MarketView for June 24

 

 

Summary  

 

It was another down day for The Dow Jones industrial average, its fourth in a row, although both the S&P 500 and the Nasdaq indexes managed to tend the day in positive territory despite the Federal Reserve reiterating its concerns regarding the economic outlook at the end of its policy meeting. Technology shares sustained some strength, bolstered by stronger-than-expected quarterly results from software maker Oracle.

 

The Fed, as expected, left the benchmark fed funds rate at almost zero. The bond market sold off on disappointment that the Fed did not announce an acceleration or increase of its purchases of Treasury and mortgage-related debt. The price of the benchmark 10-year Treasury note fell 18/32, with a yield of 3.70 percent, up from 3.63 percent late Tuesday. Stock prices were also lower because the Fed did not suggest in its statement that it sees any notable recovery any time soon.

 

Before the release of the Fed's statement, all three major stock indexes were solidly higher, with the Nasdaq up more than 2 percent, the result of a stronger-than-expected report on monthly durable goods orders, which pointed to increased economic demand. The Fed's words on the economic outlook were mixed. The central bank said the economy was likely to remain weak for a time, but the contraction's pace was slowing.

 

After the closing bell, Nike fell 6.2 percent to $49.74 following the company's fourth-quarter results. Nike's earnings, excluding charges, exceeded expectations, but its backlog fell 12 percent. In regular trading, Nike was down 1 percent to close at $53.02.

 

During the regular session, Oracle's results helped out other technology stocks, while its shares rose 7 percent to $21.26 and ranked among the Nasdaq's top advancers.

 

Fed Holds Steady

 

The Federal Reserve on Wednesday at the close of its Open Market Committee meeting, indicated that its program of buying government and mortgage debt, which is designed to keep borrowing costs low and boost recovery, will continue.  It also said it saw signs that the deep U.S. recession was easing.

 

The Fed funds rate will remain near zero percent and the Fed indicated that it is less concerned on the matter of deflation, which is considered a threat to the economy because a pattern of falling prices causes consumers and businesses to delay purchases, dragging the economy down further.

 

It also said inflation would "remain subdued for some time" and provided no hint on an imminent exit from bold policy easing, despite fears among investors that the size of the stimulus program could stoke price increases.

 

"Information received since the Federal Open Market Committee met in April suggests that the pace of economic contraction is slowing," the Fed said in its policy statement at the end of a two-day meeting. "Conditions in financial markets have generally improved in recent months."

 

The Fed said it decided to hold overnight interest rates in a zero to 0.25 percent range, the level reached in December, and repeated that rates would likely stay unusually low for some time. However, the Fed also cautioned that the economy would remain weak for a time,.

 

With the benchmark interbank lending rate virtually at zero, the Fed has focused on driving down other borrowing costs by buying mortgage-related debt and government bonds. In its statement, the Fed said it would hold to a previous pledge to buy $1.45 trillion in mortgage-related securities and $300 billion in longer-term government debt.

 

The central bank dropped a phrase it had used in its April statement in which it warned inflation could run below desired levels for a time, a suggestion that officials were worried about the risk of a troubling downward spiral in prices. It also did away with a sentence in the April statement that referenced various emergency liquidity programs devised by the Fed during the crisis to stop credit markets freezing.

 

While sounding more comfortable about deflation risks on Wednesday, policy-makers stressed that inflation was not yet a concern. "The prices of energy and other commodities have risen of late. However, substantial resource slack is likely to dampen cost pressures, and the committee expects that inflation will remain subdued for some time," the Fed said.

 

Even with the overnight rates as low as they can go, the Fed has found ways to lower other borrowing costs. In March, it more than doubled its planned purchases of mortgage-related securities and announced a plan to buy Treasury debt to drive down benchmark yields.

 

At first, the initiative to buy government bonds pulled down longer-term rates, a boon to mortgage borrowers. But this month yields on longer-term Treasuries climbed sharply over concerns that the budget deficit and Fed lending program could sow the seeds of future inflation, although yields have since retreated.

 

Durable Goods Orders Rise

 

An unexpected increase in durable goods orders last month served to increase hopes that the economy was healing, a prospect cautiously supported by the Federal Reserve on Wednesday. The Commerce Department reported on Wednesday that new durable goods orders rose 1.8 percent in May. Manufacturing accounts for about one-third of the economy, and provides a good barometer for overall business health.

 

May’s order increase was the third gain in four months, and followed a revised 1.8 percent increase in April. New orders excluding transportation advanced 1.1 percent last month, compared with a forecast for a 0.4 percent decline, buoyed in part by a 7.7 percent rise in new machinery orders. This was the largest percentage increase in that category since March 2008, the Commerce Department said.

 

New orders excluding defense were 1.4 percent higher. More importantly, non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, jumped 4.8 percent in May, the largest gain since September 2004. May's sharp rise compared with forecasts for a 0.6 percent drop and after a revised 2.9 percent April fall.

 

New Home Sales Fall

 

A report on single-family home sales also highlighted the continuing economic weakness, with the Commerce Department, reporting that sales slipped 0.6 percent last month to a 342,000 annual pace. The median sales price, however, rose in May.

 

The median sales price rose to $221,600 from $212,600 in April and was the highest since December, when it was $229,600. The median marks the half-way point, with half of all houses sold above that price level and half below.

 

A separate report showed that U.S. mortgage applications climbed last week from a seven-month low, the Mortgage Bankers Association said. Demand for home loans rose after four straight weekly declines, as mortgage rates fell and more borrowers applied to buy houses as well as refinance. MBA's seasonally adjusted mortgage applications index, which includes both purchase and refinance loans, rose 6.6 percent last week.

 

Crude Slips

 

The price of crude oil was lower on Wednesday as the stronger dollar and rising supplies in inventory outweighed supply concerns from Nigeria. Gasoline stocks were up by 3.9 million barrels in the week to June 19, as refiners cranked up output in the midst of the summer driving season. Distillate stocks hit 10-year highs, while crude stocks showed a steep drop. U.S. crude settled down 57 cents per barrel at $68.67, reversing earlier gains. London Brent crude fell 47 cents to $68.33 per barrel.

 

Optimism over a potential economic recovery boosting weak oil demand has lifted prices from below $40 a barrel over the past three months. However, crude imports by Japan fell 18.8 percent in May, when compared against last year, according to government data. EIA data showed total domestic demand down 6.6 percent in the four weeks to June 19, compared with year-ago levels.

 

Multiple militant attacks on pipelines and oil installations in OPEC member Nigeria recently have forced production stoppages at sites run by Agip, Chevron and Royal Dutch Shell, stoking supply concerns. A senior official said Nigeria's president will propose a 60-day amnesty program for militants in the Niger Delta on Thursday, in an effort to end years of attacks on Africa's biggest oil and gas industry.

 

Crude oil traders were also keeping an eye on the worst civil unrest in 30 years in Iran, the world's fifth-largest oil exporter, over a disputed presidential election.

 

Venezuela said OPEC was hoping for oil prices up to $75 a barrel by the end of the year, but added global inventories remained very high. The producer group agreed a series of production cuts last year to help stem oil's slide from record highs near $150 a barrel. Kuwait's oil minister said on Wednesday the time was not right for OPEC to boost oil production, however.

 

Launch of Toxic Asset Plan Coming Soon

 

The federal government will "very soon" launch its program to use federal funds and private capital to buy banks' toxic assets, the new overseer of the government's $700-billion bank bailout fund said on Tuesday.

 

"I'm confident that very soon we'll be launching partnerships," said Herb Allison to the Congressional Oversight Panel. "We've made a great deal of progress."

 

Allison, who was confirmed, last week as Treasury assistant secretary to head the Troubled Assets Relief Program (TARP), said "it should not be long" before Treasury announces the first stage in the delayed toxic asset plan called the Public-Private Investment Program (PPIP).