MarketView for February 23

 

 

 

Summary 

 

Share prices suffered their largest one-day loss in nearly three weeks on Tuesday after February’s consumer confidence numbers fell to a 10-month low, due in large part to the short-term outlook for jobs that worsened. Results from retailers added a bit of hope but it was not much as bellwethers like Target forecast a tepid performance in the first quarter.

 

Stocks associated with a strong cyclical upturn in the economy were also hit. Top performers during last year's rally, including technology, materials and energy stocks led the downside. Oil futures fell $1.45 to $78.86 a barrel. Caterpillar fell 2.4 percent to close at $56.66. Intel closed down 2.4 percent at $20.38.

 

The weak data added to the cautious tone before congressional testimony from Federal Reserve Chairman Ben Bernanke on interest rate policy beginning on Wednesday. Meanwhile, a separate report showed home prices unexpectedly slipped in December, adding to concerns over the sustainability of the economic recovery.

 

Overseas data set a negative tone early on with German business confidence falling unexpectedly for the first time in almost a year.

 

The day's losses reversed stocks' recent trend and the S&P 500 racked up its worst decline since early February. Investors shied away from risk ahead of Bernanke's testimony when he is likely to be asked about the Fed's surprise move to raise the discount rate last week.

 

Home was a bright spot, reporting results that beat estimates and raising its profit forecast. The company gained 1.4 percent to close at $30.75. However, Target fell 1.2 percent to $50.06 after it gave a tepid view of its first-quarter outlook even as it posted a fourth-quarter profit slightly above expectations.

 

Sharp Drop in Consumer Confidence

 

Consumer confidence sagged to a 10-month low in February on worries that a lack of jobs, combined with the gridlock in Washington, could hinder efforts to restart employment, curbing the economic recovery. The housing market also remains rickety, data showed on Tuesday, further underscoring the economy's fragility.

 

The Conference Board said its index of consumer attitudes fell to 46.0 in February, the lowest since April last year and down from a revised 56.5 in January. Consumers' assessment of the labor market worsened. The Conference Board's "jobs hard to get" index rose to 47.7 percent in February from 46.5 percent in January. The present situation index dropped to 19.4 from 25.2 in January, the worst since February 1983.

 

The number of mass edged up in January as manufacturers stepped up job cuts, another report showed, even though many analysts still think the economy is on the verge of creating jobs.

 

Emergency government support for the economy has helped limit the already severe damage to the labor market, a non-partisan organization said. The Congressional Budget Office said the massive stimulus package passed last year created up to 2.1 million jobs in the last three months of 2009.

 

Congressional leaders said on Tuesday they could get a job-creating bill through both houses soon for President Barack Obama to sign into law. Senate Majority Leader Harry Reid said he planned to bring up the $15 billion package of tax cuts and highway spending for a vote on Tuesday or Wednesday.

 

Adding to worries about the economy, the latest reading of Standard & Poor's/Case-Shiller indexes indicated that home prices unexpectedly slipped in December, but the annual rate of decline slowed, reinforcing that the housing market is on an uneven path to recovery.

 

The S&P composite index of home prices in 20 metropolitan areas declined 0.2 percent in December, matching the dip in November, for a 3.1 percent annual drop.

Commercial real estate is unlikely to show meaningful recovery before next year, a real estate group said, citing high vacancy rates. The National Association of Realtors said many property owners would be forced to make concessions on rent.

 

However, consumers increased their purchases on home maintenance and improvements. Top home-improvement chain Home Depot Inc reported its first quarterly same-store sale rise in nearly four years and gave an upbeat full-year forecast. Target Corp's CEO said both the economy and its business were meaningfully improved from a year ago.

 

But there was bad news on the banking sector as regulators reported that the number of "problem" banks rose 27 percent during the fourth quarter of 2009, to 702. That was the highest level since 1993.

 

Retail Sales Rise

 

Major retailer posted improved sales performances on Tuesday, while Home Depot and Macy's both forecasted better sales in 2010. Macy's posted fourth-quarter earnings of $1.40 per share, excluding onetime items.

 

The fact that demand picked up for items that sat out the recession on store shelves it was a time of welcome relief. Nonetheless, there was caution being express that investors should not expect a huge improvement in sales trends this year, due to the high unemployment rate. Nonetheless, Macy's said it expects a 1 to 2 percent increase in sales at stores open at least a year for the current fiscal year, compared with a 5.3 percent decline last year.

 

Target saw its share price fall 0.8 percent, as Sears ended the day down 1.3 percent, while Macy's rose 1.3 percent. Home Depot, whose quarterly results suggested continued gains against rival Lowe's, saw its share price end the day up 1.9 percent.

 

One positive sign is that customers of both Home Depot and Lowe's were more willing to spend on big-ticket home projects such as painting, new flooring and renovating kitchens after a prolonged slump in the U.S. housing market. Home Depot posted its first quarterly same-store sales rise in nearly four years.

 

Target has seen customers adding a few more home improvement and apparel items to their baskets, not just buying essentials like food, and expects sales of such discretionary merchandise to improve. However, consumer caution was also evident in weekly sales numbers. The ICSC/Goldman Sachs same-store sales index rose 0.9 percent in the week ended February 20, compared with a year earlier. ICSC research forecasts a 2 percent rise in February same-store sales overall.

 

Home Depot posted a profit that beat analysts' expectations in the quarter, compared with a year-earlier loss. It forecast increases of about 2.5 percent in both total and same-store sales for this fiscal year, while net earnings from continuing operations should rise about 15.5 percent to $1.79 a share.

 

Sears' profit more than doubled, largely on cost cuts, as its same-store sales fell 2.5 percent. At the same time, the Sears chain appears to be losing market share to Home Depot and Lowe's, which have invested to improve their stores.

 

Target slightly beat analysts' estimates as it avoided drastic clearance sales that crimped results in the holiday quarter last year. Sales at stores open at least a year, a key gauge of a retailer's health, rose 0.6 percent. In the past year, Target reduced inventory and touted low prices to win back consumers who stopped shopping in its stores during the downturn. It is also renovating hundreds of stores to add more fresh food and groceries. Target said the current Wall Street first-quarter earnings estimate is above its own forecast.

 

The Idea of Raising the Discount Rate Received Play At Last FOMC Meeting

 

Two regional Federal Reserve banks led by more hawkish policymakers began a push to raise the discount rate for Fed emergency bank loans in mid-January, according to minutes of a Fed board meeting released on Tuesday. The Kansas City and St. Louis Federal Reserve banks were the first to call for the rate hike that was ultimately implemented last week, minutes of the January 25 meeting showed.

 

When the Fed's policy-setting Federal Open Market Committee met on January 26-27, only those two banks called for raising the rate the Fed charges on emergency loans to banks.

 

"In light of improving conditions in financial markets, some Federal Reserve Bank directors indicated that they favored increasing the primary credit rate by 25 basis points in order to begin to restore a more normal discount rate structure," the minutes said.

 

The Fed has maintained that its move on Thursday, which pushed the so-called primary credit rate up to 0.75 percent from 0.50 percent, should not be interpreted as the opening salvo of a monetary policy tightening cycle.

 

The timing of the rate hike came as a surprise to financial markets. While the discount rate normally moves in tandem with the federal funds rate governing interbank lending, Fed officials wanted to make the change between policy meetings to distinguish between liquidity programs and monetary policy.

 

By the time the rate increase was announced, all 12 regional Fed banks had requested a discount rate increase.

 

In raising the discount rate, the U.S. central bank indicated it remained committed to keeping the benchmark overnight federal funds rate, its main policy tool, exceptionally low for an extended period of time. That rate remains in a zero to 0.25 percent range.

 

That the push for a higher discount rate was led by some of the more hawkish regional Fed banks could prompt some investors to second-guess other reassurances on the main policy rate.

 

It was Kansas City Fed President Thomas Hoenig who, upon rotating back into a voting seat at the Fed's January policy meeting, dissented against the central bank's vow to hold the federal funds rate extraordinarily low for an "extended period" in favor of less explicit language.

 

Hoenig has said the phrase was devised to grapple with emergency conditions that are no longer in place.

 

While the FOMC sets the target for the federal funds rate, the Fed's Washington-based board decides when to move the discount rate, acting on requests from the regional Fed banks boards of directors.