MarketView for April 29

 

 

Summary  

 

Stock prices moved sharply higher, sending the equity indexes well into positive territory as the economic news of the day, while not cheerful it did offer up the prospect that improvement was on the way, an idea reinforced by the Federal Reserve's hopeful comments. Before the Fed's announcement, the S&P 500 broke through a significant resistance around the 875 level, a key technical point the S&P had tried but failed to break in recent days. The move marked the highest level for the broad index in 3-1/2 months. A sustained move above that level could lead to even more gains. For the S&P 500, Wednesday marked its highest finish since January 28.

 

The Dow scored its highest close since February 9, the day before U.S. Treasury Secretary Timothy Geithner put forth a bank rescue plan that disappointed investors with its lack of details. The Nasdaq, up 8.6 percent for the year, closed at its highest level since November 4. The day's market advance also capped off the first 100 days since U.S. President Barack Obama took office. The S&P 500 is up 2.8 percent since his inauguration.

 

A Commerce Department report released Wednesday indicated that gross domestic product shrank by a larger-than-expected 6.1 percent annual rate in the first quarter, following a 6.3 percent decline in the fourth quarter of 2008. The recession has already cost the economy 5.1 million jobs, driving the unemployment rate to a 25-year high of 8.5 percent in March.

 

Still, some data have supported Fed Chairman Ben Bernanke's mid-March suggestion that that some "green shoots" could be seen emerging from the economic wreckage -- even if only showing that the pace of contraction is slowing.

 

For example, first-time claims for unemployment aid have been running below the 26-1/2 year high touched in late March.

 

Similarly, while sales of previously owned homes fell in March, inventories of homes available for sale also fell, and some analysts saw the decimated housing sector, which is at the heart of the U.S. economic breakdown, as stabilizing.

 

The Fed's Beige Book of anecdotal reports from across the nation issued on April 15 said five of the U.S. central bank's 12 districts saw the pace of decline in the economy slowing.

 

Even the report on first-quarter GDP offered some hopeful signs. Consumer spending turned up and business inventories fell sharply, which could pave the way for future production. The central bank backed up the positive sentiment when its policy meeting concluded and the Fed said the economic outlook had improved modestly since its last meeting in March.

 

After the closing bell, shares of Visa were little changed in extended trading after the world's largest credit card network posted higher quarterly earnings as consumers used their debit cards more. Shares of tech bellwethers helped lift the Nasdaq, with Qualcomm up 2 percent at $$43.08 and Apple up 1 percent at $125.14.

 

Energy shares also provided support to stocks as the price of crude rose back above $50 a barrel following a much larger- than-expected decline in gasoline supplies. Energy behemoths Exxon Mobil and Chevron climbed, with Exxon up 2 percent at $68.44 and Chevron up 2.4 percent at $67.56.

 

Fed Says Economy Improving Albeit Slowly

 

The Federal Reserve said on Wednesday the pace of deterioration in the U.S. economy appeared to be slowing but that it would continue to keep interest rates exceptionally low to ensure recovery. Wrapping up a two-day policy meeting, the Fed said it had decided to hold benchmark overnight interest rates in the zero to 0.25 percent range reached in December.

 

After their last meeting on March 17-18, Fed officials had offered no hint the recession was abating and they announced plans to pump an additional $1.15 trillion into the economy.

 

On Wednesday, no new actions were announced, although the central bank's policy-setting committee repeated its pledge to use all available tools to promote recovery and reiterated a vow to keep rates low for an extended period.

 

"Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower," the Fed said, suggesting it had detected an improvement in the outlook.

 

Some easing of conditions in financial markets strained by bad debts contributed to the modest lifting of the gloom, the Fed said. However, it cautioned that activity is likely to remain weak for a time with job losses mounting, households pinched by diminished wealth and credit still hard to get.

 

At their last policy meeting on March 17-18, policy-makers reacted to a sense that the economy was deteriorating quickly with a massive expansion of their credit-easing efforts. The Fed announced it would buy $300 billion in long-term U.S. government debt and increase purchases of debt and securities issued by government-supported mortgage agencies by $850 billion in a bid to lower mortgage and other interest rates.

 

Policy-makers said on Wednesday they would adjust purchases in response to the changing economic outlook and developments in financial markets. Having cut the overnight borrowing rate between banks to a range of zero to 0.25 percent in December has forced the Fed to resort to a series of unconventional measures to try and reduce borrowing costs in an effort to stimulate borrowing and credit creation.

 

Crude Prices Suggest Improving Economy

 

Oil prices climbed toward $51 per barrel on Wednesday as optimism that the recession could be easing raised expectations of a rebound in energy demand. A report showing a sharp decline in gasoline stockpiles last week added to oil's gains, sparking concern weak inventories just prior to the peak summer driving season.

 

Sweet domestic crude futures for June delivery settled up $1.05 per barrel at $50.97. London Brent crude settled up 79 cents per barrel at $50.78. The gains came hopes the recession may be abating, even as a report showed a dismal 6.1 percent contraction in the economy during the first three months of the year. However, the Fed reinforced that idea, stating on Wednesday that the pace of economic deterioration appeared to be slowing.

 

The oil market also found support from the Energy Information Administration report showing a surprise 4.7-million-barrel decline in nationwide gasoline inventories that eliminated a supply surplus heading into peak driving season. The EIA's weekly report also showed a 4.1-million-barrel increase in crude oil stockpiles last week, bringing inventories to a fresh 19-year high.

 

The gradual global spread of swine flu failed to dent the oil market Wednesday although prices for jet fuel were generally lower on concerns about the impact the health emergency would have on air travel. Oil prices remain about $100 below peaks hit last July as the global economic downturn shrank global energy consumption levels for the first time in a quarter century.

 

GDP Falls More Than Expected

 

Economic growth shrank by a surprisingly steep 6.1 percent in the first quarter, hit by a record plunge in business inventories and sinking exports, but there were signs of recovery in the report with the economy on track to emerge from recession in the second half of the year.

 

According to the Commerce Department, inventories were drawn down by a record $103.7 billion, potentially good news for the economy because it suggests businesses have cut their stockpiles of merchandise to levels that will let them start placing new orders, stimulating production.

 

While the drop in gross domestic product at an annual rate of 6.1 percent, which followed a fourth-quarter decline of 6.3 percent, was much steeper than expected, investors were cheered as they saw it laying the groundwork for a recovery.

 

The Federal Reserve, in a statement following a regular two-day meeting, said the pace of deterioration in the economy appeared to be slowing and that the U.S. central bank would continue to keep interest rates exceptionally low for an extended period.

 

GDP, which measures total goods and services produced within the nation’s borders, has now declined for three straight quarters for the first time since the recession of 1974-1975. That downturn, which started in 1973, lasted 16 months.

 

The Fed, which left its benchmark overnight lending rate in the zero to 0.25 percent range on Wednesday, has pumped about a trillion dollars into the market to help credit markets and break the economy's downward spiral.

 

The inventory plunge accounted for 2.79 percentage points of the drop in GDP. Excluding inventories, GDP contracted 3.4 percent. Business investment, which is typically made when companies are planning production increases, was down by a record 37.9 percent in the first three months of this year.

 

However, consumer spending, which accounts for over two-thirds of all economic activity, rose 2.2 percent after collapsing in the second half of 2008. Consumer spending was bolstered by a 9.4 percent jump in purchases of durable goods, the first advance after four quarters of decline.

 

Home-building activity slid at a 38 percent rate, the biggest decline since the second quarter of 1980. There are signs, however, that a big drop in construction activity is starting to slow and analysts expect this component to begin showing improvement in the quarters ahead.

 

Exports collapsed 30 percent, the biggest decline in 40-years, after dropping 23.6 percent in the fourth quarter as recession took hold around the globe. The decline in exports knocked off a record 4.06 percentage points from GDP.

 

The Commerce Department said a $787 billion government package of spending and tax cuts, approved in February, had little impact on first-quarter GDP. Part of the stimulus package is designed to bolster state and local government spending, which fell at a 3.9 percent rate in the first quarter, the largest drop since 1981's second quarter.

 

A separate report showed U.S. home loan applications fell 18.1 percent last week to the lowest level since mid-March, even as mortgage rates clung to record lows.

 

Wal-Mart Makes For a Good Economic Indicator

 

Wal-Mart indicated on Wednesday that customers are spending more on discretionary items as payroll taxes come down and gasoline prices fall. Wal-Mart is seeing customers treat themselves to items such as sporting goods and bedding, using the money they have now that those costs have come down, CEO Eduardo Castro-Wright said. Wal-Mart also had a strong Easter, an important season for the chain, Castro-Wright said.

 

The recent economic stimulus package included lower withholding taxes for many Americans. At the same time, gasoline prices are more than 30 percent lower this year than last year, he said.

 

Wal-Mart has attracted more customers in the recession as people look to save money on everyday items such as food and diapers. Still, food is not the fastest growing category at Wal-Mart stores in the United States. "Our best performing categories right now are things like sporting goods, bedding, towels," Castro-Wright said.

 

In February, 17 percent of traffic growth at Wal-Mart came from new households and the majority of those households have annual income of more than $50,000, Castro-Wright said. Those new customers are spending more than the average Wal-Mart shopper, who typically has a lower annual income.

 

"The average ticket for those customers is 40 percent higher than the rest of the chain," Castro-Wright said.

 

Still, Wal-Mart continues to see an impact from the paycheck cycle, the phenomenon where sales rise at the beginning of the month when customers have gotten their paycheck or government checks.

 

That trend is seen in products such as diapers, where consumers will buy larger "value packs" at the beginning of the month, then switch to smaller packs at the end of the month. While the larger packages cost less per diaper, the smaller packages cost less overall.

 

Wal-Mart saw a 7 percent increase in sales in Easter-related categories at stores open at least a year, Castro-Wright said. The shift in Easter to April this year from March last year hurt March same-store sales, Castro-Wright noted.

 

Wal-Mart Stores plans to release April sales data on May 7.