MarketView for March 25

 

 

Summary 

 

Wall Street managed a late rally on Wednesday as unexpectedly strong housing and durable goods data had some believing that the economy is finally on the mend, offsetting the struggle to fund plans to pull the economy out of recession. At the same time, trading was volatile as poor demand at a Treasury auction poured cold water on an early rally sparked by the reassuring economic data. However, by the end of the session much of that disappointment had worn off, and the rallying cry was that the economy was improving and stocks would continue rising from recent 12-year lows.

 

Shares of homebuilder rose after new home sales were reported to be rising at their fastest pace in 10 months during February, adding to recent data showing signs of hope in the battered housing sector. Toll Brothers rose 3.2 percent to $19.14 and DR Horton added 5.8 percent to $10.06, but both were off session highs.

 

Consumer stocks also rose, with McDonald's gaining 2.9 percent. Orders for long-lasting manufactured goods also rebounded unexpectedly in the same month.

 

The Dow Jones industrial average is now up 18.37 percent from the 12-year closing low hit on March 9. Twenty of the 30 stocks that make up the Dow rose while 10 fell on Wednesday.

 

Sentiment that the banking system is stabilizing was reinforced after Bank of America indicated that it wants to start repaying $45 billion of federal bailout money next month. Shares of Bank of America rose 7.7 percent to $7.70, while JPMorgan Chase chalked up a gain of 8.9 percent to close at $28.56.

 

Midway through the session, weak demand for $34 billion of Treasury notes briefly snuffed out the earlier rally, reviving fears about demand for sovereign debt after Britain failed to get enough demand for its debt, the first failed auction for UK debt since 2002. The tepid demand in the record-large auction of five-year Treasury notes sent benchmark government bond yields, which move inversely to prices, rising to their highest in a week.

 

It is estimated the Treasury will sell about $2 trillion of debt this year, or about one-third of outstanding Treasury debt through the end of 2008. The cash is needed to heal the ailing banking industry and keep the auto industry from collapsing.

 

IBM saw its share price dip on news that it is planning to lay off workers in its services unit, considered a strength area for the company. The shares closed down 0.4 percent to $97.95.

 

Economic News Improves

 

New orders for durable goods rose in February for the first time in seven months and new home sales rebounded, government data showed on Wednesday, suggesting the economic downturn might be easing a bit.

 

The Commerce Department said durable goods orders rose 3.4 percent to $165.6 billion in February, the largest gain since December 2007, after a 7.3 percent drop the prior month. Sales of new single-family homes rose at their fastest pace in 10 months in February, the Department said in another report.

 

Recent data, including retail sales and housing, have pointed to some signs of a moderation in the pace of the 15 month housing-led recession.

 

New durable goods orders excluding transportation rose 3.9 percent in February, the largest gain since August 2005, the Commerce Department said. Orders for machinery soared 13.5 percent in February, the biggest increase since March 2004.

 

One of the few weak spots in the report was civilian aircraft and parts, which dropped 28.9 percent after Boeing reported only four new aircraft orders in the month after 18 orders in January. Motor vehicle and parts eased 0.6 percent after a 7.6 percent tumble in January.

 

Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, expanded 6.6 percent in February. The prior month was revised to an 11.3 percent drop, previously reported as a 5.7 percent decline.

 

Despite the upbeat data, analysts said first-quarter gross domestic product would still contract at more or less the same pace as in the October-December quarter.

 

Output fell at a 6.2 percent annualized rate in the fourth quarter, but this figure is likely to be revised down to show a contraction of 6.5 percent when the government releases its final estimates on Thursday, according to analysts' estimates.

 

Inventories of manufactured durable goods fell for a second consecutive month in February, easing 0.9 percent to $336.8 billion, after dropping 1.1 percent in January, the Commerce Department said.

 

Manufactured durable goods shipments, which contribute to the GDP number, fell for the seventh consecutive month in February, slipping 0.5 percent to $179.1 billion.

 

In a separate report the Commerce Department said sales of new homes rose 4.7 percent to a 337,000 annual pace, the fastest increase since last April, from 322,000 in January. Despite the increase, February sales were the second lowest ever after the drop in January to the slowest pace in records going back to 1963, the department said.

 

Sales of previously owned homes rose 5.1 percent in February, while housing starts soared 22.2 percent that month. Stabilizing the housing market, the main trigger of the current economic slump, is crucial for the economy's recovery.

 

The median sales price in February fell a record 18.1 percent to $200,900 from a year earlier, the department said. The inventory of homes available for sale in February was at 330,000, the smallest since June 2002. The February sales pace left the supply of homes available for sale at 12.2 month's worth.

In other good news for the housing market and the economy, applications for home loans jumped last week as interest rates hit record lows after the Federal Reserve announced it would buy longer-term U.S. government debt.

 

Recovery Is Not In the Bag

 

The recession will drag on for some months before a recovery starts in late 2009 or early 2010, but the future is still clouded by risks, the Fed said on Wednesday.

 

Monetary and fiscal authorities have plenty of ammunition to combat the deepest downturn in decades and the measures already taken will be critical in driving a recovery, the presidents of the Federal Reserve banks of San Francisco and Cleveland said in separate remarks.

 

"I'm convinced this is no time to relax our efforts," Janet Yellen, president of the San Francisco Fed, said. The United States may see moderately positive growth of real gross domestic product later this year or early in 2010, said Yellen, who is a voting member of the U.S. central bank's policy-setting Federal Open Market Committee in 2009. But those forecasts are highly uncertain, she added.

 

"While there are good reasons to think the economy could begin to recover fairly soon, I'm far from confident," she said. Unemployment will likely continue to increase before peaking in 2010, she said.

 

Cleveland Fed President Sandra Pianalto, who is not an FOMC voter this year, was similarly cautious in a speech to business leaders in Maumee, Ohio. "I expect the economy to recover next year as the fiscal stimulus boosts spending and as we work off excess inventories," Pianalto said. "I have to warn you, however, that this outlook is subject to a number of strong downside risks."

 

In particular, Pianalto said a vicious cycle between the hobbled credit markets and the weak economy could continue and become mutually reinforcing, despite the Fed's "unprecedented" range of policy actions.

 

"Credit constraints remain at the heart of the current challenges," she said.

 

Yellen said an array of unconventional programs put in place by the Treasury and the Fed are "the best hope for recovery."

 

"For me, this extreme uncertainty about the future creates a very strong case for bold policy actions on a broad front ... to stimulate economic activity and prevent inflation from falling any further," she said.

 

Yellen said she supports the approach of targeting a range of credit markets, adding the various Fed and Treasury efforts offer the prospect of "more normal" financial market functioning this year.

 

Pianalto said the Fed's push into what is often termed quantitative easing "represent our efforts to lower interest rates and ease credit conditions in a range of markets, even when the federal funds rate is near zero."

 

Those programs are having success, she said, noting that 30-year fixed mortgage loan rates have fallen sharply since the Fed announced plans to buy mortgage-backed securities.

 

Yellen, however, cautioned it would be difficult to gauge the size of the impacts of the Fed's various programs. "We are using new policy tools and we simply don't have the experience needed to pin down the magnitude of the impacts," she said.

 

Yellen said fears that inflation will speed up once the economy begins to recover may be overdone.

 

"For some time to come, disinflation -- and even deflation -- will represent greater risks than inflation. With economic activity weakening, economic slack is likely to be substantial for several more years," she said.

 

Core inflation could remain below 1 percent for the next several years, she said, noting that Japan-style deflation was unlikely.

 

The Fed can "certainly" sell the Treasury debt it is expected to buy at some point, when the economy is in better shape, Yellen said.

 

Separately, Fed Governor Elizabeth Duke on Wednesday said regulators should not greatly constrain lending by financial firms with onerous regulation at a time the Fed is working so hard to get credit flowing again.

 

"It is important that supervisors remain balanced and not place unreasonable or artificial constraints on lenders that could hamper credit availability," Duke said at a House Financial Services Committee hearing.

 

Speaking with reporters, Yellen said that China's worries about the U.S. dollar's value was "understandable" given its massive holdings of greenbacks and lack of reserves diversification.

 

A recent suggestion by China's central bank governor to consider using the International Monetary Fund's basket of dollars, euros, sterling and yen as a supernational reserve currency was "interesting," but "far from being a practical alternative at this point," she said.

 

Bank of America To Repay Government

 

Bank of America CEO  Kenneth Lewis said he plans to start repaying $45 billion of federal bailout money next month, after completing a government stress test, the Los Angeles Times reported on Wednesday.

 

Lewis had previously said he hoped to pay back all of the money Bank of America took from the $700 billion Troubled Asset Relief Program as soon as later this year, without saying when repayment would begin.

 

The Charlotte, North Carolina-based bank received $20 billion of the bailout Monday as part of a January rescue in which the government agreed to share losses on $118 billion of troubled assets. About three-quarters of these assets came from Merrill Lynch, which Bank of America bought on January 1.