MarketView for August 1

 

 

Summary

 

Wall Street opened higher after data showed corporations hired more workers than expected in July, although continued weakness in the manufacturing sector pointed to sluggish economic growth. However the positive numbers did not last and the equity indexes began to slip at about 2:15 P.M. after the Federal Reserve offered no new measures to stimulate the economy and a computer glitch at a brokerage firm triggered a spike in volatility shortly after the open.

 

The market will now turn its focus to the highly anticipated European Central Bank meeting on Thursday amid expectations that the ECB could detail action to bring down rising borrowing costs in Italy and Spain in defense of the euro.

 

Fed officials described the economy as having "decelerated somewhat," a change of tone from its June statement that it was "expanding moderately." But the U.S. central bank stopped short of offering new monetary stimulus.

 

The run-up to the Fed statement was overshadowed by a spike in volume and volatility in some 140 New York Stock Exchange stocks shortly after the market opened due to a "technology issue" at market maker Knight Capital. Knight said in a statement it was advising traders to execute their trades elsewhere and its shares tumbled 32.8 percent to $6.94, a nine-year closing low. It was the latest in a series of high-profile mishaps that have damaged investor confidence in stock markets.

 

Volume was above average with about 7.26 billion shares changing hands on the equity exchanges, a number that was above the year-to-date daily average of 6.74 billion shares.

 

Fed Says Economy May Need Some Help Down the Road

 

The Federal Reserve stopped short of offering new monetary stimulus on Wednesday even as it signaled more strongly that further bond buying could be in store to help an economic recovery that it said had lost momentum this year. Fed officials described the economy as having "decelerated somewhat," a change of tone from its previous assessment in June when it said the economy had been "expanding moderately."

 

The Fed's policymakers also reiterated their disappointment with the slow pace of progress in bringing down the nation's 8.2 percent jobless rate. At the same time, the Fed dashed expectations on the Street by taking no new measures, sending share prices lower and the dollar higher against the euro and the yen.

 

Many economists thought the central bank might extend further into the future its guidance for low rates but the statement maintained its late-2014 language. The Fed nevertheless showed it was prepared to do more to support an ailing economy.

 

"The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed," the Fed said in its statement.

 

That was a slight shift from its June statement when the Fed said it was "prepared to take further action as appropriate." Richmond Fed President Jeffrey Lacker again dissented against the late-2014 timetable.

 

Economic growth slowed to 1.5 percent in the second quarter as consumer spending faltered, and unemployment remains far too high for the comfort of a central bank that has a dual mandate to keep inflation low and employment high. Job growth slowed sharply in the second quarter to just 75,000 jobs per month from 226,000 in the first quarter.

 

A report on Wednesday showed U.S. companies added 163,000 jobs in July, more than expected. However, that survey, the ADP National Employment Report, does not carry as much weight as the government's more comprehensive labor market report due on Friday, which includes both public and private sector employment.

 

Manufacturing data from the Institute for Supply Management pointed to a second month of contraction in the factory sector.

 

The Fed met a day before a key meeting of the European Central Bank. ECB President Mario Draghi last week ratcheted up speculation of further ECB purchases of Italian and Spanish bonds by saying he would do "whatever it takes" to save the euro.

 

Europe's crisis is blamed for part of the U.S. slowdown, as fears of another financial crisis keep businesses and consumers on the defensive.

 

Against that grim backdrop, many think Fed Chairman Ben Bernanke could use his speech at the central bank's high-profile gathering in Jackson Hole, Wyoming, in late August to send a strong message to markets. He used that forum in 2010 to communicate the Fed's intention to pursue a second round of quantitative easing, or QE2.

 

The Fed's next policy-setting meeting is scheduled for September 12-13.

 

A third installment of QE would probably involve some component of housing debt as the Fed attempts to breathe fresh life into a housing sector that is finally showing some signs of healing.

 

Other tools Bernanke has signaled are under consideration include lowering the interest the Fed pays banks to park their reserves at the central bank, currently at 0.25 percent, which could induce them to boost lending.

 

Another option would be to pursue a 'funding for lending' program like the one recently implemented by the Bank of England, whereby the Fed might provide cheap short-term loans to banks in exchange for guarantees that banks will resume lending to individuals and firms. The latter still requires some study, Bernanke said at his last press conference in June.

 

Auto Sales Down

 

Major automakers reported domestic auto sales for July that were somewhat softer than expected as high unemployment and weak consumer confidence kept would-be buyers on the sidelines.

 

Industry sales were on track to jump 9 percent in July to 1.1 million vehicles, less than the growth of 10 percent or more expected by many analysts. Kelley Blue Book estimated that the annual sales pace for the month was on track to fall just shy of 14 million. Analysts expected the sales rate to be 14 million.

 

July auto sales showed the continuation of what has been a slowdown in growth since the late spring. Sales early this year shot past even the most bullish forecasts, but starting in May, the rate of improvement started to weaken.

 

General Motors forecast an annual auto sales pace for July between 13.9 million and 14.1 million vehicles. Ford Motor Co projected a sales rate of 14 million, including medium- and heavy-trucks, which typically adds 300,000 sales.

 

In June, the annual pace of vehicle sales in the United States was 14.1 million. Toyota Motor Corp expects sales will come in at 14.3 million this year. GM projects the overall industry will sell between 14 million and 14.5 million.

 

In conference calls on Wednesday, executives at General Motors and Ford said the job market and consumer confidence remain weak. Separately, the Federal Reserve said the U.S. economic recovery has lost momentum so far this year.

 

GM and Ford executives also pointed to encouraging signs of economic growth, such as the pickup in the housing sector, which is tied to truck sales. Analysts and automakers also said better financing deals for consumers could also spur sales.

 

"We think some truck buyers have been reacting to the mixed economic signals of the last few months," said Kurt McNeil, head of GM's U.S. sales operations. "But recent reports of consumer confidence, home prices, and personal income were better than expected. He added: "We expect all of these factors will help release more pent-up demand and drive truck share of industry higher in the coming months, which is the normal trend."

 

Car companies are anticipating a second-half sales increase spurred partly by the introduction of a slate of new models. At the same time, major automakers are increasingly counting on our domestic auto market to offset weak sales in Europe. Last week, Ford reported a more than $1 billion loss in Europe due to the deepening economic crisis in the region.

 

On Thursday, GM is expected to report second-quarter results. Its troubled Opel brand in Europe is considered one of the biggest risks to the company's health, analysts have said. During a call with analysts and reporters, GM executives said they did not expect a change in marketing strategy after its top marketing executive, Joel Ewanick, was abruptly ousted earlier this week.

 

GM, the largest U.S. automaker, reported on Wednesday a 6 percent drop in July U.S. sales, while Ford posted a 4 percent drop. The smallest U.S. automaker, Chrysler Group LLC, posted a 13 percent increase. GM and Ford both pinned their declines on lower sales to fleet customers like rental car companies. GM's fleet sales fell 41 percent, in line with the company's forecast last month.

 

However, their overall results were still lower than some estimates. Analysts had expected better financing deals, pent-up demand and increased construction spending to offset the sluggish U.S. economy.

 

Toyota sales were up 26 percent to 164,898 in July. A year ago, Toyota was still grappling with major vehicle shortages stemming from the March earthquake in Japan. In a release, Toyota said customers were taking advantage of long-term, low-interest financing at low lease rates.

 

GM sold 201,237 cars and trucks last month. Ford, the No. 2 U.S. automaker, sold 173,966 cars and trucks. Chrysler, majority-owned by Italian automaker Fiat SpA, sold 126,089 cars and trucks.

 

Auto research firm Edmunds had expected GM to report 214,315 vehicle sales and Ford at least 175,791. Chrysler beat Edmunds' forecast for its sales but fell short of other projections.

 

Both Ford and GM attributed their sales declines to a drop in sales to fleet customers, such as rental car companies. GM's fleet sales fell 41 percent, in line with the company's earlier outlook, while Ford fleet sales dropped 16 percent. Fleet sales are less profitable than retail sales to consumers.

 

Domestic auto sales for Japan's Nissan Motor Co rose 16.2 percent in July to 98,341. German automaker Volkswagen AG said its VW brand sold 37,014 vehicles last month, up 27.3 percent from a year ago.