MarketView for June 11

 

 

Summary  

 

Stocks rose in a late rally on Friday sending the Dow Jones industrial average to its first weekly gain in nearly a month as a strong forecast from National Semiconductor lifted tech shares and helped alleviate concerns regarding the economy's health. Wall Street was on edge early in the trading day due to an unexpected drop in retail sales. Meanwhile, National Semiconductor rose 5 percent to $14.21 a day after it forecast margins and revenues above estimates.

 

For the week, the Dow was up 2.8 percent, the S&P gained 2.5 percent and the Nasdaq chalked up a gain of 1.1 percent.

 

A report by the Commerce Department indicated that retail sales fell during May for the first time in eight months, the U.S. Commerce Department reported. However, at the same time the Thomson Reuters/University of Michigan Surveys of Consumers reported an increase in its consumer sentiment index to a near 2-1/2-year high.

 

Although the reading is a preliminary number for June, it did ease the Street’s concerns over the possibility of a slowdown of the nation’s economic recovery. Nonetheless, consumer-related shares were the hardest hit, with Home Depot down 1.5 percent at $32.22, while Procter & Gamble fell down 1.5 percent to $61.01, weighing down the Dow industrials.

 

At the same time, commodity-related companies add some support to the markets. A good example was U.S. Steel, up 3.8 percent to close at $44.82.

 

In another bullish sign, the S&P 500 found technical support around the 1,077 level that marks its 14-day simple moving average. The benchmark posted its first back-to-back close above its 14-day SMA since late April. The CBOE Volatility Index .VIX, a gauge of investor anxiety, fell 5.8 percent to settle at 28.79, its lowest level since May 13.

 

Big-cap pharmaceutical companies' shares also advanced after Barclays Capital upgraded the sector to "positive" from "neutral," citing the revenue potential of new products. Pfizer was the Dow's top percentage gainer, up 3.7 percent at $15.46.

 

U.S.-listed shares of BP rose 3.6 percent to $33.97 as UK officials made supportive comments about the company, even as scientists doubled estimates of the Gulf of Mexico's oil spill.

 

Retail Sales Down

 

Retail sales fell unexpectedly in May, making it the first decline in eight months. The drop in sales reported by the Commerce Department on Friday reflected weak gasoline prices and the end of a home buyer tax credit that had pushed sales of building materials higher.

 

Nonetheless, the underlying trend of steadily advancing consumer spending is intact, despite some recent data that suggests a slowing of the recovery. Furthermore, there is little risk of the economy slipping back into recession.

 

Total retail sales fell 1.2 percent in May, after rising 0.6 percent in April. Receipts from building materials suppliers fell a record 9.3 percent in May after the expiration of incentives to boost the sale of energy-efficient appliances. Gasoline prices, which normally rise in May, fell and weighed on the dollar value of sales.

 

Core retail sales, which correspond most closely with the consumer spending component of the government's gross domestic product report, rose 0.1 percent after dropping 0.2 percent in April.

 

A surprise pull-back in private business hiring last month put consumer spending under the spotlight and fanned fears the economy's recovery from the longest and deepest recession since the 1930s was stalling. Consumers, however, are becoming a bit more optimistic despite the recent plunge in share prices.

 

The Thomson Reuters/University of Michigan's Surveys of Consumers sentiment index rose to 75.5 early this month from 73.6 in May.

 

Consumer spending accounts for about 70 percent of all domestic economic activity, but with the unemployment rate near 10 percent, households have become more cautious than in previous recoveries.

 

Excluding autos, sales fell 1.1 percent in May, the largest decline in 14 months, after rising 0.6 percent in April. Motor vehicle and parts receipts fell 1.7 percent, although dealers reported a rise in sales volumes.

 

There were some bright spots, with sales at sporting goods, hobby and book stores rising 0.4 percent in May after falling 1.3 percent in April. Receipts at electronics and appliance stores rose 0.6 percent, reversing the prior month's fall.

 

Plosser Wants Asset Sales

 

Philadelphia Federal Reserve Bank President Charles Plosser said the Feed should start selling some of mortgage backed assets "sooner rather than later" to avoid sowing the seeds of future inflation.

 

"Despite recent volatility in markets due to fiscal deficit problems in Europe, financial markets are now functioning much better than they were during the height of the financial crisis," Plosser said.

 

"I believe the Fed could begin to liquidate its positions gradually without market disruption."

 

Speaking to reporters after his speech, Plosser said he didn't think the "time was today" for asset sales. He said the decision of when to sell assets would depend on economic conditions.

 

According to Plosser, the economic recovery appears to be sustainable, with stronger business spending and moderate consumer spending growth. He said he expects inflation to remain subdued in the near term, but warned that as the economic recovery takes hold the Fed must ensure price pressures stay under wraps.

 

In addition to buying mortgage-related debt, the Fed also cut benchmark interest rates to the bone to support an economy that was reeling from the worst financial crisis since the Great Depression.

 

The central bank has kept its target for the benchmark federal funds rate at near zero since December 2008 and has pledged to keep it there for "an extended period".

 

"If we do not exit from this strategy in a timely manner, we could be sowing the seeds of another round of uncomfortable and costly inflation in the intermediate term," he said. "Returning to a more normal monetary policy will involve ... returning to an all-Treasuries portfolio, and raising the short-term interest rate toward a more normal level," Plosser said.

 

Plosser said even if the benchmark interest rate target "was increased to 1 percent, policy would remain very accommodative." However, he did not go as far as his counterpart at the Kansas City Fed, Thomas Hoenig, who earlier this month made a bold call for the benchmark interest rate to be raised to 1 percent by the end of the summer.

 

Plosser said he did not want to put a time-frame on rate hikes, arguing that this was a reason he was uncomfortable with the Fed's pledge to keep rates low for an extended period. "Some people perceive that language implies calendar time, and that can be misleading," Plosser said.

 

Like Hoenig, Plosser is known as one of the more hawkish regional Fed presidents on inflation. He is not a voting member of the Fed's policy-setting committee this year,

 

Plosser reiterated that the Fed will have to begin tightening monetary policy well before the jobless rate has fallen to "acceptable levels". The unemployment rate will decline only gradually, he said.

 

Plosser described the U.S. jobs report last Friday, which showed just 41,000 private sector jobs were created in May, as "somewhat disappointing" but cautioned not to read too much into one month's data.