MarketView for June 18

Summary 

Stocks advanced for a second straight day on Tuesday as Wall Street bet the Federal Reserve would temper statements which were interpreted to mean a sooner-than-expected winding down of stimulus efforts. Strong market breadth showed an increased appetite for equities, but trading volume was light, a sign that many market participants are still taking a wait-and-see attitude.

The Fed's two-day policy meeting began today, and traders are trying to guess the Fed’s timeline for scaling back the QE3 program of purchasing of $85 billion per month of bonds. QE3 has helped fuel a rally in equities, taking major indexes to record levels. The S&P is about 1 percent away from its all-time closing high. The Fed has said its goal is to target its benchmark interest rate near zero to lower the unemployment rate to 6.5 percent as long as inflation stays below 2.5 percent.

A policy statement from the central bank will be released Wednesday, and investors expect the current level of purchases will be maintained despite strong recent data pointing to improvements in the economy. Fed Chairman Ben Bernanke recently said the program would be wound down when the economy is strong enough, causing a surge of volatility in financial markets.

General Electric gained 2.4 percent to $24.33 and was one of the most actively traded stocks on the New York Stock Exchange. Cliffs Natural Resources rose 5 percent to $18.59 as one of the largest gainers on the S&P. Micron Tech rose 3.9 percent to $13.75, thereby aiding the Nasdaq.

Boeing launched a larger version of its flagship Dreamliner aircraft at the Paris Airshow on Tuesday, sharpening the battle with rival Airbus in the market for fuel-efficient, long-distance jets. Boeing shares rose 1 percent to $104.08, the highest level for that stock since October 2007.

The S&P 500 is forecast to end 2013 at 1,700, according to the median forecast from 42 analysts surveyed by Reuters in the past week. That 19 percent gain for 2013 would mark the best year since 2009.

The market has been volatile since Bernanke said on May 22 the Fed could begin to trim its stimulus in the "next few meetings" if the economy gains momentum and inflation remains moderate. Intraday swings have widened and the CBOE Volatility index is up 31 percent so far this quarter.

Consumer prices rose slightly last month, the government said on Tuesday, giving the deflation-wary Fed some respite. The consumer price index, excluding food and energy, advanced 1.7 percent in the 12 months since May, indicating inflation pressures remain subdued.

Shares of Walter Energy rose 16.5 percent to $13.63, rebounding after a two-day selloff triggered by news that the company pulled a planned $1.55 billion credit refinancing.

On the downside, Hormel Foods fell 3.6 percent to $39.20 after cutting its full-year earnings outlook. It was the largest percentage decliner on the S&P.

In after-market trading, Adobe Systems rose 4.2 percent to $45.20 after reporting adjusted earnings that exceeded expectations.

Approximately 5.43 billion shares changed hands on the three major equity exchanges, once again a number that was below the daily average this year of about 6.36 billion shares.

Housing Starts Do Not Meet Expectations

According to a report released by the Commerce Department Tuesday morning, housing starts rose 6.8 percent to a seasonally adjusted annual rate of 914,000 units. April's starts were revised up to show a 856,000-unit pace instead of the previously reported 853,000 units. May’s numbers were less than the Street expected; likely reflecting labor and material constraints. However, the overall trend remained consistent with strength in the housing market.

Though permits for future home construction fell, that followed a surge in April, which put them over the 1 million-unit mark. The pullback last month reflected a drop in the volatile multi-family sector, but permits for single-family construction touched their highest level in five years.

Builders, who are ramping up construction to meet demand for housing against the backdrop very low inventory, have been complaining about labor shortages and increased material costs. At the same time, a report released on Monday indicated that sentiment among single-family home builders hit a seven-year high in June, amid optimism over current and future home sales.

Lean inventories are pushing up home prices, which are in turn boosting consumer confidence and spurring consumption, helping soften the blow on the economy from tighter fiscal policy and slowing global demand.

The Federal Reserve has targeted housing as channel to boost growth, through monthly purchases of $85 billion in government and mortgage-backed securities.

Though residential construction only accounts for about 2.5 percent of gross domestic product, housing has a wider reach on the economy. Analysts estimate that for every single-family home built, at least three jobs lasting for a year are created.  Starts are expected to top a 1 million-unit pace this year.

Last month, groundbreaking for single-family homes, the largest segment of the market, rose 0.3 percent to a 599,000-unit pace. Starts for multi-family homes increased 21.6 percent to a 315,000-unit rate.

Permits to build homes fell 3.1 percent last month to a 974,000-unit pace. Permits for multi-family homes dropped 10 percent to a 352,000-unit rate. Permits for single-family homes rose 1.3 percent to 622,000-unit rate, the highest since May 2008.

CPI Up Slightly

Consumer prices rose slightly during May and a gauge of underlying price pressures showed signs of stabilizing after a long decline, a potential comfort to Federal Reserve policymakers who would like to see stronger inflation.

The Labor Department said on Tuesday its Consumer Price Index edged up only 0.1 percent higher, a slightly weaker gain than the Street had expected. However, in a sign of stronger demand in the economy, consumer prices outside of food and energy rose 0.2 percent last month, just above the pace clocked in April.

This "core" consumer price index, which is monitored closely because it is less volatile, was up 1.7 percent in the 12 months through May. That matched the increase registered in April, and supported the view that a worrisome downward trend in core inflation, which began a year ago, might be coming to an end.

At the same time, May's reading for 12-month core inflation remains below the Fed's 2 percent inflation target, a stabilization could make the Fed more comfortable as it considers paring back its economic stimulus programs.

In May, the gain in the core price index was supported by a 0.2 percent increase in clothing prices, as well as a strong 0.3 percent increase in shelter costs.

The Fed actually targets a separate but related measure of inflation published by the Commerce Department, known as the PCE index, which has shown even weaker levels of core price increases. The PCE index puts less weight on shelter, so Tuesday's data might not signal a similar stabilization in the core PCE index.