MarketView for April 14

 

 

Summary 

 

The day’s economic data was a discouragement to the financial markets on Thursday with investors concentrating their attention on some of the companies making up the Dow Jones industrial average, such as Coke, Kraft and Merck, along with some mild interest in energy shares as crude oil futures gained more than 1 percent to trade above $108 a barrel.

 

The S&P 500 index fell almost 1 percent in early trading but found support near 1,300, a level that attracted buying interest in early March. Failing to hold that level could trigger a test of the benchmark's 2011 low near 1,257.

 

Stocks have sagged lately as economists have lowered forecasts for the nation’s economic growth rate. Some economists are forecasting a rate as low as 2.9 percent, a large drop from earlier forecasts that in some cases were above 3.5 percent.

 

Adding to the bearish sentiment, Google saw its share price fall 5 percent to close below $550 in extended trading after the company's first-quarter profit fell short of Wall Street's target as operating expenses surged.

 

A Senate investigation of Goldman Sachs hurt the company and some of its peers, while an unexpected rise in jobless claims added to bearish sentiment that kept gains in check. Goldman ended the day down 2.7 percent to close at $155.79 and was a drag on the S&P financial sector.

 

Further weighing on financials, major housing lenders agreed late on Wednesday to costly fixes of their foreclosure practices as part of a settlement with bank regulators that jumped ahead of a states' probe.

 

Adding to the boost from the energy sector as oil prices rose, natural gas producer and pipeline company El Paso said it will develop a shale oil field without a partner. El Paso ended the day up 5.5 percent to close at $18.26 to lead the gains of companies in the S&P energy sector.

 

Weighing on the tech sector, Fairchild Semiconductor fell 4.5 percent to $18.31 as it disappointed investors after it said last month's earthquake that threw Japan's electronics supply chain into disarray has yet to generate new business for the company.

 

Supervalu forecast fiscal-year earnings above Wall Street's expectations after its quarterly profit fell less than feared. The supermarket operator's shares rose 16.9 percent to $10.61.

 

Although the overall stock market's activity was tepid in Thursday's regular session, the U.S. market for initial public offerings showed signs of strength. Shares of Arcos Dorados Holdings, a large South American franchisee of fast-food chain McDonald's, rose 24.7 percent to $21.20 in its stock market debut as investors clamored for exposure to the famous brand in a region with booming consumer spending. McDonald's, a Dow component, rose 0.2 percent to $77.07.

 

The stock of Zipcar rose 55.6 percent to $28 on the Nasdaq in its first day of trading as investors bought into the leader of the small but growing car-sharing industry.

 

Ford Motor fell 1.1 percent to close at $14.81 after the company agreed to expand a recall of the best-selling F-150 pickup trucks. Regulators said the recall was due to a possible short circuit that could cause airbags to deploy unexpectedly.

 

On the economic front, a government report showed a surprising increase in jobless claims, raising some questions regarding the health of the labor market recovery. The core Producer Price Index rose faster than expected in March as fuel prices moved sharply higher, adding to concerns about inflation.

 

The volume of shares changing hands remained low with about 6.91 billion shares trading on the three major equity exchanges, a number that was well below last year's estimated daily average of 8.47 billion shares.

 

Economic News Could Have Been Better

 

Prices paid by factories picked up pace in March as the disruption caused by Japan's earthquake began to be felt in the auto industry and fuel prices rose strongly. Core producer prices rose slightly faster than expected in March from February and the increase from a year ago was the largest since August 2009.

 

According to are report by the Labor Department released on Thursday, the seasonally adjusted core PPI rose 0.3 percent after gaining 0.2 percent in February. Light trucks prices advanced 0.7 percent, the biggest rise since July and accounted for a third of the gain in the core PPI. Passenger vehicle prices increased 0.9 percent, the largest increase since June 2009.

 

In the 12 months to March, the core producer price index rose 1.9 percent, the largest increase since August 2009 and an increase when compared to February's 1.8 percent rise. In the 12 months to March, producer prices overall rose 5.8 percent, the largest gain in a year. The monthly gain slowed to 0.7 percent, below the 1.0 percent expected by economists.

 

Gasoline prices were up 31.2 percent in the year to March, a reflection of the recovery in the global economy and the concerns about the unrest in the Middle East and North Africa. Energy prices, which rose 2.6 percent, accounted for nearly 90 percent of the increase in wholesale prices last month. Energy prices rose 3.3 percent in February. Gasoline prices rose 5.7 percent after increasing 3.7 percent in February. Food prices fell 0.2 percent, the first decline since August.

 

Although rising gasoline prices are adding to inflation pressures, the Federal Reserve predicts they will prove transitory. Fed officials have said they would act if necessary to ensure that an inflation psychology does not take root.

 

However, producers are struggling to pass higher costs to consumers because the labor market remains weak and wage growth is subdued.

 

A second report from the Labor Department showed initial claims for state unemployment benefits rose 27,000 to a seasonally adjusted 412,000, well above economists' expectations for a fall to 380,000. Meanwhile, the four-week moving average of unemployment claims saw an increase of 5,500 claims, climbing to a total of 395,750 claims. The rise in claims interrupted a downward trend that had kept them below the 400,000 threshold for four weeks. That level is normally associated with steady job growth. Despite last week's rise, the four-week average held below the 400,000 mark for a seventh straight week.

 

Fed Remains Unmoved

 

The recent surge in oil prices is no prelude to broader price increases that would force the Federal Reserve to raise interest rates, top Fed officials said on Thursday in what appears to be the predominant view at the central bank.

 

The comments, from Minneapolis Fed President Narayana Kocherlakota and Fed Board Governor Elizabeth Duke, echoed recent remarks by Fed Chairman Ben Bernanke, adding to expectations the central bank will stay on course with its $600 billion debt-buying program through the end of June and will not look to reverse its super-easy monetary policy any time soon.

 

Daniel Tarullo, also a Fed governor, identified himself as in the same camp, saying there are no signs that higher overall inflation, spurred by surging energy and commodity prices, will translate to underlying inflation. Tarullo said commodity prices are notoriously volatile.

 

Even a policymaker who is viewed as an inflation hawk at the central bank, Philadelphia Fed President Charles Plosser, said he saw no imminent danger that inflation would take off. However, Plosser, who has questioned the Fed's bond buying program, said there is no guarantee higher energy prices will not pass through to overall inflation, particularly with Fed monetary policy operating at full throttle.

 

He said that in light of the solid recovery, the central bank must begin to consider when to start withdrawing the unprecedented support to the economy to weather a financial panic and deep recession.

 

"The apparent strengthening of the U.S. economy suggests that, in the not-too-distant future, monetary policy will begin reversing course from a very accommodative policy stance," he said.

 

Plosser's views suggest the timing of the exit strategy will be a part of the debate at the Fed's next policy meeting April 26-27.

 

The Fed will eventually sell assets and raise rates to head off inflation, but "right now there's not really much sign of inflationary pressures building up," Kocherlakota said. "If we start to see that increase," he added, "that's when you have to start to think about, 'OK, inflationary pressures are building up, we are going to have to raise rates.'"

 

Recent spikes in energy costs have sparked worries about inflation among some economists and consumers. History suggests the effect of oil prices on inflation will be "transitory," Kocherlakota said. Duke argued that prices are likely to stabilize over the next couple of months.

 

"It would not be helpful if monetary policy reacted to every move in a volatile price," Duke said.

"The rate of inflation over the medium term is a key and important number for us to pay attention to," Duke went on to say. "But when you look at things like gasoline prices, (they) are very volatile."

 

Some Fed officials, including Plosser, have signaled a possible need to raise rates before the end of the year. Nonetheless, the core of the Federal Open Market Committee, which sets monetary policy, does not yet appear convinced.

 

"Core inflation gives a much better sense of where inflation is going in the future," Kocherlakota said, noting it is "very low right now."

 

Duke, Kocherlakota, Plosser and Tarullo all have votes on the Fed's policy setting panel.

 

The Fed's plan is "at some point" to sell the more than $2 trillion of U.S. Treasury securities and mortgage-backed debt it has accumulated, Kocherlakota said. The U.S. central bank must also eventually raise rates or risk fueling inflation, he said. He did not suggest any specific time frame or sequence for selling the debt or raising rates, but his comments on low inflation suggest he does not see those actions as imminent.