MarketView for June 24

Summary

In the latest signs of improving economic conditions, consumer confidence surged more than expected in June, while May new home sales rose more than expected. The data offered the latest evidence that the economy has regained momentum after stalling during harsh winter conditions.

The S&P 500 hit 1,968, another intraday record, and then turned lower around midday. The benchmark index had rallied for six straight days before ending Monday's session slightly lower. On Tuesday, the Dow suffered its largest drop since May 20.

The market's gains evaporated in the afternoon on concerns about an escalation of the conflict in Iraq. Secretary of State John Kerry urged leaders of Iraq's autonomous Kurdish region on Tuesday to stand with Baghdad in the face of a Sunni insurgent onslaught that threatens to destroy the country.

The Consumer Confidence Index for June hit its highest level since January 2008, according to the Conference Board, a private industry group. New home sales jumped 18.6 percent in May to a six-year high of a seasonally adjusted rate of 504,000 units, the Commerce Department said.

In another snapshot of the housing sector, the S&P/Case-Shiller composite index showed single-family home prices rose less than expected in April.

Walgreen fell 1.7 percent to $72.48 after the drugstore chain reported its third-quarter results. Walgreen withdrew its 2016 profit and revenue forecasts, citing the need to work out several aspects of its planned acquisition of Alliance Boots Holdings Ltd.

Biotech shares were a bright spot, buoyed by a 40.4 percent surge in Vertex Pharmaceuticals to $93.53 on heavy volume. Vertex said a combination of drugs designed to treat cystic fibrosis succeeded in improving lung function in a pair of closely watched late-stage clinical trials.

Volume was modest, with about 5.69 billion shares changing hands on the major equity exchanges, a number that was slightly above the 5.61 billion share average so far this month, according to data from BATS Global Markets.

Housing Prices Do Not Meet Expectations

Single-family home prices were up less than expected in April, the S&P/Case-Shiller composite index of 20 metropolitan areas indicated on Tuesday. According to the report, the index gained 0.2 percent in April on a seasonally adjusted basis. Non-seasonally adjusted prices rose 1.1 percent in the 20 cities, compared to an expectation of a 0.8 percent rise.

"Near term economic factors favor further gains in housing," said David Blitzer, chairman of the index committee at S&P Dow Jones Indices, in a statement. "However, housing is not back to normal: prices are being supported by cash sales, low inventories and declining foreclosure and REO (Real Estate Owned) sales. First time home buyers are not back in force and qualifying for a mortgage remains challenging."

Prices in the 20 cities rose 10.8 percent year over year, shy of expectations for 11.6 percent. The seasonally adjusted 10-city gauge was unchanged in April versus a 1.2 percent gain in March, while the non-adjusted 10-city index rose 1.0 percent in April compared to a 0.8 percent gain in March. Year-over-year, the 10 city gauge was up 10.8 percent.

Consumer Confidence Rises

Consumer confidence rose to its highest level in nearly 6-1/2 years in June.The Conference Board said its consumer confidence index rose to 85.2, the highest reading since January 2008, from 82.2 in May as households grew more optimistic about the labor market. The reading, however, was at odds with another survey published last week, which showed consumer sentiment ticking down in early June. Still, economists said it was in line with other data showing an improvement in job market conditions.

Mid-2015 Rate Hike Is Reasonable

The Federal Reserve can reasonably wait to raise interest rates until mid-2015 without risking an undesirable rise in inflation, William Dudley, president of the New York Federal Reserve Bank, said on Tuesday.

"We think we can get the unemployment rate considerably lower and still not have an inflation problem," Dudley told a Puerto Rico accounting group. "We also don't have inflation at a level consistent with price stability."

In May, the jobless rate stood at 6.3 percent, the lowest level since the end of 2008 and unchanged from April. Inflation has been running below the Fed's 2 percent goal, although some recent readings have been firmer.

"The market expectations are that the Federal Reserve will start to raise short-term interest rates around the middle of 2015 -- that sounds to me like a reasonable forecast," Dudley said. "But, you know, forecasts often go astray."

Dudley, who as chief of the New York Fed holds a permanent vote on the U.S. central bank's policy-making panel, speaks from experience: over the past several years the Fed has been frequently overly optimistic about economic growth prospects and officials have had to repeatedly to mark down their forecasts.

At the same time the Fed has underestimated how quickly unemployment will drop; it now sees the jobless rate as approaching near normal levels later this year.

Dudley's comments, which often reflect dominant sentiment at the Fed, suggest the central bank is in no hurry to raise rates from their current near-zero level once it winds down its bond-buying stimulus later this year.

Speaking at a separate event, Charles Plosser, the hawkish chief of the Philadelphia Fed, said he had "growing concerns that we may have to adjust our communications in the not-too-distant future. Specifically, I believe the forward guidance in the statement may be too passive."

Plosser's comments reflect concern among a minority at the Fed that the Fed may dally too long before raising rates, allowing inflation to spiral upwards out of control. Dudley on Tuesday made clear he did not share those concerns.

"In the current environment, it is still very, very appropriate to continue to follow a very accommodative monetary policy because we're making progress toward our objectives but we have not yet reached our objectives," Dudley said.