wegmans, Costco (COST) and many others with more than 65,000 different products.
Lastly, Twitter (TWTR) gapped lower following the post-IPO six-month lock-up expiration, which was no real surprise. But the question is whether or not TWTR shares will see a bounce-back similar to the one Facebook (FB) began after falling from its IPO price to a low of $22.67 last June. With consensus 2015 earnings expectations of $0.25 per share for Twitter, I'd be a buyer of Facebook at current levels instead as it launches its video ad initiative and continues to monetize Instagram.
Between now and the end of the week, there are more company earnings to be had and even a smidge of economic data on the docket. But later today, Federal Reserve Chairwoman Janet Yellen heads to Capitol Hill for some Q&A on the state of the domestic economy and Fed policy. While some may be hoping for something new, odds are Yellen's comments will be very much in line with the Fed's FOMC statement last week. If anything, Yellen's phrasing will be key. Too many times we have seen the stock market hear what it wants to hear rather than listening to what the Fed chief is actually saying.
-- Written with Lenore Hawkins
