MarketView for August 18

Summary  

Stock prices did a turnaround from Monday’s decline as better-than-expected results from big retailers encouraged investors to get back into the market. Earnings from retail consumer giants Home Depot, Target and Saks were helped by cost-cutting as revenue growth remained slack. That trend has dominated earnings season but has not stood in the way of higher share prices. Home Depot closed up 3.1 percent to $26.93 while Lowe's fell 2.3 percent to $19.99 following a sell-off the previous day on disappointing results. Target climbed 7.6 percent to $44.32 and Saks added 6.9 percent to $5.72.

The earnings reports offset an unexpected drop in housing starts and permits in July, sending all three major indexes gliding upward. Financial, retail and technology stocks were the top advancers Tuesday, but gains were broad-based. American Express was up 4.3 percent to $31.69 and Bank of America closed up 2.1 percent at $16.90. Citigroup closed out the day with a gain of 3.5 percent at $4.14.

The Nasdaq outpaced the other indexes after RBC highlighted investment opportunities in the smartphone market and raised its price target on shares of Apple, Research in Motion and Palm. Apple's shares ended the day up 2.8 percent to $164.01, RIM added a gain of 4.6 percent to close at $73.99 and Palm was up 4.9 percent to $13.88.

Producer Price Index Falls Sharply

The Labor Department reported Tuesday morning prior to the opening bell that wholesale prices, via its Producer Price Index, fell 0.9 percent last month, the result of a large decline in both energy and food costs. Over the past 12 months, the prices of goods before they reach store shelves fell 6.8 percent. The so called core rate of inflation, which excludes the energy and food sectors, was also well-behaved, falling 0.1 percent in July.

The declines in the Producer Price Index showed wholesale inflation pressures were even more subdued than prices at the consumer level. The government last week reported that the Consumer Price Index was unchanged in July and over the past 12 months fell 2.1 percent, the biggest decline in nearly 60 years.

For July, wholesale energy prices fell 2.4 percent after having surged 6.6 percent in June. Gasoline dropped 10.2 percent and home heating oil plunged 11.9 percent. Food prices at the wholesale level fell 1.5 percent last month, reversing a 1.1 percent rise in June. A large drop in vegetable prices led the overall decline, but beef and egg prices also fell.

The longest U.S. recession since the Great Depression of the 1930s has crushed demand and pummeled prices throughout the economy, keeping inflation pressures firmly at bay despite massive official efforts to stimulate growth. The 6.8 percent decline in wholesale prices over the past year was the largest drop since the government began keeping such records in 1947. It surpassed the 5.2 percent drop in the period ending in August 1949.

The 0.1 percent drop in core inflation left those prices rising 2.6 percent over the past 12 months. In July, prices for passenger cars fell 1.7 percent, the biggest decline in nearly three years.

The 1.8 percent gain in wholesale prices in June was the biggest one-month increase since November 2007 but was likely only a temporary increase and was not the beginning of a dangerous bout of spiraling prices.

Energy prices, which had propelled much of the gain, will level out and that the weak economy will keep the lid on overall inflation. Crude oil prices topped $72 a barrel in June but were trading below $67 per barrel Tuesday. The Labor Department said that gasoline prices fell 10.2 percent in July and were down 45.2 percent versus a year ago, while finished energy goods overall fell by 2.4 percent on the month and 29.7 percent over the past year. Capital equipment prices edged down 0.2 percent in July but were up 1.8 percent over the year.

Earlier in the production process, prices received by manufacturers of intermediate goods fell by 0.2 percent in July after rising 1.9 percent the month before. The crude goods index was down 4.5 percent after a 4.6 percent rise in June. At the same time, the Federal Reserve believes inflation will remain subdued for some time as the country struggles to emerge from the worst recession since World War II.

Housing Starts Fall

The Commerce Department reported on Tuesday that housing starts and permits unexpectedly fell in July, pulled down by steeper declines in multifamily units. According to the report, housing starts fell 1 percent to a seasonally adjusted annual rate of 581,000 units, well below market expectations for 600,000 units. June's housing starts were revised up to 587,000 units from the previously reported 582,000 units.

Multifamily unit starts tumbled 13.3 percent in July. However, groundbreaking for single family homes -- the worst-hit part of the housing market, rose 1.7 percent to an annual rate of 490,000 units, the highest since October. When compared to July last year, housing starts fell 37.7 percent.

New building permits, a predictor of future home construction, fell 1.8 percent to 560,000 units in July. When compared to the same period a year-ago, building permits declined 39.4 percent.

The inventory of total houses under construction fell to record low 609,000 in July, the department said, while the total number of permits authorized but not yet started also hit a record low at 102,300.

Crude Down in Price

Crude oil futures rose more than 3 percent to top $69 per barrel on Tuesday with September futures on domestic sweet settling up $3.66 per barrel at $69.19, with further support coming from the weaker dollar. Domestic crude later traded up to $70.08 per barrel after data from the American Petroleum Institute (API) portrayed a steep and surprising draw down of 6.1 barrels in inventories. London Brent crude settled up $1.83 per barrel at $72.37.

Distillate stocks rose by 1.5 million barrels, according to the API. Gasoline stocks fell less than forecast. The market was also awaiting weekly inventory data from the Energy Information Administration, to be released on Wednesday.