MarketView for December 15

Summary 

Somebody must have forgotten to tell Wall Street that a Santa Claus rally is supposed to be taking place on the Street as share prices fell after suffering through a third straight late-day sell-off on Wednesday. As a result, it may be difficult to for the Street to chalk further gains as the year comes to a close. Early in the trading day the Dow Jones industrial average hit a fresh intraday 52-week high at 11,519. About 7.82 billion shares traded on the New York Stock Exchange, the American Stock Exchange and the Nasdaq, well below the year's daily average of 8.62 billion.

After hitting two-year highs this week, a sustained rise in Treasury yields has sparked worry that rising borrowing costs could stifle the recovery. Banks, heavily dependent on loan demand, saw their share prices fade, ending lower for a third straight day. As a result, many on the Street are concluding that the market, after rising almost 11 percent so far in 2010, has run its course for the year.

Major averages and stocks that have led the rally have exhibited a familiar pattern in recent days, spiking early and succumbing to selling late as investors see stocks hitting resistance. Apple ended the day flat at $320.36, up just 0.02 percent after rising as high as $323 in earlier trading. Netflix was flat, up just 0.03 percent at $178.50, off of its high of the day  of $181.42.

A deal that President Barack Obama struck with Republicans to extend the Bush-era tax rates sailed through the Senate on Wednesday and will soon head to the House of Representatives, where it could face steeper opposition, though it is still expected to pass.

Sentiment on the Wednesday began at a low point after Moody's warned Spain its debt rating could be downgraded, bringing concerns about the euro-zone debt crisis back to the forefront and lifting the dollar, which has had a strong inverse relationship with equities of late. However, those concerns were later offset by positive industrial production and regional manufacturing data. The data raised share prices going into the latter half of the trading day, but the markets were unable to hold those gains.

Industrial production rose in November at its fastest pace in four months, implying that a self-sustaining recovery is now entrenched. An index of manufacturing activity in New York rebounded strongly, adding to the brighter picture.

Honeywell fell 1.9 percent to $51.54 after it gave a 2011 profit growth outlook that analysts described as conservative. Caterpillar rose 1.1 percent to $93.08 after RBC raised its price target to $108 from $98.

A deal that President Barack Obama struck with Republicans to extend the Bush-era tax rates sailed through the Senate on Wednesday and will soon head to the House of Representatives, where it could face steeper opposition, though it is still expected to pass.

CPI Remains Low While Production Rises

Industrial production rose at its fastest pace in four months in November, implying a self-sustaining recovery is now entrenched, but a mild gain in consumer prices indicated that the economy is still abundantly slack. Industrial output rebounded 0.4 percent, the Federal Reserve said on Wednesday, the latest data to suggest the recovery gained momentum in the fourth quarter.

However, with inflation barely rising, the pick-up in economic activity was insufficient to discourage the Fed from completing its planned purchase of $600 billion in government bonds to keep borrowing costs tamped down, and weekly data showed mortgage applications fell on high rates.

According to a report released by the Labor Department on Wednesday, the closely watched core Consumer Price Index, which excludes food and energy costs, edged up 0.1 percent in November, the first gain in three months. Overall consumer prices inched up 0.1 percent, slowing from a 0.2 percent rise in October. The rise in core CPI matched Street expectations, but the CPI was below the 0.2 percent increase that had been forecast.

Prices for long-dated treasury debt fell sharply on the data, which saw Wall Street pricing in higher growth expectations.

The data and ratings agency Moody's warning that it could downgrade Spain's debt helped to spark a dollar rally, dragging share prices lower. Moody's warning revived worries about the sovereign debt crisis in the euro zone.

Utility output rose 1.9 percent last month, while manufacturing increased 0.3 percent, despite a steep decline in vehicle production. Continued strength in manufacturing, which has been the star performer during the recovery, was underscored by a strong rebound in a gauge of manufacturing in New York state in December.

Adding to the brightening economic picture, credit card delinquency rates fell at major domestic lenders last month as fewer consumers fell behind on bill payments.

Fed officials took little note of the improving tone of economic data after a policy meeting on Tuesday, however, and kept the spotlight on high unemployment and low inflation.

During the 12 months ending in November, core CPI gained 0.8 percent, edging up from October's record low 0.6 percent but staying way below the Fed's comfort zone of 1.6 to 2.0 percent inflation.

Shelter costs rose 0.1 percent in November, the second consecutive month of gains as measures of rental costs moved higher. The expectation is that rental prices, which account for about 40 percent of core CPI, will keep rising through 2011.

New vehicle prices slipped 0.4 percent in November, extending the prior month's fall. Prices for used cars and trucks fell for a third straight month. Apparel rose 0.2 percent after falling for three straight months.

Despite signs of a pick-up in broader economic activity, housing continues to lag. Applications for home loans dropped last week as mortgage rates rose for a fifth consecutive week to touch seven-month highs, the Mortgage Bankers Association said.

Adding to the downbeat outlook for housing, home-builder sentiment was mired at record lows in December, a National Association of Home Builders/Wells Fargo survey indicated.