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MarketView
Events defining the day's trading activity on Wall Street
Lauren Rudd
Wednesday, May 22, 2013
Summary
Stocks fell on Wednesday with the S&P 500 posting
its largest decline in three weeks, after minutes from the latest
Federal Reserve meeting showed some officials were open to tapering
large-scale asset purchases as early as at the June meeting. As a
result, trading was volatile, with the Dow Jones Industrial Average and
the S&P 500 indexes up more than 1 percent during the morning and down
more than 1 percent in the afternoon. The S&P 500 rose as high as 1,687
and fell as low as 1,648 during Wednesday's trading session while the
Dow was up as high as 15,542 and as low as 15,265. The minutes followed comments from Chairman Ben
Bernanke, who said the Fed could decide to scale back the pace of bond
purchases at one of the "next few meetings" if the economic recovery
looked set to maintain forward momentum. The comments were a blow to a
market that had accelerated after Bernanke said the central bank needed
to see further signs of traction in the economy before it tapered
stimulus. According to the minutes of the April 30-May 1
policy meeting released on Wednesday, "a number" of officials were open
to tapering large-scale asset purchases as early as the June meeting,
but disagreement continued on what conditions would suffice to begin
that move. One official preferred to begin decreasing purchases
immediately and another wanted to add more accommodation immediately,
but ultimately most felt it was important simply to be prepared to
adjust the pace up or down in response to incoming data. Investors have increasingly turned their attention
to when the Fed's current $85 billion-per-month bond purchase program
might end or slow. The stimulus has been a major force behind a rally in
that has helped the S&P 500 and Dow industrials gain between 16 and 17
percent so far this year. All 10 sectors on the S&P 500 closed negative, with
energy and utilities leading the decline. The energy sector index .SPNY
fell 1.2 percent while the utilities sector .SPLRCU fell 1.6 percent. In after-hours trading, shares of Hewlett-Packard
rose 10 percent after the world's largest personal computer maker raised
the lower end of its full-year outlook. The stock had closed up 0.6
percent at $21.23. Bristol-Myers Squibb rose 5.3 percent to $46.40
after a Citi note highlighted excitement surrounding so-called
immunotherapy, in the wake of positive results from clinical trials
conducted by companies such as Bristol-Myers and Roche Holding (ROG.VX). Target cited unseasonably cold weather as it
reported a 0.6 percent decline in first-quarter sales at stores open
more than a year. Target cut its full-year profit forecast and shares
slid 4 percent to $68.40. Toll Brothers rose 2.9 percent to $37.07 after the
largest domestic luxury homebuilder posted a 46 percent rise in
quarterly profit, suggesting the housing recovery is picking up pace
across the industry. Approximately 8.34 billion shares changed hands on
the three major equity exchanges, exceeding the year-to-date average
daily closing volume of about 6.4 billion shares.
Bernanke Says More Stimulus The Federal Reserve's monetary stimulus is helping
the economy recover but the central bank needs to see further signs of
traction before taking its foot off the gas pedal, Fed Chairman Ben
Bernanke told Congress on Wednesday. A decision to scale back the $85
billion in bonds the Fed is buying each month could come at one of the
central bank's "next few meetings" if the economy looked set to maintain
momentum, he said. However, minutes from the Fed's most recent meeting
released on Wednesday showed the bar was still relatively high. "Many participants indicated that continued (job
market) progress, more confidence in the outlook, or diminished downside
risks would be required before slowing the pace of purchases," according
to minutes from the April 30-May 1 meeting. In testimony that showed little immediate desire to
retreat from the Fed's third and latest round of bond buying, Bernanke
emphasized the high costs of both unemployment and inflation, which
respectively continue to run above and below the Fed's targets. "Monetary policy is providing significant benefits,"
he told the congressional Joint Economic Committee, citing strong
consumer spending on autos and housing, as well as increases in
household wealth. "Monetary policy has also helped offset incipient
deflationary pressures and kept inflation from falling even further
below the 2 percent longer-run objective." Still, financial markets focused on the possibility
that Fed purchases will be scaled back later this year. The S&P 500
closed 0.8 percent lower, the dollar hit a near three-year peak against
a broad basket of currencies, and the bond market sold off sharply.
Yields on 10-year Treasury notes jumped back above 2 percent to their
highest levels since mid-March. The Fed is currently buying $45 billion in Treasury
bonds and $40 billion in mortgage-backed debt each month to keep
borrowing costs low and encourage investment, hiring and economic
growth. It is the third round of asset purchases, or quantitative
easing, since the Fed drove interest rates to near zero in late 2008. Bernanke noted that the main inflation gauge the Fed
monitors rose just 1 percent in the 12 months through March, just half
the central bank's 2 percent target. Part of the reason, he said, was a
decline in energy prices. But there were also indications of more
broad-based disinflation, Bernanke said. He went on to say that the Fed
was prepared either to increase or reduce the pace of its bond buys
depending on economic conditions, as the central bank stated on May 1
after its last policy meeting. "If we see continued improvement and we have
confidence that that's going to be sustained then we could in the next
few meetings ... take a step down in our pace of purchases," he said. "If we do that it would not mean that we are
automatically aiming toward a complete wind down. Rather, we would be
looking beyond that to see how the economy evolves and we could either
raise or lower our pace of purchases going forward." Economic growth caused the GDP to grow at a 2.5
percent annual rate in the first quarter following an anemic end to
2012. The unemployment rate has fallen to 7.5 percent from a peak of 10
percent, but remains, as Bernanke put it, "well above its longer-run
normal level." Recent economic data have been mixed. Job growth,
retail sales and housing have all shown some vigor, but factory output
has been contracting. Bernanke said some headwinds facing the economy,
including the debt crisis in Europe, have been dissipating. But he said
a sharp tightening of the U.S. government's budget had become too big of
a drag on growth for the central bank to offset fully. Bernanke told the committee the Fed was aware of the
risk that keeping monetary policy too easy for too long could fuel asset
price bubbles. However, he said the central bank believed major asset
prices were justified by the economy's fundamentals. Further, he warned
of the risks to pulling back on stimulus too early. "A premature tightening of monetary policy could
lead interest rates to rise temporarily but would also carry a
substantial risk of slowing or ending the economic recovery and causing
inflation to fall further," Bernanke said. He also suggested the Fed could refrain from selling
off some of the mortgage-backed securities it has acquired when the time
finally came to tighten monetary policy. "I personally believe that we
could exit without selling any MBS," he said. In separate remarks, New York Fed President William
Dudley stressed that uncertain economic conditions meant it was too
early to determine whether to taper the Fed's bond purchases. "I think three or four months from now you'll have a
much better sense of 'Is the economy healthy enough to overcome the
fiscal drag or not?'" Dudley said in a Bloomberg TV interview that took
place on Tuesday but aired on Wednesday. Dudley added that it would be possible to dial down
the program by the fall "if the economy does better and if the labor
market continues to improve." The minutes of the last Fed meeting said a number of
officials expressed a willingness to taper bond purchases as early as
the upcoming meeting on June 18-19 if there were signs of "sufficiently
strong and sustained growth." But views differed both on how to gauge
progress and on how likely it was that that threshold would be met. Asked whether the Fed would curtail the pace of its
bond purchases by the September 2 Labor Day holiday, Bernanke said
simply: "I don't know."
Home Sales Up Sharply Home re-sales were up sharply during April, reaching
their highest level in nearly 3-1/2 years, as prices surged, offering
the economy a buffer from the stiff headwinds posed by belt-tightening
by Washington. According to the National Association of Realtors
existing home sales advanced 0.6 percent to an annual rate of 4.97
million units, the highest level since November 2009. The data underscored the housing market's improving
fortunes as it starts to regain its footing. Re-sales were 9.7 percent
higher than in the same period last year. The ripples from housing's
recovery have also extended to the jobs market, with construction
employment rising. That should limit the degree to which the economy
slows this quarter. It expanded at a 2.5 percent annual pace in the
first three months of the year. Tight supplies in some parts of the country have
constrained the pace of home sales, but sellers are starting to wade
back into the market, attracted by rising prices. In April, the median
home sales price increased 11 percent from a year ago to $192,800, the
highest level since August 2008. It was the fifth consecutive month of
double-digit gains. With prices rising, more sellers put their
properties on the market. The inventory of homes on the market rose 11.9
percent from March to 2.16 million. The increased inventory represented
a 5.2 months' supply at April's sales pace, up from 4.7 months in March.
It remained, however, below the 6.0-month level that is normally
considered a good balance between supply and demand. The market has been helped by monetary stimulus from
the Federal Reserve that has kept mortgage rates near record lows. On
Wednesday, Fed Chairman Ben Bernanke said a decision to scale back the
$85 billion in bonds the Fed is buying each month could come at one of
the central bank's "next few meetings" if the economy looked set to
maintain momentum. Distressed properties - which can weigh on prices
because they typically sell at deep discounts - accounted for only 18
percent of sales last month. That was the lowest since the Realtors
group started monitoring them in October 2008. These properties,
foreclosures and short sales, had made up 21 percent of sales in March. In another bright sign, properties are selling more
quickly. The median time on the market for homes was 46 days in April,
down from 62 days the prior month. That was the fewest days since the
NAR started monitoring that number in May 2011. Before the market
collapsed in 2006, it usually took about 90 days to sell a home. About 44 percent of all homes sold in April had been
on the market for less than a month, while only 8 percent had been on
the market for a year or longer. Last month, first-time buyers accounted
for 29 percent of the transactions, with investors buying 19 percent of
homes. Investors, both individuals and institutions, are mostly buying
homes for renting. Sales were up in three of the four regions, falling
3.4 percent in the Midwest.
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MarketView for May 22
MarketView for Wednesday, May 22