MarketView for June 3

 

 

Summary   

 

Wall Street’s winning streak came to an end on Wednesday as falling oil prices hit energy shares, while less upbeat economic reports rekindled worries about recovery prospects. The end result was a decline by all three major equity indexes. Oil prices fell in excess of 3 percent after a report of an unexpected increase in inventories.

 

As a result, Chevron ended the day down 1.6 percent to $68.26, while Exxon Mobil closed down 1.2 percent at $72.08. Front month crude settled down $2.43 per barrel, or 3.5 percent, to $66.12 after a government report indicated a surprise build-up in inventories in the recent week.

 

Commodities companies were also hit as the dollar strengthened more than 1 percent against a basket of currencies .DXY, depressing the value of commodities denominated in the U.S. currency.

 

A report indicating that the service sector contracted for the eighth consecutive month in May and from a report showing employers axed 532,000 private-sector jobs last month, also did not help matters. The data signaled that the revival in consumer and business spending will take longer than previously forecast. The Institute for Supply Management said its index of the U.S. services sector, which makes up 80 percent of the economic activity, shrank for the eighth straight month in May.

 

According to ADP Employer services, U.S. employers cut 532,000 private-sector jobs. The ADP report is often viewed as a harbinger of the government's monthly unemployment report due on Friday.

 

Federal Reserve Chairman Ben Bernanke said in an appearance before the House Budget Committee he expected to see "some positive growth later this year" but not robust growth.

 

Alcoa closed down 4.3 percent to $10.07. Among some of the other large industrial names, Boeing fell 1.7 percent to $48.37, while DuPont was down 3.9 percent to $28.89, making the stock the top drag among those companies making up the Dow Jones industrial average.

 

Technology shares were not spared, with Research In Motion off 2.6 percent to $80.48.

 

Crude Supplies Rise Forcing Prices Lower

 

Oil fell more than 3 percent on Wednesday, dragged down by an unexpected build and a stronger dollar. Sweet domestic crude for July delivery settled down $2.43 per barrel at $66.12, after falling as low as $64.95 during intraday activity. London Brent crude settled down $2.29 per barrel at $65.88.

 

Crude oil inventories rose by 2.9 million barrels last week as imports rose, according to data from the Energy Information Administration. Total domestic petroleum inventories rose by 15 million barrels during the week, the biggest gain since last October.

 

Pressure also came as the dollar recovered from a 2009 low against the euro after monetary sources in Asia said they would keep buying U.S. Treasurys even if the U.S. credit rating were cut. The stronger dollar tends to depress the value of commodities denominated in the greenback.

 

Fuel demand over the four weeks ending May 29 fell by 7.7 percent against year-ago levels, according to the EIA. Gasoline demand over the period, which included the Memorial Day holiday weekend that traditionally kicks off summer driving season, was down 0.4 percent from last year.

 

 President Obama flew to OPEC kingpin Saudi Arabia on Wednesday, where he said he would raise the issue of price volatility with King Abdullah and indicate no halt to the need for oil imports.

The Organization of Petroleum Exporting Countries last week agreed to leave production targets unchanged after setting a series of cuts last year to stem oil's steep slide from near $150 a barrel as the economic crisis battered demand.

 

Unemployment Numbers Deceiving

 

The national unemployment numbers can be deceiving as 93 metropolitan areas are registering unemployment rates of at least 10 percent in April, according to Labor Department data released on Wednesday. That is more than 13 times the number of cities that notched the same high levels a year earlier, the Department said.

 

Currently, the national unemployment rate is 8.9 percent, but in nearly 150 cities a higher proportion of residents were out of work this spring. Nonetheless, the number of cities posting unemployment rates below 7 percent was 117, which was less than half of the 347 cities recording lower rates just a year earlier.

 

The Labor Department said nine of the 13 metropolitan areas with jobless rates of at least 15 percent were in California. That state's city of El Centro, less than a half hour's drive from the Mexican border, had the highest rate in the country at 26.9 percent. The city has outpaced all others in unemployment each month in 2009.

 

Of the 49 metropolitan areas with populations of more than 1 million in the survey, Detroit had the highest unemployment rate of 13.6 percent, while Michigan had the highest jobless rate for the month. It was followed by California's Riverside area, which is north of El Centro and still smarting from the housing slump.

 

The Labor Department said that 291 metropolitan areas reported drops in the number of jobs from a year earlier.

 

On Friday, the department will release its nonfarm payrolls report for May. Payrolls likely fell by the smallest amount in seven months, pointing to a slackening of the recession, but the unemployment rate looks set to climb to its highest level in nearly 26 years.

 

Bernanke Remains Upbeat But Warns About Deficit

 

Federal Reserve Chairman Ben Bernanke sounded a cautiously upbeat note on the economy on Wednesday but warned that corralling government debt was vital to ensuring the nation's long-term health.

 

In testimony to Congress, Bernanke sounded more confident than he had just one month ago, and he said the risk of a dangerous downward spiral in prices had receded.

 

However, Bernanke also made it abundantly clear that rising deficits posed a significant long-term threat.

 

"Maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance," Bernanke told the House of Representatives' Budget Committee.

 

"Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth."

 

He said rising debt was contributing to a jump in longer-term interest rates. However, he gave no clue as to whether the U.S. central bank would step up its purchases of government and mortgage-related debt to keep rates low, something investors have been watching for.

 

President Obama has said substantial deficits are a necessary evil while the economy is suffering from the credit and housing market busts, and that once the crisis has passed, the focus will shift to shoring up the fiscal position.

 

That is a critical issue for countries such as China that hold hundreds of billions of dollars in U.S. government debt. If the United States is unable to control its long-term deficits, it could weaken the dollar and drive up inflation, hurting the value of those dollar-denominated assets. Treasury Secretary Timothy Geithner, on his first visit to China as Treasury Secretary, sought to reassure Beijing that the United States was committed to living within its means.

 

While offering a rosier assessment of the economy, Bernanke acknowledged that even after a recovery gets under way, growth would likely remain below its potential for a while.

 

"We now are on a process of slow and gradual repair, both in the financial system and the economy," he said. "We averted, I think, a very, very serious calamity."

 

He said financial markets had improved, thanks in part to the Fed's efforts to restore lending, but he also took note of the recent spike in yields on longer-term Treasury debt and fixed-rate mortgages, which could potentially choke off an economic recovery.

 

"These increases appear to reflect concerns about large federal deficits but also other causes, including greater optimism about the economic outlook, a reversal of flight-to-quality flows, and technical factors related to the hedging of mortgage holdings," Bernanke said.

 

The Fed has committed to buy up to $300 billion in Treasury debt and $1.45 trillion in mortgage-related debt, but some economists have called for even more purchases to counteract the rise in interest rates.

 

Representative Paul Ryan, the top Republican on the panel, said the rising bond yields were "telling us that there is no free lunch," and cautioned that the combination of huge debt issuance and central bank buying could be dangerous.

 

"The Treasury is issuing debt and the central bank is buying it," Ryan told Bernanke. "It gives the alarming impression that the U.S. one day might begin to meet its financial obligations by simply printing money."

 

That could trigger inflation, and Ryan said there were already "faint warning bells" of inflation going off as evidenced by a weaker dollar and rise in gold prices.

 

Bernanke said he didn't think inflation was currently a concern, even as he said deflation risks had lessened. He said even with a recent jump in the price of oil and other commodities, cost pressures "generally remain subdued."

 

"As a consequence, inflation is likely to move down some over the next year relative to its pace in 2008. That said, improving economic conditions and stable inflation expectations should limit further declines in inflation," he said.