MarketView for June 14

Summary  

The major equity indexes posted their largest gains in nearly two months on Tuesday as retail sales figures allayed fears over the economy that had driven a six-week slump in the market. Specifically, the retail sales data was not as bad as most had expected, which provided an excuse to buy after the market had neared its most oversold conditions in a year. Retail sales declined for the first time in 11 months in May, but the fall was less than forecast.

Nonetheless, the S&P 500 index is down about 5.4 percent from its high in early May as recent weak data sparked worries about the sustainability of an economic recovery. And many headwinds remain, including concerns over debt problems in Europe and the United States, along with the expiration at the end of this month of the Fed’s QE2 bond-buying program, which has been a key source of liquidity for markets.

Volume was light once again with about 6.45 billion shares changing hands on the major equity exchanges, well below the daily average of 7.58 billion shares.

Data from China helped to ease worries about global growth. Inflation remaioned a concern in China after consumer prices rose at their fastest pace in almost three years during May. However, industrial output grew from a year ago, in line with forecasts and China's central bank increased the reserve requirement ratio for commercial lenders by 50 basis points.

J.C. Penney closed up 17.5 percent to $35.37 after the department store chain named Ron Johnson, Apple’s senior vice president of retail, as its new chief executive.

Options expiration this week also could generate more volume and amplify stock moves as traders adjust their hedges. Such dynamics can lead to pinning where a stock or index closes at or around its corresponding at-the-money option strike.

Economic Data Reasonable

Consumers have not pulled back aggressively despite the recent slowdown in the economy, retail sales data showed on Tuesday, and falling gasoline prices should support growth in the months ahead. Retail sales fell in May for the first time in 11 months as auto sales took a hit from the damage wrought by Japan's earthquake, while other spending also softened.

Sales slipped 0.2 percent, the Commerce Department said, after a 0.3 percent rise in April. However, the decline was less than the expected 0.4 percent decline and sales excluding motor vehicles rose 0.3 percent.

The retail sales report painted a generally weak picture of consumer spending, though sales at building materials and garden equipment suppliers rose 1.2 percent. Core retail sales, which exclude autos, gasoline and building materials, rose 0.2 percent in May,  after rising 0.3 percent in April. Core sales correspond most closely with the consumer spending component of the government's gross domestic product report, which showed growth at a 2.2 percent annual pace in the first quarter.

Treasury prices fell, with the yield on the benchmark 10-year Treasury note rising back above 3 percent. Sentiment over the economy, which has been shattered by a recent string of surprisingly weak data, was also lifted by a separate report showing a moderation in wholesale inflation last month.

Economists are looking for second-quarter growth between 2 percent and 2.5 percent, supported by a narrower trade deficit in April, after a 1.8 percent pace in the first quarter. The economy started the year on a soft note beset by bad weather and rising oil prices and limped into the second quarter as supply chain disruptions after Japan's earthquake in March took hold.

Disruptions to motor vehicle production, which left dealers with lean inventories and unable to offer customers incentives, pushed auto sales down 2.9 percent -- the largest decline since February 2010 -- and depressed overall retail sales. However, the decline in vehicle production, which also slowed inventory accumulation by businesses in April is likely to be temporary.

Prices received by U.S. producers rose just 0.2 percent last month after rising 0.8 percent in April as gasoline prices fell. The drop in gasoline costs should help to stimulate consumer spending. Receipts at gasoline stations rose 0.3 percent in May, the smallest increase since June. Gasoline prices have dropped to about $3.78 a gallon from just over $4 a gallon in early May.

High gasoline prices curbed discretionary spending in May, with electronics and appliance sales posting their largest decline in over a year. Best Buy reported its fourth straight quarter of same-store sales declines on weak demand for televisions. At the same time, however, Best Buy kept its profit outlook for the year, citing strong demand for mobile phones and tablet computers.

The Federal Reserve is due to conclude its $600 billion government bond-buying program at the end of the month and policymakers, who have faced intense criticism for risking inflation, have set the bar very high for a new program. At the same time, the government is looking at ways to slash a huge budget deficit.