MarketView for July 8

 

 

Summary 

 

Stock prices managed to gain a bit of ground late in the day on Wednesday after a day of wild price swings, with the Dow Jones industrial average and the Nasdaq indexes eking out gains ahead of a hopeful quarterly earnings season.

 

Stock prices were sharply lower for most of the day as investors worried that an economic recovery will be slower than thought. Those fears helped send crude oil futures to a more than a six-week low, while copper, a barometer for global demand, hit a two-week low as commodities sold off across the board.

 

The earnings season unofficially began after the bell, with the release of results from Alcoa .

 

ConocoPhillips fell 1.4 percent to $39.44 as crude settled down 4.4 percent to $60.14 per barrel. US Steel ended the day down 3.6 percent to close at $30.50 with declining metal prices.

 

The Energy Information Administration released data that showed gasoline and distillate inventories rose more than expected last week, pointing to ongoing weakness in demand -- adding to fears about the economy.

 

Shares in the healthcare and consumer staples, sectors, traditionally seen as better able to weather a weak economy, helped out companies such as Johnson & Johnson and Merck, both up around 1.5 percent. Together they helped push the Dow into positive territory late in the session.

 

In an overall shift away from riskier assets, traders unwound positions in which they borrowed in yen to fund riskier, higher-yielding investments. That sent the dollar, euro and other world currencies lower against the Japanese currency.

 

Alcoa Posts Better Than Expected Results

 

Alcoa Inc posted a third consecutive quarterly loss on Wednesday, but the numbers exceed what was expected.  As a result, Alcoa shares were up almost 7 percent at $10.10 in post market trading.

 

According to the company, it posted a second-quarter net loss of $454 million, or 47 cents per share, compared with earnings of $546 million, or 66 cents per share for the same quarter a year ago. However, the loss from continuing operations, was 32 cents per share and excluding restructuring, the loss was 26 cents.

 

Revenue came in at $4.2 billion, down from the $7.2 billion of a year ago, as Alcoa curtailed aluminum and alumina production in response to reduced demand.

 

The company said the average price of aluminum on the London Metal Exchange in the second quarter was $1,485 per ton, a nine percent increase from the first quarter of 2009, but a 49 percent decrease from the second quarter of 2008. The economic downturn has affected most of Alcoa's markets, including such key sectors as automobile manufacturing, commercial transportation, building and construction, and aerospace, it said.

 

In response to the tough times, Alcoa, the first member of the Dow Jones industrial average to report, has cut thousands of jobs, reduced its dividend, trimmed spending and raised $1.3 billion to help it through the slowdown.

 

Consumer Credit Falls

 

Consumer credit fell by $3.23 billion in May, Federal Reserve data showed on Wednesday, although the previous month's drop was revised to a steeper decline than initially reported. Specifically, May consumer credit outstanding fell at a 1.5 percent annual rate to $2.5196 trillion from $2.5229 trillion in April.

 

The current string of four monthly declines in consumer credit is the longest since June-December 1991, the Fed said. Consumer credit has also declined in eight out of the last 10 months. With credit card defaults at record highs, companies are slashing lending limits and closing accounts to curb losses.

 

Non-revolving credit, which includes closed-end loans for big-ticket items like cars, boats, college education and holidays, fell $400 million, or at a 0.3 percent annual rate. Revolving credit, made up of credit and charge cards, declined $2.9 billion, or at a 3.7 percent rate.

 

Crude Down Sharply

 

The price of sweet crude oil for August delivery was down over 4 percent to under $61 per barrel on Wednesday after a report by the Energy Information Administration showed that distillate stocks have almost reached a 25-year high, reinforcing concerns regarding a potential economic rebound.

 

Sweet domestic crude settled down $2.79 per barrel at $60.14 for its sixth straight daily loss. The close was the lowest since $59.65 a barrel on May 19. London Brent crude settled down $2.80 per barrel at  $60.43.

 

Distillate stocks, including diesel, the primary fuel of industry, climbed by 3.7 million barrels last week, compared with an expected 2-million-barrel rise, according to the EIA's weekly report. The data indicated that gasoline stocks were up by 1.9 million barrels despite the Fourth of July holiday weekend, which is traditionally the peak travel weekend of the summer driving season.

 

OPEC in its 2009 World Oil Outlook released on Wednesday said consumption of its crude would not return to 31 million barrels per day (bpd), the level it averaged in 2008 before the economic crisis cut oil use, until 2013.

 

Commodities, including oil, were also pressured by a statement from the Commodities Futures Trading Commission (CFTC) this week that it was considering tougher position limits to try to curb speculation.

 

Fed Policy Likely to Remain Accommodative

 

The recession is likely to end this year, but the Federal Reserve will not be in a rush to change its policy stance while unemployment is still rising Chicago Fed President Charles Evans said on Wednesday.

 

"I'm assuming that policy will continue to be accommodative for a considerable time," Evans said.

 

Evans was the latest policy-maker to cast doubt on ideas that the Fed could raise benchmark interest rates before the end of 2009 or in early 2010. The Fed needs clearer signs of "sustainable growth" before starting to reverse course, Evans said. He forecast "modest increases" in output for the second half followed by somewhat stronger growth in 2010.

 

At this late stage in the economic cycle, Evans said additional stimulus would be helpful but that it would be "tough" to identify fresh measures that the Fed could undertake.

 

"Everybody is very nervous about the current situation and we're at a very difficult time. We're trying to judge if in fact the economy is closing to bottoming out. There's a large amount of nervousness and uncertainty associated with that."

 

Evans, a voting member of the Federal Open Market Committee in 2009, suggested that Fed policies regarding benchmark rates and on nontraditional credit easing programs, are on hold.

 

"In the absence of unexpected shocks and changes, I don't foresee the need for any major changes to the policy parameters of the programs, and I view us in a wait-and-see mode."

 

Evans did not anticipate inflation flaring up in the short run given weak labor markets and low capacity utilization. Specifically, he said the jobless rate, which hit 9.5 percent in June, rose faster than he expected and may not peak until sometime in the first half of 2010.

 

The Fed traditionally has not raised interest rates while unemployment is still rising. Evans said the jobless rate was likely to peak above 10 percent, but below 10.6 percent. With that level of slack in the economy, "I think the downward forces on inflation will be greater than the upward forces, and we could see some declines in core inflation," Evans said. Inflation risks will become more balanced "over the medium term," he said.

 

Evans said that recent economic data have been "uneven" but on balance consistent with the idea that "the pace of contraction is slowing and that activity is bottoming out." Improved conditions in financial markets, and stabilization in consumer spending and housing markets, are among the signs of improvement, he said.

 

In the months ahead, a turn in the inventory cycle as inventories better align with sales should "translate into a net positive for GDP growth," Evans said.

 

Evans said that some of the Fed's credit-easing programs will shrink as market conditions improve. Still, a "significant portion" of the balance sheet will likely not shrink on its own, or at the "appropriate" pace, forcing the Fed to gear up its exit strategy.

 

"We need tools to manage it actively, so that monetary policy can be more easily calibrated. In this respect, we can be as creative on the way out as we were on the way in," Evans said. Some of those tools will include selling assets outright or through reverse repurchase agreements, and paying interest on reserves, he added.

 

Evans acknowledged the risk that the rapid increase in the Fed's balance sheet could trigger high inflation, but said there is no "middle link" in the chain that has led from central bank credit expansion to inflation in the past.

 

"Inflationary pressures will not arise without broader credit expansion, and there is no evidence for that at present," he said.

 

Still, Evans noted that inflation, and survey-based measures of inflation expectations, have not fallen as much as might have been expected given the severe downturn.

 

As the economy improves, consumers and businesses might expect upward pressure on inflation, Evans warned. "Experience shows that a rise in inflation expectations, once solidified, becomes embedded in many economic decisions and makes inflation harder to control."