MarketView for March 4

 

 

Summary 

 

Stocks rallied on Wednesday, ending a five-day losing streak, as another Chinese stimulus package added momentum to commodity prices and drove oil and metals prices higher, helping to underpin the market after it hit a 12-year low a day earlier. Data also suggested China's economy is recovering.

 

General Electric, the oldest component of the Dow Jones industrial average, was among the few big names to end the day lower. The economic bellwether fell 4.6 percent to $6.69 for its fourth day of losses as investors worried its ailing financial arm could threaten the whole company. GE has fallen 21 percent this week. Besides GE, the Dow's other four major decliners were all financials, with JPMorgan Chase the largest drag, down 8.1 percent at $19.30.

 

Caterpillar, another major Dow stock and a major exporter to China ended the day up 13.2 percent to close at $25.44. Caterpillar is also a key provider of equipment to the mining industry.

 

The day's rally was a modest one, however, compared with declines of more than 21 percent since the beginning of the year for both the Dow and S&P 500 indexes. Nonetheless, Wall Street's fear gauge, the CBOE Volatility Index, or VIX,. fell 6.6 percent to 47.56, but it remained up more than 6 percent through the past five days.

 

In a further effort to shore up the economy, the Obama administration launched a $75 billion foreclosure relief plan that enables struggling homeowners to modify loans even if they are "under water." Even so, new data showed one in five homeowners with mortgages owe more than their house is worth. It was the latest in a slew of efforts to improve credit markets, including Tuesday's program from the Federal Reserve to spur consumer lending.

 

Oil prices rose nearly 9 percent sending the shares of Chevron up 2.7 percent to $59.28, while miner Freeport-McMoRan Copper & Gold Inc rose 13.4 percent to $32.21. On the Nasdaq, Apple (was a key player, chalking up a gain of 3..2 percent to $91.17, while Intel rose 3.9 percent to $12.76.

 

Crude Prices Rise Sharply

 

The price of crude was up nearly 9 percent after data indicated an unexpected drop in domestic crude stocks and an increase in gasoline demand. News that China's manufacturing index climbed for the third straight month also supported prices, dealers said. Domestic sweet crude futures for April delivery settled up $3.73 per barrel at $45.38. London Brent crude settled up $2.42 per barrel at $46.12.

 

Weekly U.S. inventory data showed stocks of crude oil in the world's top consumer declined by 700,000 barrels despite expectations for a 1.2-million-barrel build as U.S. refiners ramped up production by 1.7 percentage points to 83.1 percent of capacity.

Demand for gasoline over the past four weeks was up 2.2 percent from a year ago, the Energy Information Administration said. Year-over-year gasoline demand has increased in the last several weeks, possibly signaling a recovery of demand.

 

Data from China also gave room for cautious economic optimism as the main gauge of China's manufacturing sector, its purchasing managers' index (PMI), rose in February, implying higher oil demand. China's PMI index rose for the third month in a row last month as factories restocked in anticipation of an early revival in the economy.

 

The data helped revive sentiment in equity markets on Wednesday after the U.S. S&P ended below 700 for the first time since October 1996. Oil prices have traded in a narrow band around $40 since mid-December, pulled down by falling demand due the global economic downturn but drawing some support from expectations OPEC might cut production again when it meets on March 15.

 

OPEC planned to lower oil output by 4.2 million barrels per day from production levels in September in an effort to increase prices. Angola, which currently holds the presidency of the 12-member group, will not advocate for further production cuts when the group meets on March 15 in Vienna, OPEC sources said Wednesday. Ecuador also said it sees no need for more output cuts at the next meeting, while other OPEC members have yet to make a decision.

 

Venezuela, Algeria and Libya have raised the possibility of a further reduction, while Iran has said OPEC needed to define a mechanism to support prices, without specifying what form it would take.

 

Crude prices were also boosted by a statement from the commander-in-chief of the Iranian Revolutionary Guards that missiles from the OPEC nation can reach Israeli nuclear sites, raising concerns of conflict in the Middle East.

 

Fed Outlook Remains Dour

 

The battered economy will continue to weaken over the coming months, with unemployment rising, top Federal Reserve officials said on Wednesday, though they remain confident that forceful policy action will help end the more than year-long recession. Dennis Lockhart, president of the Atlanta Federal Reserve Bank, said it was hard to "be upbeat about the immediate future."

 

Richard Fisher, president of the Dallas Fed, said indicators show the economy to be on track for a decline in the first quarter roughly equal to the 6.2 percent annual rate of contraction seen in the 2008 fourth quarter.

 

Fisher, who characterized himself as the most pessimistic of all of his colleagues on the Fed's policy-setting Federal Open Market Committee (FOMC), said he fears the country might suffer two years of recession. The current recession started in December 2007.

 

Lockhart, however, said he still expects the economy to begin a modest recovery in the second half of the year.

 

"Looking broadly at the national economy, the recent numbers have been discouraging," Lockhart said. "Other incoming data give little reason to be upbeat about the immediate future. Unemployment continues to rise," said Lockhart, who is a voting member of the Federal Open Market Committee this year. He later said he was apprehensive about the government's February jobs report, which is due on Friday.

 

"I'm concerned that this, too, will show some job destruction, substantial job destruction and the unemployment rate will rise," Lockhart said

 

Lockhart said the outlook was more unclear than usual and deteriorating financing conditions for the commercial real estate sector could add to the strain on battered banks. "Problems in residential real estate are well known. But, with continued economic weakness, I'm increasingly paying attention to commercial real estate," he said.

 

"Declining commercial real estate markets could put further pressure on already strained financial institutions and markets. And overcoming problems in the financial sector is central to achieving economic recovery," he said.

 

Fisher, speaking in Fort Worth, Texas, called 2008 "an annus horribilis -- a truly horrible year that only a sadist could look back upon with pleasure.

 

"We might call this the Godzilla economy -- it presents a monstrous challenge," said Fisher, who is not a voting member of the FOMC this year.

 

Noting the economy's decline at a 6.2 percent annual rate in the fourth quarter, he said: "All indicators thus far point to our economy being on track for a decline of roughly the same magnitude in the first quarter of 2009."

 

Lockhart stressed that Fed moves to steady the ability of households to tap credit markets have gained traction and said the Fed would do what it takes to restore U.S. growth.

 

"I want to assure you that the Fed has the capacity to act, even with the federal funds rate near zero, with the aim of returning the country as quickly as possible to its enormous potential for growth and prosperity," Lockhart said.

 

Fisher also found notes of optimism in discussing the potential impact of the Fed's new Term Asset-Backed Loan Facility, which is designed to revive lending to consumers and small businesses. He said there is already an improved "tone" to many of the asset-backed securities markets that will reside under the TALF umbrella.

 

Kansas City Fed President Thomas Hoenig cautioned the massive stimulus would require the Fed to tighten monetary policy well before the next economic expansion was fully under way, to prevent a powerful inflation from taking root.

 

"Once you know there's a recovery -- you're convinced of it -- it's probably too late to really avoid the future inflationary or whatever speculative bubble might be coming our way," Hoenig, a voting member of the Fed's policy committee next year, said.

 

ADP Employment Survey Down

 

The private sector cut 697,000 jobs compared with 614,000 in January, according to an ADP Employer Services report that suggested hefty employment declines are on the way in the government's more comprehensive payrolls data on Friday.

 

The service sector slump accelerated in February, the Institute for Supply Management said, and contributed heavily to job cuts among private companies even though it is often more recession-resistant than other areas of the economy.

 

The U.S. economy has already lost more than 3.5 million jobs since the beginning of this recession, which is likely to extend through the first half of this year or longer and become the longest in the post-World War Two era.

 

Look for Friday's payrolls report, which gives a more comprehensive picture of the labor market than ADP, to show the economy shed 648,000 jobs in February alone, which would be the biggest monthly decline since 1949.

 

The unemployment rate is expected to have risen to 7.9 percent in February, which would be its highest in 25 years, when the economy was just pulling out of the deep recession of the early 1980s.