MarketView for February 01

Summary 

Wall Street had a very positive day on Monday as better-than-expected data from the manufacturing sector, in combination with a reasonable earnings number from Exxon Mobil sent share prices higher across the board in what a welcome relief after the equity indexes ended their worst month in almost a year. The S&P 500's gain comes after three consecutive weeks of losses, but the broad index is still off 5.3 percent from its 15-month closing high set on January 19.

The Institute for Supply Management's manufacturing index showed the sector grew in January at a faster rate than expected, following similar surveys from China, Australia and the euro zone. Exxon's stock gained 2.7 percent to end at $66.18 after the country’s largest domestic oil company reported natural gas products helped raise the results at Exxon’s exploration arm.

In addition, the U.S. Commerce Department reported that consumer spending rose a quicker-than-expected 0.2 percent in December.

Shares of industrial materials companies gained on the strong global manufacturing data, with Alcoa up 5 percent at $13.36, and U.S. Steel up 6.5 percent at $47.32. In the tech sector, Apple was up 1.4 percent to close at $194.73, buoying the Nasdaq. Qualcomm rose 1.5 percent to $39.77 and helped lift the Nasdaq, while IBM chalked up a gain of 1.9 percent to close at $124.67. IBM ranked among the Dow's major advancers. In January's pullback, the materials and technology sectors were the biggest losers.

Nonetheless, the Nasdaq's advance was slowed a bit by Amazon, whose shares fell 5.2 percent to $118.87 after the company essentially gave in with regard to a dispute it had going with Macmillan, a key book publisher. That in turn could lead to higher prices on some of the e-books being supplied by Amazon.

Warner Chilcott fell 6.8 percent to $25.46 and also dragged on the Nasdaq after Morgan Stanley downgraded the stock to "equal weight" from "overweight". Warner Chilcott’s primary market is in the US, selling brand-name drugs to the country's OB/GYNs and dermatologists. For women, Warner Chilcott makes and markets hormonal contraceptives (including Femcon FE, Loestrin, and Ovcon) and hormone therapies, such as Estrace cream and femhrt. In the area of dermatology, the specialty drug firm makes an acne drug called Doryx.

Manufacturing Expands, Economic Data Continues to Improve

Manufacturing expanded in January at its fastest pace since 2004, data showed on Monday, but consumers increased spending only slightly in December, worried by job prospects and the state of the economy. The manufacturing sector has been expanding since August, but the economic recovery remains modest, as evidenced by a 10 percent unemployment rate. Nonetheless, the Institute for Supply management said its index of national factory activity rose to 58.4 from 54.9 in December, handily beating economists' median forecast of a rise to 55.5. A reading above 50 indicates growth in the sector. The prices paid component was at its highest since August 2008.

The index indicated that the economy was keeping pace with others showing expanded factory activity. For example, Chinese manufacturing grew at a near record pace in January.

However, part of the gain is the result of businesses replenishing inventories, which fell sharply during the recession, drove the sector's gains. Nonetheless, the economy grew at a 5.7 percent annual pace in the fourth quarter, its fastest clip in six years, driven by a sharp slowdown in the rate at which businesses reduced stocks of unsold goods, the government said on Friday.

But while the ISM employment component hit its highest level in nearly three years, the month-on-month gain was still fairly modest.

Norbert Ore, chairman of the ISM's Manufacturing Business Survey Committee, said the employment index is "a good indicator of sentiment rather than actual jobs." He added: "I do think manufacturers are willing to hire if they have the need, but I think it's premature to expect a lot of job growth."

A separate Commerce Department report showed consumers were cautious with their credit cards in December, when spending rose 0.2 percent after increasing by an upwardly revised 0.7 percent in November.

It was the third straight monthly gain in spending, which accounts for about two-thirds of the U.S. economy. But it was less than economists had expected, and in all of 2009, consumer spending fell 0.4 percent, the largest drop since 1938.

December's slight spending increase came even as real disposable income climbed 0.3 percent after rising 0.3 percent in November. The rise in income boosted the savings rate to its highest since June.

Commerce Department data also showed the personal consumption expenditures price index, excluding food and energy, rose 1.5 percent in December from a year earlier. The index, which is a key inflation measure monitored by the Fed, rose 1.4 percent in November.

Low interest rates and the aggressive fiscal spending undertaken to prevent a recession turning into a depression have caused a massive rise in the budget deficit. President Barack Obama on Monday projected the shortfall would peak at a record of $1.56 trillion in 2010, or 10.6 percent of GDP, before easing.

Separate Commerce Department data showed construction spending fell 1.2 percent in December to the lowest since 2003, hurt by a sharp drop in private residential and state and local government construction.

Crude Prices Begin To Rise

The price of crude oil futures rose over 2 percent on Monday, as stronger manufacturing data prompted optimism that the economic recovery remains alive and well. At the same time a weaker dollar helped raise crude demand after oil prices fell to five-week lows on Friday.

Sweet domestic crude for March delivery settled up $1.54 per barrel at $74.43. Prices touched $72.43 on January 29, their lowest level since December 21. London Brent crude settled up $1.65 per barrel at $73.11. Future crude oil prices fell more than 8 percent in January, pressured by weak energy demand, worries over fiscal turmoil in smaller euro zone countries and a stronger dollar.

A weaker dollar, growth in consumer spending and firming equities markets helped to push oil prices higher on Monday, as optimism surrounding a U.S. recovery prompted investors to funnel more money into assets considered riskier, such as commodities and stocks.

Oil prices often rise when the dollar weakens since it makes the dollar-priced commodity cheaper for holders of other currencies, boosting demand. The dollar came under pressure on Monday on news that the budget deficit would hit another record in 2010.

Royal Dutch Shell said on Sunday it had shut in some crude production in Nigeria, a key African exporter, after a crude oil pipeline was sabotaged over the weekend.

Crude oil inventories likely slipped slightly last week by about 200,000 barrels in the week.

Temperatures in the Northeast are expected to be mostly below normal through mid-February, according to the National Weather Service.

Nonetheless, any rebound in oil prices may still be short-lived, since demand for still has not rebounded strongly since the recession, prompting the refining industry to run its plants at their lowest distillation rates since the 1980s. Stocks of distillate fuel, such as heating oil and diesel, were 16 percent above five-year averages in late January, according to government data.