MarketView for May 23

 

 

Summary

 

The major equity indexes finished sharply off their session lows as a rally in Hewlett-Packard's shares offset worries about weak Chinese manufacturing data and the prospects of the Federal Reserve reducing its monetary stimulus. Nonetheless, trading was choppy as many traders were adjusting their positions ahead of the long holiday weekend. Markets will be closed on Monday for Memorial Day.

 

Hewlett-Packard saw its share price rise more than 17 percent to a fresh 52-week high a day after the world's largest PC manufacturer raised its outlook. The company’s shares ended the day up 17.1 percent to close at $24.86, a day after the computer maker raised its 2013 earnings forecast following quarterly results that exceeded low expectations. The stock touched a new 52-week high of $24.95 earlier in the session. The rise supported the Dow Jones Industrial Average and helped limit the S&P 500's decline.

 

For most of the morning, the market had been pulled lower by worries that the Fed's stimulus may be scaled back sooner than hoped and after weak factory data in China. Signs of improvement in the housing and labor markets also helped indexes come off their lows by midday.

 

Earlier, the S&P 500 traded below its 14-day moving average before bouncing back above it. Holding above that level would be positive sign to investors as it would suggest the uptrend is still intact.

 

Ralph Lauren lost 2.3 percent to $183.69 after the fashion company reported sales below its own projections.

 

On Wednesday, the minutes from the Fed's latest meeting indicated that some officials were open to tapering large-scale asset purchases as early as at the June meeting. The minutes came in the wake of comments from Fed Chairman Ben Bernanke, who said the Fed could scale back the pace of its bond purchases at one of the "next few meetings" if the economic recovery looked set to maintain forward momentum.

 

When the Fed may decide to slow or halt its program of buying $85 billion of bonds a month has become one of the biggest questions on investors' minds. The central bank's stimulus efforts have helped propel markets to all-time highs this year and investors are trying to gauge whether a change in the program could spell the end of the rally.

 

On the economic front, the number of Americans filing new claims for unemployment benefits fell more than expected last week, suggesting strength in the labor market. New home sales rose in a sign that the sector's rebound is still intact. But separate data showed manufacturing slowed for a second straight month in May.

 

Approximately 7 billion changed hands on the three major equity exchanges, exceeding the year-to-date average daily closing volume of about 6.4 billion shares.

 

New Home Sales Rise Sharply

 

Sales of new homes rose in April and nearly matched the fastest pace in five years, driving the median price to a record high. The gains suggest the housing recovery is strengthening. Specifically, new-home sales increased 2.3 percent in April from March to a seasonally adjusted annual rate of 454,000, the Commerce Department said Thursday. That's only slightly below January's pace of 458,000, which was the fastest since July 2008.

 

Steady job creation and near-record-low mortgage rates are spurring more Americans to buy homes. Sales are still below the 700,000 pace consistent with healthy markets, but they have risen 29 percent over the past year.

 

The median sales price jumped 8.3 percent in April from March to $271,600. That's highest on records going back to 1993. The median sales price is not adjusted for inflation.

 

Prices are rising quickly because more people are bidding on a limited number of homes. The supply of new homes for sale increased 3.3 percent in April to 156,000. That's the most in 18 months, although it's still only slightly above the record low of 142,000 set in July 2012.

 

At the same time, builders are growing more confident in the housing recovery and have started to ramp up construction. In April, they requested permits to build homes at fastest pace in nearly five years.

 

Sales of new homes increased 10.8 percent in the West in April and 3 percent in the South. They fell 16.7 percent in the Northeast and 4.8 percent in the Midwest. The increase in new-home sales follows a report Wednesday that sales of previously owned homes rose in April to a seasonally adjusted annual rate of 4.97 million, the highest level in 3½ years.

 

Prices for re-sales are also rising, although they remain well below peak levels reached before the housing bubble burst. Higher prices tend to make homeowners feel wealthier. That encourages consumers to spend more, which accounts for 70 percent of economic activity.

 

Federal Reserve Chairman Ben Bernanke cited the revival in housing as a significant benefit of the Fed's super-low interest rate policies.

 

"Higher prices of houses and other assets, in turn, have increased household wealth and consumer confidence, spurring consumer spending and contributing to gains in production and employment," Bernanke said in an appearance before the congressional Joint Economic Committee.

 

Several major homebuilders have reported strong annual increases in orders for the first three months of the year. Ryland Group Inc. said that its orders in April jumped 59 percent from a year earlier.

 

Though new homes represent only a fraction of the housing market, they have a sizable impact on the economy. Each home built creates an average of three jobs for a year and generates about $90,000 in tax revenue, according to data from the National Association of Home Builders.

 

Fed Is Not Ready to Wind Down QE3

 

James Bullard, president of the Federal Reserve Bank of St. Louis, sought to give reassurance on Thursday that the Fed is in no hurry to start winding down its economic stimulus after comments by Chairman Ben Bernanke sent stock markets tumbling. Bullard said on Thursday he did not think the Fed was "that close" to starting the process of winding down its support although it was the likely next step if the economy continued to improve and inflation picks up.

 

Share prices around the world fell sharply after Bernanke said on Wednesday that the Federal Reserve may start to trim its bond purchases at one of its next policy meetings. Bernanke also said the Fed needed to see more signs of recovery in the economy before scaling back its stimulus, but investors focused less on those comments.

 

Bullard, said the U.S. economy was improving but he would like to be sure inflation was heading back towards target before the Fed started winding down its support program.

 

"I think the chairman, as he always does, said the right thing which is it depends on the data," Bullard, a current Fed voting member, said.

 

"Even if we do taper it would still be a very aggressive pace of purchases because we would only be moderating the rate by a small amount ... I don't think we are actually that close at this point to talking about an exit."

 

A European policymaker also said on Thursday it was not yet time for either the Fed or the European Central Bank to consider reining in support for their economies.

 

"I think the policy followed by the ECB as well as, for instance, the Fed in the United States is appropriate for the current economic situation, but of course always with the perspective that one has to adjust to further developments," ECB Governing Council member Ewald Nowotny said in Vienna.

 

Many financial markets have hit record or long-term highs in recent months as the constant drip feed of central bank stimulus has driven investors into a frenzy.

 

Bullard told reporters after his speech that as long he was sure inflation was again heading in the right direction he would be happy with reducing the buying by $15 billion-$20 billion a month.

 

"What I would like the committee to do is to think about relatively small moves that more-or-less correspond to a 25 basis point Federal Funds rate move in normal times, so we are not in a position where we are having to make decisions about cutting the whole program in half or bringing the program to a halt in a short period of time."

 

He also laid out the step-by-step sequence he would like to see the Fed adopt beyond that.

 

"I think the basic structure of the exit strategy will stay about the same; which is to first allow a run down of the balance sheet, later increase the interest payment on reserves and only after that consider selling assets."

 

He added: "And it is a little unclear at the moment if the committee wants to push out the dates for that (selling of assets)."