MarketView for April 1

 

 

Summary 

 

Stock prices moved sharply higher on Wednesday as factory and home sales data raised hopes the economic downturn is moderating. Companies such as Caterpillar and US Steel rose sharply as a result of data indicating factory activity in March fell at a slower pace than the month before, while pending home sales rose more than expected in February. The data was enough to counter a report that indicating private-sector job losses accelerated in March to 742,000, heightening concerns ahead of the government's monthly payroll numbers on Friday.

 

Caterpillar was up 3.7 percent at $28.99 and U.S. Steel was up 7.1 percent at $22.62, while Dow Chemicals rose 4.5 percent to $8.81, on news it had completed a merger with Rohm & Haas, thereby creating a specialty chemicals and advanced materials company.

 

Ford saw its share price chalk up a gain of 4.2 percent to $2.74 after the company indicated that March sales declined 41 percent, which was better than expected. The company said the pace of the economic decline may be moderating. General Motors executives also cited March sales data as showing the "first signs of brightening" in the auto industry, GM's stock pared losses even as investors fear the struggling automaker may be headed for controlled bankruptcy.

 

GM's share price was down 0.5 percent to $1.93, well off its session low at $1.58. The New York Times reported that the government is seeking to ease GM into a "controlled" bankruptcy, but a senior official said the White House remains optimistic that GM can restructure without that fairly drastic action.

 

In the financial sector, JPMorgan Chase closed up 5.9 percent to $28.14 while Goldman Sachs gained 4 percent to close at $110.29. Shares of homebuilders were also among the day’s top gainers following the home sales data.

 

However, gains were tempered by declines in the health-care sector after Celgene Corp forecast first-quarter earnings below estimates, prompting at least four brokerages to cut their price target on the stock. Celgene was the top drag on the Nasdaq, down 13.4 percent at $38.47. Healthcare  was the only one of 10 sectors on the Nasdaq to end the day lower.

 

Crude Prices Fall

 

The price of crude oil futures fell more than $1 per barrel on Wednesday, on data showing crude stocks were at a fresh 16-year high after growing again last week. Crude futures settled down $1.27 per barrel at $48.39, eroding Tuesday's 2.6 percent gain. London Brent crude settled down 79 cents per barrel at $48.44. The Energy Information Administration data showed a 2.8 million barrel increase in crude oil inventories. Gasoline stockpiles increased by 2.2 million barrels, running counter to forecasts of a 1.4 million-barrel decline.

 

OPEC reached agreements in September to remove 4.2 million barrels per day to stem the slide in oil prices, and has delivered almost 80 percent of the promised reduction. OPEC production has now declined for seven consecutive months.

 

In deciding not to lower its output targets further in March, OPEC said it was giving the world a chance to recover from the economic downturn and looked ahead to this week's G20 meeting in London to stimulate the economy and help shore up fuel demand. Meanwhile, OPEC, which meets again at the end of May to reassess the situation, has taken out enough oil to support higher prices.

 

In the immediate term the demand outlook is weak, and a flurry of bearish economic news emerged on Wednesday that weighed on stock markets and added pressure on oil prices.

 

Economic Contraction Lessens

 

Mounting job losses and plans to lay off more workers continued to weigh on the economy in March, which could lead to a grim labor market report from the government on Friday. Meanwhile, other reports indicated that the contraction in factory activity slowed in March, while construction spending fell at a slower-than-expected rate in February..

 

Private sector job losses accelerated in March to 742,000, exceeding expectations, according to a report by ADP Employer Services on Wednesday. February's number was revised up to 706,000 job losses from a previously reported 697,000.

 

However, the Labor Department's non-farm payrolls report, due out on Friday, accounts for public sector jobs as well as private and the concern now is that current forecast of 650,000 jobs lost in March may be too low.

 

Current reports indicate that the worst of the current 15-month, housing-led recession is over -- but that has been scant comfort to the jobless. Separate data showed planned layoffs fell in March to their lowest in six months, but quarterly job losses are at the highest in more than seven years as the recession continues to take a toll.

 

Scheduled job losses fell 19.3 percent in March to 150,411, the lowest since October, but the more than 578,000 cuts so far in 2009 are the most for any quarter since the last one of 2001, outplacement company Challenger, Gray & Christmas said in a monthly report.

 

The news on the labor market, amid the overall economic slump which is likely to become the longest since the Great Depression of the 1930s, helped cap Wednesday’s gains on Wall Street. U.S. government bond prices, which generally benefit from signs of economic weakness, pared losses in the immediate wake of the ADP release but were lower later in the New York session.

 

The good news was a report indicating that factory activity decreased at a slower pace in March than in the previous month, according to data from The Institute for Supply Management released on Wednesday. With the current reading of 36.3, the index has been below 50, indicating contraction, for 14 straight months, though new orders rose to 41.2 in March from 33.1 in the prior month.

 

However, the employment component of the factory report was posted at 28.1, indicating ongoing job losses.

 

In other economic releases, construction spending fell at a slower-than-expected rate in February, government data showed on Wednesday, suggesting that the pace of deterioration was beginning to moderate.

 

The Commerce Department said spending on construction projects slipped 0.9 percent to a seasonally adjusted annual rate of $967.5 billion, the lowest since March 2004, after falling by a revised 3.5 percent in January.

 

Pending sales of existing homes rose modestly in February but the market is still weak in the face of continued declines in home values and a recession, the National Association of Realtors said on Wednesday.

 

NAR's Pending Home Sales Index, based on contracts signed in February, was up 2.1 percent to 82.1 from an index of 80.4 in January. "Pending home sales have a way to go for there to be a meaningful increase," said NAR chief economist Lawrence Yun. Yun said "it will take a few months" for affordability to work through the market and burn off excess housing stock.

 

Pianalto of the Federal Reserve sees 2010 economic recovery

 

Cleveland Fed President Sandra Pianalto said on Wednesday she expects the economy to stabilize this year and begin to recover in 2010.

 

"I expect economic conditions to stabilize by the end of the year and then begin to recover next year as the fiscal stimulus boosts spending and as we work off excess inventories," Cleveland Fed President Sandra Pianalto said in a speech to a bankers' group.

 

The economy shrank by 6.3 percent in the last three months of 2008, the worst showing since 1982, and unemployment rose to a 25-year high of 8.1 percent in February. job losses will likely accelerate in March. The downturn has spread around the world, with international economic organizations forecasting declines in worldwide growth this year.

 

The Fed has cut interest rates to near zero and pumped hundreds of billions of dollars into the economy to boost lending since the crisis exploded in the summer of 2007. At the same the government has put into place a $700 billion bank bailout package and a $787 billion spending and tax cut bill. Lawmakers and policymakers are also debating ways to strengthen financial system oversight to ensure a similar crisis can be avoided in the future.

 

Pianalto said the Fed continues to aggressively use all the tools at its disposal to provide liquidity to financial markets and promote an economic recovery. At the same time, she said the Fed will be careful that its lending does not expose the U.S. central bank to losses as a result of a recently launched program aimed at boosting consumer and small business lending.

 

"Any type of security that's not a Treasury security is riskier, but we're taking prudent steps to make sure that we're mitigating any credit risks," she said. "We are ultimately responsible to taxpayers."

 

That program, the Term Asset-Backed Securities Loan Facility, could expand to lending of $1 trillion to support securities of new and recently originated auto, credit card, student and small business loans. The Fed hopes TALF will jolt comatose securitization markets to life, and has said it is willing to expand its balance sheet aggressively to fund the program.