MarketView for July 15

 

 

Summary 

 

Now Wednesday is what I would call a “good” day on Wall Street. A rally that began as a result of some very positive numbers posted by Intel the night before, in combination with the explosive return to profitability by Goldman Sachs, sent stock prices sharply higher as the S&P 500 index posted its best three says since last March. This week alone, the S&P 500 is up 6.1 percent.

 

The current earnings season will be a key contributor to the market’s performance during the summer as Wall Street searches for some pilings on which to build a supporting floor of  optimism that an economic recovery has really begun in earnest.

 

One encouraging sign was a report by the credit card companies indicating that defaults and delinquencies were lower in June than expected. American Express forecast better business in the second half of the year, pushing its stock up 11.3 percent to $27.22.

 

Optimism was further reinforced by manufacturing data that suggested the recession is abating, as well as minutes from the Federal Reserve's most recent policy-setting meeting that showed officials judged that the U.S. economy's contraction was slowing.

 

But Intel set the tone with earnings that handily beat forecasts on better-than-expected consumer demand for personal computers. It also gave a strong outlook and shares of the world's largest chip maker shot up 7.3 percent to $18.05.

 

Along with technology shares, the financial sector led the way upward on the expectation that banks will report better-than-anticipated quarterly results fueled Monday's rally. JPMorgan, which releases its scorecard on Thursday, gained 4.5 percent to $36.26.

 

Intel's results also lifted its arch rival Advanced Micro Devices whose shares rose 8.7 percent to $3.86, while the PHLX semiconductor index .SOXX rose4.4 percent. Furthermore, the technology sector will likely remain in the limelight as we see earnings numbers from IBM and Google IBM gave the Dow its largest boost climbing 3.9 percent to close at $107.22, while Google ended the day up 3.2 percent to close at $438.17.

 

On the economic front, separate reports showed both industrial output and New York factory activity declined at a slower pace, while consumer prices edged up moderately. The New York Federal Reserve Bank's Empire State business index registered its strongest level since April 2008. Minutes from last month's FOMC meeting showed central bank policy-makers thought economic growth would resume in the second half of the year, although the economy remained vulnerable.

 

Consumer Prices Rise

 

According to a report released by the Labor Department prior to the opening bell on Wednesday, consumer prices grew at a  0.7 percent pace in June, but much of the increase was due to rising gasoline prices and the core measure of inflation remained relatively tame.

 

The Labor Department said the rise in the Consumer Price Index was the largest since July 2008.

Gasoline prices were up 17.3 percent last month, the largest increase since September 2005, and explained much of the increase in the headline index, the Labor Department said.

 

Compared to the same period last year, consumer prices fell by 1.4 percent, which was the largest decline since January 1950, when prices fell 2.1 percent. Gasoline prices compared with a year ago were 34.6 percent lower.

 

However, if you take out the volatile energy and food sectors, the closely watched core measure of consumer inflation rose by 0.2 percent in June. Core prices compared with a year ago rose 1.7 percent, the smallest rise since a matching gain in January.

 

Minutes of Last Federal Reserve Meeting Show Restraint

 

The Federal Reserve held back on additional asset purchases at its meeting last month because of doubts over the resultant reaction by the financial markets to more buying, the minutes of the last meeting released on Wednesday indicated.

 

The Fed seemed to reach the conclusion that the recession was coming to an end, and they bumped up forecasts for economic activity for both this year and next. However, the policy-makers also raised their projections for unemployment and determined that downside economic risks remained.

 

Despite this risk, the Fed opted not to increase an existing $1.75 trillion asset purchase program, currently their main tool for spurring the economy, out of worry this could do more harm than good.

 

"Although an expansion of such purchases might provide additional support to the economy, the effects of further asset purchases, especially of Treasury securities, on the economy and on inflation expectations were uncertain," minutes of the Fed's June 23-24 meeting said.

 

Long-term bond yields was up somewhat in the weeks before the meeting, with some blaming the change on fears among investors that the Fed would monetize the debt, meaning to purchase government bonds with newly created money to help it finance a record budget deficit.

 

Policy-makers did not think that U.S. Treasury purchases would add to inflationary pressures, but noted that public perceptions about debt monetization could impact expectations.

 

The Fed also held interest rates in a range of zero to 0.25 percent at the meeting, and repeated an assurance that rates would remain exceptionally low for an extended period. With rates about as low as they can go, asset purchases are now a key tool in the central bank's arsenal to stimulate growth, and it has already doubled its balance sheet to around $2 trillion to support the economy.

 

But policy-makers felt that with a massive purchase program already in train, $300 billion of longer dated Treasuries to be bought by end-September and $1.45 trillion of mortgage debt by end-December, they had done enough for now.

 

"Moreover, it seemed likely that economic activity was in the process of leveling out, and the considerable improvements in financial markets over recent months were likely to lend further support to aggregate demand," the Fed said.

 

Policy-makers slightly raised their outlook for the economy in 2009, but projected that unemployment could push above 10 percent, and then only decline slowly over the next 12 months.

 

"Labor market conditions were of particular concern to meeting participants," the Fed said, noting that these could weigh on consumer spending and potentially hurt the recovery. In this light, and with core inflation expected to remain "subdued for some time", the policy-makers remained very wary. "Most believed that downside risks to economic growth had diminished somewhat since the April meeting, but were still significant," the Fed said.

 

Policy-makers also thought that it would take five to six years before the economy would get back to a path where growth, inflation and unemployment were all around long-term trend sustainable levels. Given such slack, there was little talk in the minutes of an exit from the Fed's massive monetary stimulus; although it did say that it had the tools needed to manage the balance sheet.

 

"Ensuring that policy accommodation can ultimately be withdrawn smoothly and at the appropriate time would remain a top priority for the Federal Reserve," the minutes said.

 

Industrial Output Improves

 

Industrial output declined at a slower pace in June and a key regional factory survey posted its strongest reading in a year this month. Another report showed core consumer prices edged up at a moderate pace in June, providing further evidence that the recession was not pushing the country toward a Japan-style deflation and stagnation.

 

The U.S. Federal Reserve also gave a somewhat more optimistic outlook, saying the economy probably would not contract as sharply as previously thought in 2009.

 

In its updated economic projections, released along with minutes from its June policy-setting meeting, the Fed nudged up its 2009 GDP forecast to a range of -1.5 percent to -1 percent, from its April outlook for -2.0 to -1.3. However, it also raised its unemployment forecast for this year and next, warning that the economic recovery would probably be too anemic to generate much job growth.

 

Federal Reserve data indicated that industrial production fell by a smaller-than-expected 0.4 percent last month, reinforcing hopes the pace of the economy's decline was slowing, although the result was helped by strong utilities production. For the second quarter as a whole, output fell at an annual rate of 11.6 percent, a more moderate contraction than in the first quarter, when production fell at a 19.1 percent rate.

 

A separate report from the New York Federal Reserve Bank indicated that the decline in factory activity in New York State was easing, adding to recovery hopes. The New York business conditions index rose to minus 0.55 in July, the highest reading since April 2008, from minus 9.41 in June. The improvement reflected a big jump in the new orders index, which reached its highest point since December 2007, while the inventories index fell to a record low.

 

Crude Up Sharply

 

Oil prices settled over 3 percent higher on Wednesday, supported by falling U.S. crude oil inventories, news of quarterly corporate results that were better than expected and some signs of economic recovery. Sweet domestic crude futures for August delivery settled up $2.02 per barrel at $61.54. London Brent crude settled up $2.23 per barrel at $63.09.

 

Crude stocks fell last week by a greater-than-expected 2.8 million barrels to 344.5 million barrels, the U.S. Energy Information Administration said.

 

At the same time there is a looming question as to the strength of energy demand due to swelling stockpiles of refined oil products. The EIA data showed an increase in gasoline stockpiles in the week to July 10, which included the July 4 Independence Day holiday, when the summer driving season typically peaks.

 

Gasoline stocks climbed 1.5 million barrels to 214.6 million barrels, surpassing analysts' forecasts, despite the Fourth of July holiday weekend. Weak demand for fuel due to the ailing economy lifted stockpiles of refined products, with distillate stocks reaching a 25-year high last week, according to the EIA data.

 

Nigeria's main militant group agreed to a 60-day ceasefire, but traders had yet to be convinced it would translate into a more stable environment for oil production. Doubts over the sustainability of any truce in Nigeria were amplified after Henry Okah, a militant leader released by the government on Monday, said he believed other militants would keep attacking the country's oil industry.