MarketView for June 27

Summary 

The equity markets were higher on Wednesday as stronger-than-expected economic data helped lift energy stocks, overshadowing concerns a European Union summit will not yield tangible progress in easing the debt crisis.

The energy sector could lay claim to the greatest gains among the 10 major S&P 500 groups, rising 1.9 percent as oil prices settled higher at $80.21 per barrel. Cabot Oil & Gas had a gain of  9 percent to end the day at $41.24 and was the largest advancer on the S&P 500.

Worries about Europe have fed dramatic selloffs in stocks lately, but the declines have been tempered by enough short-term buying to keep the market confined to a range. Sentiment was helped by better-than-expected sales of long-lasting manufactured goods in May, although excluding transportation and defense items, orders were down.

In other data, signed contracts for home purchases hit a seven-month high. Shares of Lennar, the third-largest U.S. homebuilder, rose 4.8 percent to close at $28.70 after the company reported a rise in new orders for the fifth straight quarter.

Arena Pharmaceuticals ended the day up 28.7 percent to $11.39 on news that the FDA approved the pharmaceutical company’s pill to treat obesity, the first weight-loss drug in 13 years. Shares of Vivus and Orexigen Therapeutics were higher following the FDA approval of Arena's obesity drug. The companies are also hoping to bring their medicines to market. Vivus ended the day up 7.4 percent to $28.33 and Orexigen Therapeutics chalked up a gain of 20.3 percent to close at $4.92.

But uncertainty remained ahead of the euro zone leaders' summit, which begins on Thursday. Few anticipate anything concrete to emerge from the two-day meeting after German Chancellor Angela Merkel said debt sharing, an idea backed by France, Italy and Spain, would not happen in her lifetime.

Healthcare stocks were in focus heading into Thursday's U.S. Supreme Court decision on President Barack Obama's 2010 healthcare law. Some investors have their attention on stocks less likely to be affected by the ruling, such as large pharmaceuticals. Many investors expect the requirement that uninsured Americans purchase health insurance to be overturned.

The market's rise came on light volume of 5.75 billion shares that changed hands on the three major equity exchanges. The daily average year-to-date is 6.84 billion shares.

Some of Wall Street's top analysts published their research on Facebook, and most are cautiously optimistic. Facebook shares fell 2.6 percent to $32.32 after gaining more than 20 percent in the prior two weeks.

Disagreement on More Fed Easing

There was serious disagreement with the Federal Reserve on whether Fed needs to be more aggressive in spurring economic growth, indicating another round of easing is far from certain. Chicago Federal Reserve Bank President Charles Evans, one of the Fed's strongest advocates for further monetary policy easing, said Wednesday he is flummoxed by the Fed's timidity in the face of high unemployment and low inflation.

However, his colleague, Atlanta Fed leader Dennis Lockhart, said the Fed would only need to act further if the economy took a turn for the worse or if Europe's simmering debt crisis boils over.

"I don't think the conditions have developed that require us to bring out bigger guns quite yet," Lockhart said in an interview with Nightly Business Report.

Lockhart, who unlike Evans wields a vote this year on the Fed's policy-setting panel, said policymakers' most recent action, extending a program swapping shorter-term bonds it owns for longer-term ones to push down longer-term interest rates, serves to maintain the right level of help for the weak recovery.

An escalation of problems in Europe, a sudden slowing of U.S. economic growth, a spike in job layoffs, or the risk of a deflationary spiral might be triggers for more Fed action that could include another round of bond buying, Lockhart said.

"If the circumstances call for it, more stimulus could be provided," he said.

The Atlanta Fed president's stance is as at the mid-point of Fed views that range from reluctance to further expand the central bank's underpinning of the modest recovery to those such as Evans who think more aggressive steps are urgently needed.

At its policy-setting meeting last week, Fed officials sharply slashed their gross domestic product forecasts for 2012 and 2013 and marked down the outlook for inflation. Those changes to the Fed's summary of economic projections, suggest progress on its twin goals of full employment and stable prices is slowing if not stalled.

Instead of reacting with a new round of bond buying to boost jobs, the Fed took the much more modest step of adding six months to an existing program, known as Operation Twist, which is aimed at lowering long-term interest rates.

"I think if you look at our projections ... it's hard to understand why we wouldn't be willing to do more because the inflation outlook is lower than our objective," Evans told a small group of reporters at the Chicago Fed headquarters.

With unemployment at the "completely unacceptable" level of 8.2 percent and inflation set to fall, the Fed should be ramping up even more its already significant level of accommodation, Evans said. Extending Operation Twist is better than nothing, he said, but is likely to reduce 10-year Treasury yields by only about a tenth of a percent.

Although the Fed said in January it will take a "balanced approach" to meeting its goals, Evans suggested Wednesday the central bank should allow a bit more inflation in the pursuit of higher employment.

"I don't think we've clarified what we mean by ‘balanced approach' at all," said Evans, who grimaced at times as he described an economy close to stall speed and faced with risks from Europe's crisis and elsewhere.

"I think that a balanced approach means I'd be willing to undertake accommodative policies at some risk of increased inflation - it's below our target - at some risk of increasing it above that by some amount," he said. "How much? How much? That's a fair question. We are not offering very much in delineating that."

The Fed last week kept its guidance that rates will stay low until at least late 2014, tying policy to the calendar in a fashion that virtually no Fed policymaker appears to support wholeheartedly.

Evans, for his part, said the Fed needs to provide more clarity around that guidance, and reiterated his view the central bank should promise to keep rates low until unemployment falls to 7 percent, or inflation threatens to rise above 3 percent.

It should also be clearer about how far inflation would need to deviate from the Fed's 2 percent inflation target, either above or below, before setting off alarm bells, he said.

Yet Evans suggested the Fed's communications sub-committee, of which he is a member, is not close to providing additional refinements to its current guidance.

"We are trying to understand the implications of what we've put in place, and whether or not there are simple enhancements, or alternative enhancements, which could improve things," he said.

Before committing to further quantitative easing, the Fed last week appeared to want to give European policymakers a chance to stabilize the crisis-stricken euro zone, warning of "significant downside risks to the economic outlook," including Europe's sovereign debt crisis.

Fed Chairman Ben Bernanke also said he was watching to see if jobs data might improve before unleashing any new round of bond purchases.