MarketView for April 12

 

 

Summary

 

Wall Street saw share prices drop a bit on Friday, retreating from the previous session's record highs due in small part to a decline in financial shares, but major indexes had the biggest weekly gains since the first week of the year. Losses were pared during the final hour of trading, with the Dow Jones Industrial Average gaining from a rally in Home Depot.

 

For the week, the Dow rose 2.1 percent, while the S&P 500 chalked up a gain of 2.3 percent and the Nasdaq picked up 2.8 percent. It was the best weekly gain for both S&P 500 and the Nasdaq since the first week of the year.

 

Financial stocks were pressured on Friday by a pair of disappointing bank results and a delay in closing a large bank deal. Weak retail sales and consumer sentiment data, suggesting the economy lost momentum, also weighed on stocks.

 

The string of discouraging data indicates that equities could be vulnerable to a pullback, especially following a rally that has taken the S&P 500 up 11.4 percent so far this year. Telecom and healthcare, two defensive groups, were among the few S&P sectors in positive territory.

 

Both JPMorgan Chase and Wells Fargo were lower after reporting results, with JPMorgan hit by a decline in revenue and Wells Fargo by a reduction in home loans. Shares of Wells Fargo fell 0.8 percent to $37.21, while JPMorgan, a Dow component, fell 0.6 percent to $49.01.

 

Earnings for S&P 500 companies are expected to grow at a modest 1.2 percent in the first quarter, down from a January forecast of more than 4 percent, according to Thomson Reuters data. With only 6 percent of the S&P having reported thus far, 62 percent of companies have beaten expectations.

 

The S&P financial sector was hurt by a delay in the closing of the M&T Banks acquisition of Hudson City Bancorp. M&T ended the day down 4.5 percent to close at $100.24, while Hudson slumped 5.5 percent to $8.29 as one of the S&P's biggest percentage decliners.

 

Losses were offset in the Dow by Home Depot, which rose 2.4 percent to $73.62 after Jefferies & Co upgraded the stock on expectations of strong first-quarter same-store sales.

 

Data showed retail sales fell 0.4 percent in March, while February's strong gain was revised down slightly. Consumer spending plays a key role in the economy, accounting for two-thirds of activity.

 

Another report showed consumer sentiment fell to a nine-month low in early April amid gloom about the long-term health prospects for our economy. However, investors have been rattled by indications economic growth could be softening, particularly after last week's disappointing jobs number, though that has not derailed the market rally so far.

 

The advance in equities in recent months was partly buoyed by the Federal Reserve's economic stimulus efforts, and analysts are viewing the first-quarter earnings season as a test for whether those gains are justified by corporate performance.

 

Material and energy stocks also fell alongside a drop in oil and precious metal prices. Oil prices sank 2.8 percent to an eight-month low while gold hit its lowest since July 2011. Prices were hit by concerns over the global economic outlook and the impact it could have on demand. <O/R>

 

Newmont Mining fell 5.9 percent to $36.37 while Newfield Exploration was down 4.1 percent to $21.70. The SPDR Gold Shares ETF fell 4.7 percent to $143.95 and hit its lowest close since May 2011. Friday marked the worst day for the gold ETF since February 2012.

 

Volume was light, with about 5.94 billion shares changing hands on the three major equity exchanges, a number that was below the daily average so far this year of about 6.36 billion shares.

 

Sharpest Drop in Producer Price Index in 10 Months

 

Producer prices recorded their biggest drop in 10 months in March as the cost of gasoline tumbled, according to a government report on Friday that supported the case for the Federal Reserve to maintain its very accommodative monetary policy.

 

The Labor Department said its seasonally adjusted producer price index fell 0.6 percent last month, the largest drop since May, after increasing 0.7 percent in February.

 

Economists polled by Reuters had expected prices received by the nation's farms, factories and refineries to fall only 0.2 percent. In the 12 months through March, wholesale prices were up 1.1 percent, the smallest rise since July. Prices had increased 1.7 percent in February.

 

Underlying inflation pressures also were muted, with wholesale prices excluding volatile food and energy costs rising 0.2 percent for a third straight month. In the 12 months through March, the so-called core PPI increased 1.7 percent after rising by a similar margin in February.

 

The benign inflation environment could strengthen the argument for the Fed to keep monetary policy expansionary as it tries to steer the economy towards faster growth, despite diverse opinions within the Fed.

 

In March, energy prices fell 3.4 percent - the largest drop since February 2010. A 6.8 percent drop in gasoline prices accounted for more than 80 percent of the fall in the wholesale energy price index. Gasoline as up 7.2 percent in February.

 

Food prices increased 0.8 percent, more than reversing February's 0.5 percent fall. A 0.7 percent increase in prices for civilian aircraft accounted for almost a quarter of the rise in core PPI last month. Elsewhere, passenger car prices rose 0.2 percent, while light truck prices were flat.

 

Retail Sales Fall

 

Retail sales contracted in March for the second time in three months and consumer confidence tumbled in April, a sign that tax hikes early this year have stolen momentum from the American economy.

 

Retail sales fell 0.4 percent in March, the Commerce Department said on Friday. That missed analysts' expectations of a flat reading.

 

The data supports the view that our economy continues to struggle and hasn't performed as well as analysts believed just a few weeks ago. Many analysts cut their growth forecasts for the first quarter.

 

At the same time, a separate report showed wholesale prices fell sharply in March due to lower gasoline costs. That will come as a relief to consumers beset by high prices at the pump, and could help the U.S. Federal Reserve maintain its very accommodative monetary policy.

 

Readings for retail sales have been volatile so far this year, making it difficult to know whether the weakness in March was due to a tax hike that went into effect at the start of the year or to temporary factors related to the weather.

 

However, in a sign that higher taxes may have bitten more into family budgets than previously thought, sales fell 0.2 percent in March when stripping out cars, gasoline and building materials. This core measure corresponds closely with the consumer spending component of gross domestic product.

 

The government also revised lower past core retail sales figures to show a 0.3 percent gain in February and flat sales in January.

 

Following the report, Barclays cut its estimate for first quarter growth to a 2.8 percent annual rate from a 3.2 percent rate.

 

Also weighing on the outlook for first quarter growth, business inventories rose less than expected in February, data from another Commerce Department report showed.

 

Share prices declined on the weak retail sales data and as results from major banks failed to impress investors. Prices for U.S. Treasuries rose, while the dollar extended its declines against the yen.

 

A separate report suggested the government's belt tightening was damaging consumer sentiment. The Thomson Reuters/University of Michigan's preliminary reading on the overall index of consumer sentiment fell to 72.3 in April, the lowest since July 2012 and below economists' forecasts.

 

Over the entire year, Washington's austerity drive could subtract about 1.5 percentage points from economic growth this year, according to an estimate by the non-partisan Congressional Budget Office.

 

Many economists have also noted the loss of economic momentum in many economic indicators for March could have been due to a warm winter, which may have led companies and consumers to pull forward spending.

 

Indicators from retail sales and hiring to factory manager confidence were much stronger in February, and a chilly March may have then dulled activity.

 

Producer prices recorded their largest drop in 10 months in March as the cost of gasoline tumbled, the Labor Department said in a separate report.

 

The seasonally adjusted producer price index fell 0.6 percent last month. Economists polled by Reuters had expected prices received by the nation's farms, factories and refineries to fall only 0.2 percent.

 

In the 12 months through March, wholesale prices were up 1.1 percent, the smallest rise since July. Prices had increased 1.7 percent in February.

 

The benign inflation environment could strengthen the argument for the Fed to keep monetary policy loose as it tries to steer the economy towards faster growth, despite divisions among policymakers over continued asset purchases.

 

Minutes of the Fed's March 19-20 meeting released on Wednesday showed the U.S. central bank was moving closer to ending its monthly $85 billion purchases of mortgage and Treasury bonds to keep rates low and spur faster job growth.