MarketView for May 1

 

 

Summary

 

Stock prices gained ground again on Friday as rising oil prices sent energy shares higher and fresh economic data suggested key parts of the economy could be stabilizing. Exxon Mobil saw its share price rise 2 percent to end at $68.01 after crude oil futures settled above $53 a barrel.

 

At the same time, factory output contracted in April, but at a slower pace. However, consumers are reported to be feeling more confident about the economy last month than at any time since September when Lehman Brothers collapsed, paralyzing the global financial system.

 

For the week, the Dow rose 1.7 percent, the S&P gained 1.3 percent and the NASDAQ ended up 1.5 percent. The NASDAQ’s gains marked the eighth straight weekly advance for the index, it's longest streak since December 1999.

 

Acting as a drag on Wall Street was American Express whose shares ended the day down 3.7 percent to $24.29 after it was reported that regulators delayed results of widely-anticipated stress tests, which aim to measure the strength of the 19 largest U.S. banks. The Street is concerned that the delayed stress test results may mean bank balance sheets need even more capital.

 

The results have obsessed investors across the globe in that they remain concerned regarding the health of the U.S. banking system. The results are now scheduled to be released late on Thursday afternoon.

 

McDonald's shares were also among the top weights on the Dow after Goldman Sachs removed the fast-food chain from its conviction buy list, although it reaffirmed its positive rating. McDonald's shares fell 1.7 percent to $52.40.

 

MasterCard, the world's second-largest credit card network, was also among the laggards after it said revenues will grow less than expected in 2009. MasterCard shares were down 5.8 percent at $172.90.

 

Aiding the NASDQ were major technology companies such as Apple, up 1.1 percent to $127.24, and Research In Motion, up 4 percent to $72.30. Celgene was the largest drag on the NASDAQ, down 7.4 percent to $39.54, after it reported first-quarter results that were in line with the company's forecast, but the company said that it expects its full-year earnings to come in at the low end of its previously announced range.

 

Manufacturing Activity Appears To Be Leveling Off

 

Slower-than expected contraction in manufacturing activity during April promulgated the idea that the steep plunge that began last fall may be moderating. The performance was driven by a rise in new orders. According to the Institute for Supply Management, its manufacturing index rose to 40.1 in April from 36.3 in March. A reading below 50 indicates a contraction.

 

As new orders rose, company inventories shrank for a 36th straight month, implying that future production will need to ramp up and eventually help stimulate the economy.

 

The index has been falling steadily as the economy deteriorated late last year, hitting a 28-year low in December. The index covers indicators such as new orders, production, employment, inventories, prices, and export and import orders.

 

In a separate report, though, the Commerce Department said factory orders fell 0.9 percent in March, worse than the 0.6 percent drop that economists had been expecting. Many companies have been battered by the prolonged recession in the United States and by spreading weakness overseas that has sharply reduced their foreign sales.

 

For March, orders for durable goods dropped 0.8 percent as strength in demand for commercial jetliners and military aircraft offset weakness in other areas. Orders for nondurable goods, products such as petroleum, chemicals and paper, dropped 1 percent after a 0.2 percent fall in February.

 

The weakness in nondurable goods reflected declines in demand for textile goods, clothing, paper and chemicals. They were partly offset by a rise in demand for petroleum — an increase that likely reflected higher prices more than a boost in demand.

 

The ISM report for April showed that manufacturing inventories contracted for the 36th straight month, though at a slower pace than before. Smaller inventories are an important signpost because they indicate that companies will eventually need to restock goods and boost production to meet new orders. That would help revive the economy. The new-orders index reached 47.2, up 6 percentage points from March.

 

Crude At A 4-Week High

 

The price of crude oil rose more than $2 per barrel on Friday to hit a four-week high, the result of rising consumer confidence and further evidence of record levels of compliance by OPEC with its agreed output cuts.

 

Sweet domestic crude futures for May delivery settled up $2.08 per barrel at $53.20, after hitting $53.65, the highest since April 3. Brent crude settled up $2.05 per barrel at $52.85.

 

The gains came as a result of surveys indicating that consumer confidence was higher in April than at any time since the September failure of Lehman Brothers.

 

Adding support was another survey indicating that OPEC reduced supply in April, implementing 84 percent of its agreed output cut. The compliance rate is a record high, while the average is around 60 percent. PEC has agreed to cut some 4.2 million barrels per day of output since September in an effort to counter slumping demand and a $100 collapse in prices.

 

Nonetheless, weak oil demand in the near term and rising crude inventories, now at their highest level since 1990, have slowed the rising price of crude.

 

Comments From St. Louis Fed President On Jobs

 

The jobless rate will likely not rise to levels reached during the recession of the early 1980s and is probably crest above 9 percent before declining, St. Louis Federal Reserve President James Bullard said on Friday.

 

"I'm hopeful that we will stay under the peak hit in 1982 of 10.8 percent," he said.

 

Bullard said one of the Fed's main goals in the coming year should be to avoid falling into a vicious cycle of falling prices causing consumers and businesses to pull back, bringing prices down further, a deflationary trap like Japan experienced in the 1990s.

 

However, he said that in the medium term, it is very important for the U.S. central bank to have a plan in place to pull back the vast amounts of liquidity it has pumped into the economy to avoid a sharp rise in inflation when the economy rebounds.

 

"You're sort of shooting the rapids here," he said.

 

Bullard said the harsh recession is likely moderating and expansion is possible in the second half of 2009 after several quarters of contraction.

 

"We will see a less severe rate of decline in the second quarter and I'm hopeful we'll see some positive growth in the second half of this year," said Bullard, who is not a voter on the Fed's policy-setting panel this year.

 

The Fed said on Wednesday after a two-day policy meeting that the outlook for the U.S. economy had improved a bit in recent weeks but that low interest rates would be needed for some time to ensure it recovers from recession. Although the economic outlook had improved modestly since the March meeting, partly reflecting some easing of financial market strains, "economic activity is likely to remain weak for a time," the Fed said.

 

Discussing the likely overhaul of bank regulation in the wake of the worst financial crisis since the Great Depression, Bullard said the Fed needs to continue to regulate the largest banks to be able to monitor developments in the financial system.

 

"The Fed's lender of last resort and monetary policy functions mean that it will have to remain closely involved in the regulatory structure," Bullard said. To improve supervision of large banks and non-bank financial firms, a credible resolution regime and improved monitoring are important, he said.

 

The regulatory system has worked well for small banks during the crisis because it provides deposit insurance, high-quality monitoring of banks, and a clear, credible resolution regime, Bullard said.

 

Consumer Confidence Is Rising

 

Consumers felt more upbeat regarding the economy during April, a month when the country's battered manufacturing sector also appeared to be crawling out of a deep recessionary hole, reports showed on Friday.

 

The news was fresh evidence that the economy may be on a slow path to recovery, helped by a huge government stimulus package and the Federal Reserve's efforts to prop up the banking sector.

 

The Reuters/University of Michigan survey of consumers said its final index of confidence climbed to 65.1 in April from 57.3 in March. As consumer confidence increases, the willingness to consider major purchases or to pull out the plastic, could increase as well.

 

The index reached its highest since September 2008, when the collapse of investment bank Lehman Brothers set in motion a crisis that rocked the financial system and pushed the economy, already in recession, into an even deeper downturn.

 

Much of the gain in the consumer survey was attributed to a thumbs-up for President Obama's $787 billion stimulus plan, said Richard Curtin, director of the Reuters/University of Michigan survey. The survey also found that 65 percent of consumers thought the stimulus would improve the national economy.

 

Rising stock markets in April , the Standard & Poor's 500 index gained 9.4 percent, its greatest monthly gain in nine years, were also seen boosting sentiment as well as deep discounts from retailers and in the housing market.