MarketView for June 30

Summary  

Wall Street wound up a dismal second quarter on Wednesday in another low volume session as the Street found little reason to do much anything after conflicting economic data. Wednesday's session ended like many during the quarter, with a late-day sell-off as buying interest waned and under performers came under selling pressure in the worst quarter since collapse of Lehman Brothers.

The S&P 500 fell below the 1,040 level that it had held since February, breaking out to the downside from what chartists call a very bearish "head and shoulders" price pattern and suggesting a major fall could come in the next five months.

To make matters worse, leveraged short ETFs, widely blamed for a portion of Tuesday's losses, were also cited for the late sell-off as managers piled on bets the market will fall. Those funds shorted the market to keep up with customer demand.

For the second quarter, the Dow fell 10 percent, the S&P 500 was down about 12 percent and the Nasdaq fell 12 percent as rising concern over Europe's sovereign debt and the sustainability of the U.S. economic recovery took their toll. The losses put Wall Street in correction mode as the second quarter ended.

Technology shares were among the hardest hit, with Google down 2.1 percent at $444.95 and Apple closing down 1.8 percent at $251.53.

Data on Wednesday showed Midwest business activity grew slightly more than expected in June, but a private-sector report showed weakness in employment, a critical part of the economic recovery.

Housing Demand Falls

Refinancing sent. mortgage applications to an eight-month high, as loan rates fell to or near record lows. Nonetheless, demand sank toward 13-year lows last week, the Mortgage Bankers Association reported on Wednesday. The housing market has continued to deflate since the spring sales spree, fueled by now-expired federal tax credits of up to $8,000. As a result, the upside to the market is now limited by unemployment stuck near 10 percent, heavy foreclosure supply and pent-up selling from owners just waiting for the right time to put their homes back on the market.

Mortgage refinancing requests rose 12.6 percent in the week ended June 25 to the highest level since May 2009, as average 30-year mortgage rates slid 0.08 percentage point to 4.67 percent, the MBA said. The 30-year loan rate flirted with the record low of 4.61 percent set in March 2009, according to the MBA's records dating back to 1990, while the 4.06 percent 15-year rate was an all-time lows.

Refinancing drove total mortgage applications up by 8.8 percent, seasonally adjusted, last week. Nearly 77 percent of all loan requests were for a refinancing, the highest share since April 2009.

Still, refinance applications were about half the level seen in the spring of 2009 and purchase demand fell for the seventh week out of eight weeks since the tax credit ended, said Michael Fratantoni, MBA's vice president of research and economics.

Many qualified borrowers who could refinance have already taken advantage of low rates when they previously touched current levels. Others are not eligible, either because of credit scores or home values that are well below their current mortgage amounts.

Despite low borrowing costs and home prices average about 30 percent less than their peaks four years ago, applications to buy homes dropped 3.3 percent to hover just above 13-year lows. Buyers had to sign contracts by April 30 to get the $8,000 first-time purchase credit or $6,500 move-up credit.

However, sales of new homes fell nearly 33 percent in May, the lowest since record keeping began in the early 1960s. Existing home sales unexpectedly fell 2.2 percent. Although home prices did increase during April, the unsold inventory of houses, combined with foreclosure activity, will impede a sustained recovery, Standard & Poor's said on Tuesday.

Fed Reiterates Policy Stance

Concerns that financial strains may derail the still nascent economic recovery is indicative of the conclusion that the Federal Reserve is in no rush to end its ultra-low interest rates, comments by Fed officials confirmed on Wednesday.

One senior Fed official went as far as acknowledging that falling inflation could spur the central bank to further ease financial conditions, and another policy maker would not rule out additional measures to stimulate growth.

When asked whether lower inflation would prompt the Fed to try to push borrowing costs even lower, Atlanta Federal Reserve President Dennis Lockhart said: "It's appropriate to think about what we would do under a deflationary scenario. At this point, no specific planning in my view is occurring but discussion in all likelihood will be on the agenda."

The president of the Chicago Fed, Charles Evans, said the central bank had "provided a tremendous amount of accommodation," but he also would not rule out further action to stimulate the economy. "I'm going to be looking at the circumstances, and if we need to adjust policy in either direction, I am going to be responding," he said.

Financial market strains stemming from the European debt crisis and weak reports on housing and employment in recent weeks have led to some anticipation that the Fed would need to spur the tepid recovery with additional actions to promote growth. If it decided to take further action, the Fed would likely buy additional Treasury or other securities.

Lockhart and Evans are generally considered to be in the mainstream of Fed thinking. Neither, however, is a voter on the Fed's interest-rate setting panel this year.

Ensuing comments by Elizabeth Duke, a board member, suggests some trepidation on the part of the Fed over the strength of the recovery. Duke typically focuses on banking issues at and rarely comments on the outlook for the economy or policy.

Duke said the job market recovery was likely to proceed only slowly due to sluggish economic expansion. U.S. gross domestic product rose at a modest 2.7 percent annual rate in the first quarter.

"At that speed of recovery, you are not going to create jobs very quickly," she said, in response to questions at a banking conference in Columbus, Ohio. "It is going to be, I think, a long period for jobs to recover.

The Fed last week renewed its promise to hold interest rates exceptionally low for an extended period, saying the recovery is "proceeding."

The economy has expanded for three quarters in a row, and some Street analysts had until recently been expecting the Fed's next move to be a tightening of financial conditions through a combination of raising interest rates and sales of mortgage-related debt the Fed bought to stimulate lending.

The Chicago Fed's Evans said the economic recovery is "definitely on," with growth expected at 3.5 percent this year. However, he said he expects inflation to be well below his guideline of 2 percent for the next three years or more and said unemployment would stay high for some time.

"It's going to be a number of years before (unemployment) is going to get down to any type of rate that we might almost say is acceptable," he said. Taken together, low inflation and high unemployment mean that the Fed's current accommodative monetary policy is still needed, he said.