MarketView for June 11

 

 

Summary 

 

Stock prices were higher pretty much across the board on Thursday, aided by rising commodity prices and improving labor market conditions, combined with a sharp drop in interest rates. And while prices were up sharply in early trading, the rally faded somewhat as the day wore on with light volume hindering a move by the S&P 500 index to go beyond the 950 level.

 

Energy shares helped lead the advance after the International Energy Agency raised its demand forecast for the first time in 10 months. Crude oil rose briefly to more than $73 a barrel and lifted shares of resource companies, such as Chevron, which closed  up 2.4 percent at $71.90 and Alcoa, up 6.4 percent close at $12.22.

 

At the same time, upgrades on some of the larger regional banks by t Goldman Sachs, combined with a separate upgrade of Bank of America, sent bank shares skyward. Bank of America was up 8.3 percent to close at  $12.97 after Keefe, Bruyette & Woods analysts raised their rating on the stock to "outperform" from "market perform" and increased their price target to $16.50 from $12.

 

Further bolstering bank shares, Goldman Sachs raised its ratings on regional banks Regions Financial, which closed up 9.3 percent at $4 and Fifth Third Bancorp, sending its price up 5.9 percent to close at $7.77, although Goldman said it favored large banks overall.

 

Rising energy costs are now being viewed in a positive light by investors as a signal of renewed demand. Recent concerns about large debt auctions have been shrugged off, with a big rally in the bond market on Thursday as the Treasury sold $11 billion of 30-year bonds.

 

Early in the trading day the major stock indexes had gained more than 1 percent, with the Dow briefly turning positive for the year when it rose as high as 8,877.93 intraday.

 

Demand was well above average for an auction of $11 billion of 30-year Treasury bonds, resulting in a sharp rally in the bond market. Stocks have tracked bonds of late, with higher rates causing concern among investors, but the fall-off in bond prices, which move inversely to their yields, makes stocks more attractive.

 

Retail sales data showed May retail sales rose 0.5 percent, but the rise was mostly due to higher gasoline prices. Excluding autos and gasoline sales, sales were up just 0.1 percent.

 

Weekly initial jobless claims fell to 601,000, which was better than expected, suggesting improvement in the labor market.

 

Boeing was the blue-chip Dow's primary laggard as its stock fell 3.1 percent to $50.66 after the company slashed its forecasts for new plane demand due to the industry downturn.

 

Economic Data Improving

 

Retail sales rose in May for the first time in three months and the number of workers filing new claims for jobless benefits last week hit a January low, fostering hope the recession was abating. According to a report by the Commerce Department on Thursday, retail sales rose 0.5 percent last month, the result of stronger gasoline and building material receipts, after falling by 0.2 percent in April.

 

A separate report from the Labor Department indicated that the number of workers filing new claims for unemployment benefits fell by 24,000 claims to 601,000 claims last week, the lowest since the week of January 24.

 

While initial claims for state unemployment insurance benefits declined for the fourth straight week last week, the number of people staying on the benefit rolls after collecting an initial week of aid rose to a record 6.82 million in the week of May 30. It was the 19th week in a row so-called continued claims set a record.

 

The data were the latest in a series to bolster the argument that the economy's severe recession was close to hitting a bottom, with the sales report raising optimism that consumer spending would probably be flat to only modestly lower in the second quarter.

 

However, there are worries that higher gasoline prices, which boosted retail sales in May, could hurt the economy. Gasoline prices rose every week in May, according to government data, increasing from $2.13 a gallon at the beginning of the month to $2.57 by June 1. If you exclude sales at gasoline stations then retail sales were up just 0.2 percent, after declining by 0.2 percent in April, the Commerce Department said.

 

Gasoline sales jumped 3.6 percent last month after dropping 0.8 percent in April, while sales of building materials climbed 1.3 percent, the biggest gain since April last year. Car sales rose 0.5 percent.

 

The yield on the 10-year Treasury note, a benchmark for many mortgages, hit 4 percent on Wednesday for the first time since October and revisited that level briefly on Thursday in a potential challenge to the hoped-for economic recovery.

 

Consumer spending, which accounts for about 70 percent of U.S. economic activity, rose at a 1.5 percent annual rate in the January-March period after a 4.3 percent dive in the fourth quarter of last year.

 

Consumers, buffeted by lost income from rising unemployment and falling home prices, have largely refrained from splurging and prefer to either save or pay off debt with the extra cash from tax cuts and government transfers.

 

Data from the Federal Reserve on Thursday showed household net worth dropped by $1.3 trillion in the first quarter to $50.4 trillion, with debt contracting at a 1.1 percent annual rate after a 2.2 percent fall in the fourth quarter.

 

However, with confidence picking up and the pace of job losses showing signs of abating, analysts expect consumers to loosen their purse strings in the second half of the year.

 

A third report showed businesses continued to pare inventories sharply in April. According to the Commerce Department, inventories fell 1.1 percent, the eighth monthly decline in a row, with stocks of motor vehicles down a sharp 2.4 percent. The Commerce Department said on May 29 that inventories fell $91.4 billion in the first quarter after a $25.8 billion drop in the final three months of last year.

 

Crude Prices Continue to Rise

 

The price of crude oil extended a three-day rally to above $73 a barrel on Thursday on hopes for a recovery in world energy demand and worries refinery shutdowns could tighten gasoline supplies ahead of the summer driving season. At the same time, the International Energy Agency said it revised its outlook for global oil demand higher for the first time since August; two days after the Energy Information Administration did the same.

 

Domestic sweet crude futures for July delivery settled up $1.35 per barrel at $72.68, the highest settlement price since October 20, after reaching $73.23 earlier in the trading session. London Brent crude settled up 99 cents per barrel at $71.79.

 

Earlier in the day, China reported that its oil imports rose 5.5 percent in May when compared to the previous year, reaching the second-highest volume on record.

 

Oil dealers added that news of Valero shutting its refinery on the Caribbean island of Aruba for the summer due to weak profit margins encouraged the rally by intensifying concern fuel supplies will tighten when Americans hit the roads this summer. The 275,000 barrel-per-day Aruba refinery ships partially processed fuels to the United States.

 

The U.S. has already been hit by several refinery outages in recent weeks, including fires at Sunoco's plant in Marcus Hook, Pennsylvania, and Flint Hills' plant in Corpus Christi, Texas.

 

Crude prices have more than doubled since this winter, aided in part by worries OPEC production curbs will dig into world stockpiles just as the economy recovers. Venezuela Oil Minister Rafael Ramirez said the group, which has agreed to cut 4.2 million barrels per day of output from the market since September, should not consider increasing production until world oil stockpiles are reduced.

 

Domestic crude stocks fell by a sharp 4.4 million barrels last week due to sliding imports, but they remain about 19 percent higher than a year ago, the Energy Information Administration (EIA) reported on Wednesday.