MarketView for April 16

 

 

Summary

 

The major equity indexes rose sharply on Wednesday, advancing for a third straight session as Federal Reserve Chair Janet Yellen reaffirmed the central bank's commitment to keeping interest rates low.

 

Helping out were data indicating that Chinese economic growth exceeded expectations, while industrial production rose for a second straight month, both of which added to the overall sentiment index.

 

Yellen, speaking in New York, reaffirmed the Fed's commitment to keep interest rates low, even after ending its bond-buying program, as long as inflation remains below target and unemployment elevated. The Fed's Beige Book, a report of anecdotal information on business activity indicated that activity picked up in most regions in recent weeks.

 

Yahoo was the S&P 500's largest gainer, rising 6.3 percent to $36.35, despite a tepid revenue outlook. However, revenue growth accelerated in the last quarter of 2013 for Alibaba in which Yahoo holds a 24 percent stake.

 

Intel briefly hit its highest point since June 2012, a day after the company posted a quarterly net profit that exceeded Street's estimates. The stock rose 0.6 percent to end the day at $26.93.

 

Meanwhile, both Bank of America and CSX sold off following their results. Bank of America fell 1.6 percent to $16.13 after the bank swung to a quarterly loss. CSX fell 1.8 percent to $27.79 after its results.

 

After the closing bell, Google reported its quarterly results and its stock fell 4.9 percent to $536. IBM fell 1.5 percent after the bell following the release of its earnings. The shares of American Express fell 0.9 percent in extended-hours trading after the world's largest credit card issuer reported its first-quarter earnings.

 

In the latest economic data, China reported that its economy grew at its slowest pace in 18 months at the start of 2014, but the increase was better than expected and showed some improvement in March. U.S. manufacturing output rose for a second straight month in March in a sign of recovery from a harsh and prolonged winter that had put a damper on activity.

 

While only 9 percent of S&P 500 companies have reported results so far, 57.4 percent have topped earnings expectations, below the long-term average of 62 percent. Only 53.2 percent have topped revenue expectations, below the long-term average of 61 percent.

 

Approximately 5.98 billion shares changed hands on the major equity exchanges according to BATS exchange data, a number that was below the month-to-date average of 6.95 billion shares.

 

Housing Starts Rise - Permits Fall

 

The Commerce Department reported on Wednesday that housing starts were higher but was nonetheless below Street expectations. At the same time building permits fell in March, pointing to underlying weakness in the housing market that could persist despite improving weather.

 

According to the Department starts increased 2.8 percent to a seasonally adjusted annual rate of 946,000. February's starts were revised to show a 1.9 percent rise rather than the previously reported 0.2 percent fall.

 

Groundbreaking for single-family homes, the largest segment of the market, surged 6.0 percent to a 635,000-unit pace last month. Starts for the volatile multi-family homes segment fell 3.1 percent to a 311,000-unit rate. That was the lowest level since last October. Compared to March last year starts dropped 5.9 percent, the biggest decline since April 2011.

 

While a brutally cold winter weighed on home building in December and January, activity has also been hampered by shortages of building lots and skilled labor as well as rising prices for materials.

 

A report on Tuesday showed homebuilders in April were still downbeat about the sector's near-term prospects. The housing market is under strain from higher mortgage rates and elevated house prices that are sidelining potential buyers.

 

Yet, there is a ray of hope for a pick-up. The Mortgage Bankers Association reported on Wednesday that applications for loans to buy houses rose last week. The MBA's builder application survey data also showed mortgage applications for new home purchases increased 15 percent in March compared to February. The data has not been adjusted for seasonal fluctuations.

 

Housing starts rose 30.7 percent in the Northeast and 65.5 percent in the Midwest, but fell in both the South and West. Permits to build homes fell 2.4 percent in March to a 990,000-unit pace. Permits for single-family homes rose 0.5 percent but fell 6.4 percent for the multi-family sector.

 

Manufacturing Output Rises

 

Manufacturing output rose for a second straight month in March in a sign of recovery from a long winter that had put a damper on activity. Factory production increased 0.5 percent in March, according to data from the Federal Reserve on Wednesday.

 

Overall industrial production was up 0.7 percent, beating analysts' expectations. February's industrial production was revised up to a gain of 1.2 percent from a previously reported 0.6 percent rise, due to stronger gains for durable goods manufacturing and for mining, the Fed said. Mining output rose 1.5 percent in March, while utilities were up 1.0 percent.

 

Capacity utilization, a measure of how intensively firms use their resources, was up to 79.2 percent from a revised 78.8 percent in February. March's capacity utilization rate was the highest since June 2008.

 

Officials at the Fed tend to look at utilization measures as a signal of how much "slack" remains in the economy, and how much room there is for growth to run before it becomes inflationary.

 

Yellen Speaks

 

Persistently low inflation poses a more immediate threat to the U.S. economy than rising prices, Federal Reserve Chair Janet Yellen said on Wednesday, stressing that the Fed would be delivering policy stimulus for some time to come.

 

In her second public speech since taking the Fed's helm, Yellen was careful not to predict when interest rates would rise from near zero. Instead, she stressed the decision would hinge on healing in the labor market and on how briskly inflation rises toward the Fed's 2 percent goal.

 

Yellen's relatively staid remarks to the Economic Club of New York intensified somewhat when Martin Feldstein, a Harvard University professor and former adviser to President Ronald Reagan, asked her whether she would let inflation creep above 2 percent to give the economy a bit more support.

 

"With inflation running at around 1 percent, at this point I think the risk is greater that we should be worried about inflation undershooting our goal and getting inflation back up to 2 percent," Yellen said.

 

The central bank will "of course" eventually need to tighten policy to avoid a run-up in inflation, she said. "Overshooting that goal ... can be very costly to reverse."

 

Yellen noted the Fed was not alone in its struggle to move inflation higher as a buffer against an economically disabling deflation. The European Central Bank is mulling unconventional policies that could lift inflation in the euro zone, while Japan has been mired in deflation for 15 years.

 

The Fed has kept its key rate near zero since the depths of the financial crisis in late 2008, and has bought more than $3 trillion in assets to help depress borrowing costs and stimulate economic growth amid a frustratingly slow recovery.

 

While the central bank's preferred inflation gauge is just above 1 percent, a more popular measure firmed in March. Jobs growth was also decent last month, but the unemployment rate stayed high at 6.7 percent as Americans returned to the labor market in droves to search for work.

 

An apparent pick up in the world's largest economy after a sluggish winter has many investors attempting to predict when the Fed will finally raise rates, with most eying mid-2015. Yellen herself said it was "quite plausible" the economy would be back to near full employment and a healthier level of inflation by the end of 2016.

 

"We are seeing very meaningful progress, although clearly ... the goal has not been achieved at this point," she said. "We will be very focused on removing accommodation when the right time has come."

 

In the last few years, the Fed has tried an array of strategies to telegraph just how long it will wait to tighten policy; including tying the ultra-low rates to time periods, and later, to specific unemployment and inflation thresholds.

 

Last month it rolled out its latest version of forward guidance, effectively promising not to raise rates for a "considerable time" after it halts its bond-buying program. But Yellen sowed more confusion when she then told a news conference that a "considerable time" means about "six months" or so, causing a selloff in stocks and bonds. Yellen did not mention the six-month term on Wednesday.

 

How long rates will stay near zero, she said, will depend on how far the U.S. economy remains from the central bank's goals of 2 percent inflation and maximum sustainable employment, and how long it will likely take to meet them.

 

She repeated her view that there is likely more slack in the labor market than suggested by the unemployment rate, which lessens the risk of inflationary wage gains as the economy strengthens.

 

But she emphasized that unforeseeable events could alter the central bank's current course, as it has several times since the economy began recovering from the 2007-2009 recession.

 

The Fed could even set aside efforts to wind down its bond-buying stimulus if dealt an economic surprise, Yellen said. Financial markets believe the Fed is nearly certain to end its purchases by year end.