MarketView for March 30

 

 

 

Summary 

 

It was another positive day on Wall Street as share prices continue their inexorable rise upward. Stocks rose in a slow session on Tuesday as a result of data showing more stabilization in the economy. Meanwhile, Apple rallied on a report that it was developing a new iPhone for Verizon. Apple's shares closed at an all-time record high of $235.83, up 1.5 percent, after the Wall Street Journal reported that the company was developing a new iPhone to work on Verizon’s mobile network. The news on Apple sent the shares of Qualcomm up 0.9 percent to $42.13.

 

Financials kept the S&P 500 under pressure, with Bank of America (BAC.N) shares down 1.6 percent at $17.76. Citigroup slid 2.2 percent to $4.09 as investors continued to weigh the implications of the U.S. government's planned sale of its Citi stake. Verizon closed up 2.6 percent at $31.23. Shares of 3M closed up 3.6 percent at $84.28 making it a key contributor to the rise in the Dow Jones industrial average.

 

After the bell, Honeywell raised its first-quarter profit outlook, sending its shares up 2.3 percent to $45.96 in after-hours trading. It had closed at $44.95, up 0.2 percent during the regular trading session. Meanwhile, Tuesday's regular session saw light volume as did Monday, as Passover and the coming Easter holiday decimated staffs.

 

With one trading day left, the S&P 500 is up 5.2 percent for the quarter, while the Dow is up 4.6 percent and the Nasdaq is up 6.2 percent. However, Friday's release of the government's non-farm payrolls report for March is likely to give the stock market a fresh catalyst to brush up against 18-month highs. March non-farm payrolls are set for release Friday morning even though the stock market will be shut for the Good Friday holiday.

 

Worries about Greece's funding needs lingered a day after an auction of 7-year Greek bonds drew weaker demand than hoped for by some.

 

On the economic front, consumer confidence rebounded in March, as optimism over the labor market increased slightly, the Conference Board said. Another report showed that January home prices rose for the eighth straight month. The stronger-than-expected report on consumer confidence lent some support to consumer-oriented companies. For example, Macy's closed up 2.2 percent at $22.12, while Wal-Mart rose 0.3 percent to close at $55.91.

 

Economy Moving Ahead According to Dallas Fed

 

The economic recovery is gathering speed as business activity picks up pace, despite lingering weakness in employment, Dallas Federal Reserve Bank President Richard Fisher said on Tuesday.

 

In an unusually detailed account of information obtained from industry contacts, Fisher cited improvements in areas ranging from shipping to retail, arguing the nation's economic rebound was on a solid, sustainable path. The remarks suggested Fisher, a self-proclaimed inflation hawk whose tone had become rather dovish in recent months, was warming up to the idea of removing some of the heavy monetary accommodation that has been applied by the Fed.

 

"Taken together, anecdotal evidence indicates that, absent some exogenous shock, the recovery that began last summer is unlikely to be reversed and will instead proceed, slowly gathering momentum as we progress through the year," said Fisher, who reiterated his forecast U.S. gross domestic product would expand around 3 percent in 2010.

 

"It is less than we had grown accustomed to in the heyday before the crisis, and it may not result in as rapid a reduction in unemployment as we would like. But it is positive and noteworthy," Fisher said.  Fisher also made it clear that he was not advocating an increase in interest rates just yet, or any sales of assets. However, he also said that the Fed has the tools it needs to remove monetary stimulus when the time is right.

 

Fisher does not currently vote during the Fed's policy-setting Federal Open Market Committee meetings this year, but he does take part in the deliberations. Fisher, a former hedge fund manager, said a return to healthier credit markets had enabled the Fed to pull the plug on most of its emergency liquidity facilities. As for the long-term monetary accommodation undertaken in the form of outright debt purchases, Fisher said the Fed was looking for ways to sell such assets in an orderly fashion.

 

"We are now focused on restoring our balance sheet to a more normal configuration," Fisher said, adding that the central bank would like to return to the days when most of its holdings consisted of Treasury bonds, rather than mortgage debt. "The disposition of those assets and liabilities will depend on the course of the economy."

 

In other words, the Fed could be putting the Street and the country on notice that it is laying the groundwork for what is expected to be the opening salvo of its monetary tightening campaign: the removal from the central bank's policy statement of a commitment to keep interest rates at "exceptionally low levels for an extended period."

 

Fisher's remarks were not at all hawkish. He did emphasize the ongoing troubles of the labor market, where a 9.7 percent unemployment rate remains uncomfortably close to double-digits. This, together with an absence of price pressures, suggests there is still plenty of slack in the economy, he said. Overall, Fisher's tone was distinctively more sanguine on growth.

 

In response to the most severe financial crisis in generations, the Fed chopped interest rates down to nearly zero and undertook a host of unconventional measures to boost market liquidity and drive borrowing costs lower still. These included a myriad of emergency lending facilities to specific impaired markets, such as commercial paper. It also involved over $1.7 trillion in direct purchases of both mortgage-linked debt and Treasury bonds.

 

With the end of the Fed's mortgage-backed securities (MBS) buying program the central bank must sell those assets back to the market, but it is not yet time to do so, Fisher said. Moreover, it is unlikely the Fed will have to step back into markets to buy MBS, even though rates on residential home loans are rising, Fisher said.

 

"We cannot turn a blind eye to the effect that growing government indebtedness has on investors' confidence and Treasury yields," he said. Fisher added that the Fed would not come to the government's rescue by making additional purchases of Treasury debt if bond yields continue their upward march.

 

"Should we do so, we would only become an accomplice to the fiscal incontinence of Congress," he said.

 

OPEC Befuddled Regarding Higher Crude Prices

 

 OPEC officials on Tuesday appeared undecided as to how to respond if oil prices rise above the $70-80 a barrel range for any prolonged period of time. It is a looming challenge for the cartel. Although prices have held calmly within this band for much of 2010, crude, currently around $82 per barrel, is near the top of its recent range, and some analysts said it could push even higher as demand from the United States and other industrialized nations rebounds as their economies recover.

 

Some major consumers at the biannual International Energy Forum agreed with OPEC members' claims the $70-80 price was good for both sides, providing sufficient revenues for producers and incentives to build new projects but not so high as to choke off growth in importing nations.

 

However, there was no sign of a clear consensus by OPEC members at what price they would ramp up production if prices broke above the band Saudi Arabian Oil Minister Ali al-Naimi this week called "most appropriate".

 

Algerian Oil Minister Chakib Khelil stressed that oil markets could sustain the current oil price for six months to a year, and that OPEC had no specific target price that would trigger an increase in production.

 

Some members of the cartel aren't waiting for a policy decision to gradually step up production. Total supply from OPEC's 11 members rose by 200,000 barrels per day (bpd) in March, taking compliance with supply curbs agreed in December 2008 to just about 50 percent.

 

"I'm not very happy with that percentage," OPEC Secretary General Abdullah al-Badri said on Monday, pinpointing OPEC compliance last month at 54 percent.

 

The IEF aims to produce a statement when the meeting concludes on Wednesday outlining measures to minimize oil volatility, including steps to increase market transparency, after price swings from a record high near $150 a barrel to below $33 in 2008 hit the economies of producers and consumers.

 

From the consumer's perspective, Holland's Energy Minister Maria van der Hoeven said $70-80 a barrel as fair, while Italy's Minister of Economic Development Claudio Scajola said $60-70 a barrel was a good.

 

But Japan's trade minister, Masayuki Naoshima, said that while producers had a consensus around $80 a barrel, consumers had not agreed on a price. The U.S. Deputy Secretary of Energy Daniel Poneman said that fundamentals were better suited than targets to determine prices. Rex Tillerson, chief executive of ExxonMobil, said he was less troubled by volatility, citing the firm's history of making long-term investments.

 

Consumer Confidence Rebounds

 

Consumer confidence rebounded in March, while home prices rose in January for the eighth straight month according to the Conference Board’s latest numbers released on Tuesday. The data on Tuesday came a day after news of further gains in consumer spending as Americans feel more confident about the economy. Consumer participation is critical for the durability of the recovery that started in the second half of 2009.

 

The confidence data also showed a slight increase in optimism about the labor market, although concerns remain. It comes ahead of a key government nonfarm payrolls report due on Friday that is expected to show the economy added jobs in March. According to the Conference Board report, its index of consumer attitudes rose to a reading of 52.5 in March from an upwardly revised 46.4 in February. Analysts polled by Reuters had expected a March reading of 50.0. Consumer assessment of the labor market improved. The "jobs hard to get" index declined to 45.8 percent from 47.3 percent, while the "jobs plentiful" index increased to 4.4 percent from 4.0 percent.

 

The Labor Department plans to release its monthly employment report on Friday. The health of the labor market will be a key determinant of when the Federal Reserve will start raising benchmark interest rates, currently near zero. Chicago Federal Reserve Bank President Charles Evans said on Tuesday that the Fed's monetary policy is still appropriate because of high unemployment and minimal inflationary pressures in the United States.

 

In another sign of recovery, the Standard & Poor's/Case-Shiller home price indexes released on Tuesday showed prices of single-family homes rose in January. And the annual rate had its best reading in almost three years, although the year-over-year reading still showed a small decline in prices. However, the strength in the Case-Shiller index contrasts with other measures such as new home sales and Loan Performance home prices, which have shown deterioration lately. The Street will receive more information on consumer spending on Thursday when auto sales are released.