Mid-Day Recap: Stocks Struggling to Maintain Monday Gains

The main events of the morning were soaring producer prices, a better-than-expected retail sales report (driven, however, by fuel costs), slipping business inventories, and record profits from Goldman Sachs in the second quarter. 

Market reaction to the mixed news has been volatile in the first 135 minutes of trading. Stocks were mostly lower in the first hour but in recent minutes have approached flat levels and begin to go postive again, in part owing to optimism from the Goldman. 

As of 11:45 am, the Nasdaq is +0.27% to 1451, the Dow is +0.30% to 8356, while the S&P 500 is trading up 0.45% lower at 905.

The day began with twin releases at 8:30, each driven above consensus forecasts by soaring energy prices in June.

Retail Sales beat the consensus by one-tenth with a 0.6% gain in June, led by a 6% surge in gasoline prices. Motor vehicle sales & parts also contributed a 2.3% gain, but overall analysts said the report indicated that consumption remains soft.

“In June, as in May, a jump in gasoline prices pulled up the headline number; excluding gasoline, sales were lackluster,” noted Patrick Newport from IHS Global Insight. “Retail sales have been flat since January, after falling off a cliff in the second half of 2008. Sales have stabilized across the board except for sales at furniture and home furnishings stores, which continue to decline.”

Looking ahead, Newport added: “Based on today's report, we expect that real consumer spending will decrease at a slight 0.3%-0.5% annual rate in the second quarter—after posting a 1.4% gain in the first quarter.

Higher energy prices also pushed up Producer Price Index, which doubled the consensus expectation with a 1.8% advance in June. Energy prices jumped 6.6% in the month, building on a 2.9% gain in May.

Reaction to the report was muted, however, given that energy prices have fallen in the past two weeks. 

With energy and food prices excluded, core PPI moved up 0.5%, sending the annual rate to +3.3%.

“Energy prices were clearly the driver of higher prices across all levels of production in June,” said TD strategist Charmaine Buskas. “But the huge across the board gains in June PPI are likely to be at least partially reversed in July, as energy prices continue to unwind.”

At 10 am, the Business Inventories report for May showed a 1% drop, extending the 1.3% cut to inventories in April. Business sales also declined 0.1% in the month, allowing the inventory-to-sales ratio to slip one-tenth to a seven-month low at 1.42.

“Inventories are declining faster than business sales, resulting in falling aggregate inventory-sales ratios over the last three months,” said analysts from RDQ in a client note. 

Aside from data, the major news of the morning came as the fifth biggest bank in the US posted record profits in the midst of the credit crunch.

Revenue from trading and underwriting stock helped Goldman Sachs post net revenue of $13.76 billion in the second quarter, putting net income at $3.44 billion, far higher than the $2 billion figure predicted in the media earlier in the week. Earnings per share were $4.93 per share, easily beating the consensus forecast of $3.65.

"Our role as an intermediary focused on making markets for buyers and sellers helped drive our performance," said CEO Lloyd Blankfein.

He added: “While markets remain fragile and we recognize the challenges the broader economy faces, our second-quarter results reflected the combination of improving financial market conditions and a deep and diverse client franchise.”

The FT noted: “Had it not been for a $426m dividend payment made in connection with the repayment of government funds, Goldman would have earned $5.71 per share for the quarter.”

The $13.8 billion revenue compares with $9.43 billion in Q1. In the second quarter of 2008, Goldman revenue was $9.42 billion.