MarketView for June 23

 

 

Summary  

 

It was a mostly down day on the Street this Wednesday, due in no small part to the somewhat degraded outlook for the economy posted by the Federal Reserve after its two day meeting that ended on Wednesday. At the same time, the Fed indicated that it planned to keep interest rates at their current level.

 

The major market indicators oscillated between positive and negative territory for much of the day as the Street wrestled over the implications of the Fed's statement. By the closing bell, the S&P 500 and Nasdaq indexes were in the red, while the Dow managed to put a small gain on the scoreboard.

 

Although the Fed renewed its determination to keep benchmark interest rates exceptionally low, its somewhat less than bullish statement on the economy hurt a broad range of share prices. Banks were among the day's weakest performers as Bank of America closed down 0.9 percent at $15.43.

 

After the closing bell, Dell rose 2 cents to $13.84 based on its a full-year outlook. Paychex fell 3.6 percent to $26.43 in extended-hours trading after the company reported its fourth-quarter results. Nike lost 2.1 percent to $71.02 after its results. Finally, Bed Bath & Beyond shed 6.5 percent, falling to $38.78 after the bell, after it forecast a lackluster second-quarter profit.

 

Earlier in the day, the Commerce Department reported that sales of new homes fell to their lowest level ever in May. Homebuilders' shares, however, rebounded after initial weakness on the news on the assumption that the worst was over for the crippled sector.

 

Supporting the Dow was Boeing, up 1.8 percent to close at $67.45. The aircraft manufacturer has just received a $216 million contract from the U.S. Air Force.

 

August crude futures settled down 2 percent, or $1.50, at $76.35 per barrel as a large increase in crude inventories cast doubt on demand prospects and a downturn in a broad array of commodities diminished risk appetite.

 

Jabil Circuit gained 11 percent to close at $15.03 a day after it reported third-quarter earnings that beat expectations and forecast strong fourth-quarter results. Philip Morris rose 3.3 percent to $46.49 after it said its earnings would grow more than expected this year.

 

On the downside, Adobe Systems fell 7.3 percent to $30.38, a day after reporting second-quarter results.

 

Fed Leaves Interest Rates Unchanged – Says Economy is Soft

 

As was widely expected on Wall Street, the Federal Reserve acknowledged that we are experiencing a somewhat slower economic recovery than had been initially thought as it kept benchmark interest rates exceptionally low for what will likely be an extended period of time.

 

In a statement at the end of a two-day meeting, the Fed scaled back its assessment of the pace of recovery, taking note of pockets of weakness, and also issued a cautionary note about volatile financial markets in light of Europe's debt woes. But it stuck to its expectation that the economy will continue to gradually emerge from the worst recession in decades.

 

"Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad," the Fed said.

 

Therefore, the Fed held overnight rates in the zero to 0.25 percent range set in December 2008 as it continues to battle the recession. And as expected, Kansas City Federal Reserve Bank President Thomas Hoenig dissented for the fourth meeting in a row, arguing the Fed's promise to hold rates ultra low for a long time risks perpetuating a boom-and-bust cycle.

 

The Fed said the economic recovery was "proceeding," a downgrade from its assessment in April when it said the economy had continued to strengthen. The Fed also nodded to a recent softening of inflation. It noted that energy and other commodity prices had declined in recent months, and underlying inflation had trended lower.

 

Recent disappointing jobs and housing market reports, financial turmoil in Europe, and a four-decade low in a key inflation metric have raised doubts about the outlook, prompting some analysts to push back forecasts for Fed rate hikes.

 

The Fed's summary of economic conditions compiled for this week's meeting found that while conditions were still improving, the pace of growth was modest. However, some Fed officials have said in recent weeks they see the pickup in growth gaining momentum. Kansas City's Hoenig has argued the recovery is strong enough, and the risks of inflation from the Fed's easy money policies are serious enough, that raising rates to 1 percent fairly soon is warranted.

 

Bernanke said he expects GDP to expand at a 3 percent annualized rate this year and gain steam in 2011. Meanwhile, most economists expect the Fed to begin pushing up borrowing costs next year, but the recent string of downbeat economic data has some contemplating a further easing of monetary policy.

 

The economy added jobs in May, but most were public sector positions. In addition, mortgage applications have plummeted since the homebuyer tax credit expired at the end of April. Like sales of new homes, sales of previously owned homes also slumped last month.

 

Financial turmoil in Europe on doubts about euro zone member countries' ability to meet debt obligations has roiled financial markets, pushing up interbank lending rates and sparking fears of a renewed credit crunch.

 

New Home Sales Hit Record Low

 

A report released by the Commerce Department on Wednesday stated that sales of new homes fell by a record 32.7 percent during May, reaching their lowest level in at least forty years as the impetus to purchase that was supplied by the popular tax credit expired. According to the Commerce Department, single-family home sales fell to a 300,000 unit annual rate, the lowest level since the series started in 1963.

 

In addition, April and March sales figure was revised down to 446,000 units and 389,000 units respectively. The drop in sales in May unwound two months of gains, which had been inspired by a government tax credit for home buyers.

 

The report comes on the heels of Tuesday’s announcement and report indicating that sales of previously owned homes, which are recorded at contract closing, fell unexpectedly in May. The expiry of the tax incentive has also resulted in a decline in new home construction and demand for home loans applications for loans to buy homes fell last week, staying near 13-year lows.

 

Last month's weak sales pace saw the supply of homes available for sale jumping a record 46.6 percent to 8.5 months' worth, the highest in nearly a year, from 5.8 months' worth in April. However, the number of new homes on the market dipped 0.5 percent to 213,000 units, the lowest since November 1970.

 

The median sale price for a new home fell 1 percent in May from April to $200,900. In the 12 months to May, prices fell 9.6 percent, the largest decline since July 2009.

 

Price of Crude Oil Falls

 

The price of crude oil fell by 2 percent on Wednesday after government data indicated that crude stocks rose sharply last week and the International Energy Agency forecast supplies would be comfortable for five years.

 

Domestic sweet crude futures for August delivery settled down $1.50 per barrel at $76.35 extending declines into a second day. Prices earlier touched a low of $75.17 a barrel before partly recovering. ICE Brent crude futures for August fell $1.73 to $76.31 a barrel.

 

The Energy Information Administration said crude oil inventories rose by 2 million barrels last week, contrary to analysts' expectations for a drop of 800,000 barrels. The build was slightly below industry data published on Tuesday.

 

Prices received some support from a possible improvement in demand as inventories of gasoline fell by 700,000 barrels last week, the EIA said, with demand over the past four weeks up 1.2 percent on last year. Other distillate demand, which includes diesel, heating oil and jet fuel, is up by almost 12 percent over the past four weeks on the same period last year as an improving economy boosts consumption. U.S. distillate stocks rose by 300,000 barrels, against analyst expectations for a 1.3 million barrel build.

 

While average daily global oil consumption is expected to grow by 1.2 million barrels each year between 2009 and 2015 supply will largely keep pace, the International Energy Agency (IEA) said in its annual medium-term oil and gas report.

 

"For the next few years, the oil market is marked by more comfortable spare capacity than envisaged last year, and the duration of the current gas glut is set to last beyond 2013, at least in some regions. Yet, we shouldn't be complacent," the Paris-based IEA said.

 

Global oil production capacity was seen hitting 96.5 million barrels per day (bpd) by 2015 from 91 million bpd currently, but potential delays to new deepwater oil projects following the accident at BP's) oil rig in the Gulf of Mexico may tighten supplies.

 

However, on Tuesday, a U.S. judge blocked the Obama administration's six-month ban on deepwater drilling imposed in the wake of BP Plc's (BP.L) Gulf of Mexico oil spill, but the White House said it would appeal against the ruling.

 

A tropical wave south of Haiti strengthened slightly overnight and could develop into a tropical depression over the next couple of days, the U.S. National Hurricane Center said on Wednesday.

 

If the storm develops and turns north to head for the area between Mexico's Yucatan peninsula and western Cuba, as suggested by some models, it could disrupt clean-up operations and oil production in the Gulf of Mexico.

 

Prices of U.S. crude have gained less than 0.5 percent this week after briefly jumping toward $79 on Monday.

 

They have climbed about 20 percent from a trough below $65 a barrel a month ago but are still about $10 lower than the 19-month peak above $87 a barrel hit in early May, before the onset of the European debt crisis.