MarketView for August 14

 

 

Summary  

 

Stock prices were sharply lower on Friday after weak consumer sentiment data fueled concerns over the strength of an economic recovery. Data from the Reuters/University of Michigan Surveys of Consumers showed consumer confidence fell more than expected in early August, dropping to its lowest level since March.

 

The weak report underscores the worry that consumer demand remains soft, denting the hopes for a rebound that has fueled the rally in stocks. Stocks have come under pressure this week on weaker-than-expected reports on consumer activity.

 

Boeing closed down 3.8 percent at $44.87 and was the biggest drag on the Dow Jones industrial average after the aerospace company said an Italian supplier ceased production in June on two sections of Boeing's long-delayed 787 Dreamliner plane because of structural flaws.

 

For the week, the Dow was down 0.5 percent, the S&P took a loss of 0.6 percent and the Nasdaq fell 0.7 percent. Retail stocks felt the pressure of the poor sentiment report and a weak outlook from JC Penney. The retail giant saw its share price fall  6.2 percent to $31.29 after it indicated that  its full-year results could fall short of expectations.

 

Abercrombie & Fitch, which rose 3.9 percent to close at $34.25, was a bright spot among retailers after it reported second-quarter results and said its international growth plans remained on track.

 

Among other economic indicators on Friday, industrial output gained for the first time in nine months in July, rising more than expected, and consumer prices suggested that inflation would remain mild.

 

Inflation Remains Tame

 

Consumer prices were flat in July as compared to June, but fell over the past 12 months by the most since 1950, according to government data that suggested continuing benign inflation pressures. According to a report released by the Labor Department on Friday,  its Consumer Price Index was unchanged after rising 0.7 percent in June.

 

Gasoline prices fell 0.8 percent after jumping 17.3 percent the previous month, helping to keep overall prices contained. The food index declined 0.3 percent, the biggest fall since May 2002, after being flat in June, while prices for apparel and new vehicles rose in July. When compared to the same period last year, consumer prices fell 2.1 percent, the largest decline since January 1950.

 

If you remove the volatile food and energy sectors, the so-called core measure of consumer inflation rose 0.1 percent in July after increasing 0.2 percent in June, the Labor Department said.

When compared to July of last year, the core inflation rate rose 1.5 percent, making it the slowest advance since February 2004.

 

Industrial Production Rises

 

Industrial production rose for the first time in nine months, driven by increased output from auto companies. The increase provides more evidence that the worst recession since World War II is easing. It marks only the second gain in industrial production since the downturn began in December 2007.

 

According to a report by the Federal Reserve released on Friday, production rose 0.5 percent in July, after falling 0.4 percent in June. Automakers led the rebound, as the production of motor vehicles and parts rose 20.1 percent, after falling for three straight months. General Motors and Chrysler last month reopened many plants that had been closed in May and June as the companies restructured and emerged from bankruptcy protection.

 

Sales also jumped in response to the government's Cash for Clunkers program, which provides consumers up to $4,500 for trading in old cars. Auto sales clocked in at a seasonally adjusted annual rate of 11.2 million in July, up from 9.7 million in June.

 

Ford Motor indicated on Thursday that it will increase production in response to the program. The company said it will boost third-quarter production to 18 percent above last year's levels, and fourth-quarter production 33 percent.

 

Production also rose in other areas, according to the Fed. Excluding autos, manufacturing output rose 0.2 percent, as companies produced more aerospace equipment, computers and electronic products, and plastics. Mining output increased 0.8 percent. Utility output fell 2.4 percent, however, due to mild weather, the Fed said.

 

Despite July's increase, total industrial production is down 13.1 percent from a year ago.

And many factories remain idle. The operating rate for the nation's mines, plants and utilities was 68.5 percent in July, up from a record low of 68 percent in June. The rate is usually around 80 percent in a healthy economy.

 

The recession has taken a bite out of demand in the U.S. for all kinds of manufactured goods, especially those related to housing, such as appliances and building materials.

Production of appliances dropped 0.8 percent in July, while construction supplies fell 0.1 percent, according to the Fed. Manufacturers also have suffered from a drop in overseas sales, as foreign economies plunged into recession.

 

But that may be changing, as many European and Asian countries show signs of growing again. On Wednesday, the Commerce Department reported that U.S. exports rose for the second straight month. Large gains in shipments of semiconductors, civilian aircraft and engines, and telecommunications equipment led the export increase, the department said.

 

Precipitous Drop In Crude Oil Prices

 

The price of crude oil chalked up its largest loss in more than two weeks on Friday after a report indicated a decline in consumer confidence. The losses, the largest since July 29, came after the Reuters/University of Michigan Survey of Consumers showed consumer confidence in early August dropped to the lowest level since March. As a result, domestic sweet crude oil futures for September delivery settled down $3.01 per barrel, or 4.27 percent, at $67.51, while London Brent crude settled down $1.07 at $72.41.

 

Crude oil prices continue to be more than double their winter lows below $33 in December, with most of the support for commodities markets so far this year finding root in economic optimism. At the same time, the market's attention has also been on the weather in the Atlantic Ocean, which could soon see its first named storm of the hurricane season. Tropical storms and hurricanes can disrupt operations at offshore platforms and coastal refineries but many forecasts are for a mild hurricane season this year.

 

Consumer Sentiment Falls

 

Consumer sentiment was lower during the early part of August as concerns over job availability and lower income overshadowed the day’s positive news. The latest data on Friday pointed to a sluggish recovery at best with little or no help to come from embattled consumers.

 

The Reuters/University of Michigan Surveys of Consumers said on Friday its preliminary reading of the index of confidence fell to 63.2 from 66.0 in July, well below market expectations for a reading of 68.5.

 

Consumer sentiment ebbed for a second straight month as households, battered by high unemployment and falling home values, gave less favorable views their personal finances. The erosion in confidence added to fears that consumers would not drive the anticipated recovery from the worst recession since the Great Depression, leaving the economy vulnerable to a double dip. Consumers are responsible for about 70 percent of all domestic economic activity.

 

There were a few bright spots in the consumer survey report, including a rebound in the home buying conditions index, and households' outlook for the labor market was less negative than in the prior month.