MarketView for May 13

 

Summary

 

The Dow Jones Industrial Average and the S&P 500 indexes eked out record closing highs again on Tuesday, while the Nasdaq resumed its recent slide, dragged down by shares of Cisco. The S&P 500 briefly rose above 1,900 for the first time early in the session, but quickly gave back some of its gains. Meanwhile, the Russell 2000 index of small-cap stocks fell 1.1 percent.

 

Homebuilders' shares were higher and the common stock of mortgage finance giants Fannie Mae and Freddie Mac rose as Federal Housing Finance Agency Director Mel Watt laid out new policies that could make it easier for many Americans to obtain mortgages. Fannie Mae ended the day up 7.8 percent to close at $4.57, while Freddie Mac chalked up a 6.9 percent gain to end the day at $4.49.

 

Cisco, set to report results on Wednesday, was the largest drag on the Nasdaq. The shares fell 1.4 percent to close out the day at $22.86.

 

The decline by the Russell 2000 came a day after the index scored its largest daily percentage gain since early March. At its session low on Friday, the index was down exactly 10 percent from the intraday record high set in early March.

 

The Dow Jones Transportation Average reached another intraday record high, which some analysts say points to upbeat prospects for the economy.

 

More developments on the deal front enhanced the outlook for stocks. Keurig Green Mountain was the S&P 500's largest percentage gainer, up 7.6 percent at $119.07. The stock climbed after Coca-Cola said it would raise its stake in the company to 16 percent, up from 10 percent.

 

In other deal news, DirecTV shares fell 1.2 percent to $86.08 on news that AT&T was in active talks to buy the company in a deal that could be worth close to $50 billion. AT&T's shares fell 1 percent to $36.20, making it the largest drag on the S&P 500.

 

Among homebuilders, D.R. Horton was up 2.2 percent to $23.07.

Data did little to change the view that the economy is poised for faster growth this quarter. Retail sales rose 0.1 percent in April, less than expected, though the March reading was revised upward.

 

Approximately 5.5 billion shares changed hands on the major equity exchanges, a number that was below the 6.1 billion share average posted for the month to date, according to data from BATS Global Markets.

 

Retail Sales Disappoint

 

April retail sales were a disappointment, with the Commerce Department reporting only a 0.1 percent increase last month, held back by declines in receipts at furniture, electronics and appliance stores, restaurants and bars and online retailers.

 

Accounting for a third of consumer spending, sales rose by a revised 1.5 percent in March. That was the largest increase since March 2010 and reflected pent-up demand after a brutally cold winter.

 

So-called core sales, which remove automobiles, gasoline, building materials and food services, thereby corresponding most closely with the consumer spending component of gross domestic product, fell 0.1 percent in April. That followed a revised 1.3 percent advance in March. Core retail sales had previously been reported to have chalked up a 0.8 percent in March.

 

Last month, retail sales were restrained by a 2.3 percent drop in receipts at electronics and appliance stores. Sales at furniture stores fell 0.6 percent, while receipts at food services and drinking places dropped 0.9 percent. Sales at non-store retailers, which include online sales, fell 0.9 percent.

 

However, receipts at building materials and garden equipment stores rose 0.4 percent and sales at auto dealerships increased 0.6 percent. There were also increases in sales at gasoline stations, reflecting higher pump prices. Excluding gasoline and autos, retail sales fell 0.1 percent. Receipts at clothing stores rose 1.2 percent. There were also gains in receipts at sporting goods shops.

 

Import Prices Fall

 

The Labor Department reported on Tuesday that import prices fell 0.4 percent during April, after chalking up a 0.4 percent increase during March. In the 12 months through April, import prices fell 0.3 percent.

 

Weak import prices are helping to keep inflation muted. The lack of inflation pressures in the economy suggests the Federal Reserve could keep monetary policy very accommodative for a while even as labor market slack starts to ease.

 

The Labor Department report also showed export prices fell 1.0 percent in April. That was the biggest drop since June 2012 and followed a 1.0 percent rise in March. In the 12 months through April, export prices were up 0.1 percent.

 

Household Debt Increases

 

Households chalked up more debt in the first quarter, the third straight quarterly increase, thanks in large part to heftier mortgages, a survey by the Federal Reserve Bank of New York showed on Tuesday.

 

The report on household debt and credit showed however that mortgage originations dropped to their lowest level since the third quarter of last year, which could buck the overall trend of growing confidence among consumers.

 

Outstanding household debt rose by $129 billion from the previous quarter, boosted by a $116 billion jump in mortgage debt and smaller rises in student and auto loans, the report said. Total household indebtedness was $11.65 trillion, which is still 8.1 percent below the peak in the third quarter of 2008.

 

Since then, the economy has been in a deep recession that for years caused consumers to restrict spending. That trend has started to reverse in recent quarters, according to the New York Fed survey that draws from a nationally representative consumer credit sample.

 

"We've observed household debt increase three quarters in a row and delinquency rates at their lowest levels since 2008," Andy Haughwout, a New York Fed economist, said in the report, noting that "the direction of future mortgage originations will have an important implication on the household financial outlook."

 

Mortgage originations fell by $120 billion to $332 billion.

 

Small Business Optimism Rises

 

Optimism among small businesses rose to its highest level in 6-1/2 years in April, which should lead to acceleration in economic activity during the second quarter. The National Federation of Independent Business (NFIB) said on Tuesday its Small Business Optimism Index rose 1.8 points to 95.2 during April, the highest reading since October 2007, when the economy was on the cusp of its worst recession since the 1930s.

 

"April's reading took the index to a post-recession high and a recovery high level," the NFIB said in a statement.

 

It adds to data such as employment and surveys on the manufacturing and services industries that have shown the economy regaining steam early in the second quarter after growth braked abruptly in the first three months of the year.

 

Seven of the index's 10 components advanced, with gains in job creation plans and the share of businesses optimistic about earnings. There also was an increase in the share of businesses raising inventories, which was one of the drags on first-quarter growth.

 

More owners reported they could not find qualified workers to fill open positions, which is leading to higher wages.

 

"Inflation will begin to pick up because reports of higher compensation are growing in frequency and these costs will be recovered in higher prices," the NFIB said.

 

Almost a quarter of businesses reported raising prices in April. Another 25 percent plan to increase their prices over the next few months.

 

"Reports of increases in average selling prices have accelerated sharply in the last few months, reaching the highest level since 2011," said the NFIB.

 

Economic Growth Slows in China

 

China's economic activity showed across-the-board weakness in April, with data from output to investment and consumption all missing market expectations, sparking new calls for Beijing to ease policies to shore up growth.

 

Months of lackluster performance and growing signs of weakness in the housing market have led some analysts and investors to question whether more stimulus is needed lest economic expansion this year fall short of the official target of around 7.5 percent.

 

China's central bank asked commercial banks on Monday to speed up the granting of home loans and to set mortgage rates at reasonable levels, sources told Reuters, underscoring concerns that any sharp deterioration in the property market could further strain the world's second-largest economy.

 

The most concerning data is fixed-asset investment, which grew 17.3 percent in the first four months from a year ago, the weakest pace since the government started a new statistics method in 2011.

 

April industrial output data also disappointed the market, growing 8.7 percent from a year earlier versus market consensus of a rise of 8.9 percent, while retail sales also missed forecasts by rising 11.9 percent during the same period, the National Bureau of Statistics said on Tuesday.

 

Beijing has unveiled a number of targeted measures so far this year to help shore up the economy, which dipped to 18-month low in the first quarter and is seen on track to post the weakest showing for 2014 in 24 years.

 

Such measures include faster investment in railway and shanty town constructions, easing reserve requirements for rural banks and tax breaks for smaller firms. However, those actions are probably not dramatic enough to arrest a persistent slowdown in the Chinese economy, especially at a time when the slowing property market adds a significant new risk to the economy and the banking system.

 

Revenues from property sales fell 7.8 percent in the first four of months of the year compared with the same period last year, Tuesday's data also showed. Real estate directly affects about 40 other industries in China and is considered a crucial pillar of the economy.

 

Central bank Governor Zhou Xiaochuan said on Saturday that the government would not use any large-scale stimulus to boost its economy in response to speculation that authorities might lower reserve requirements for banks to spur growth.

 

Separately, an academic advisor to the monetary policy committee repeated on Tuesday that there would be no big adjustment in monetary policy as Beijing needs to wait for more data in the coming months to decide on policy settings.

 

Chinese top leaders have said on many occasions that they would be more tolerant of slower economic growth while they push ahead with structural reform to pursue a more sustainable growth model.

 

In the latest indication of Beijing's determination to push reforms, Chinese President Xi Jinping had said last week the country must adapt to a "new norm" of economic growth and keep "cool-minded" amid a slowing economy.

 

He also pledged to continue to coordinate the efforts of stabilizing growth, promoting reforms, adjusting structure, improving people's livelihood and preventing risks so as to ensure sound economic growth and social stability.

 

Recent factory surveys, though still weak, have hinted at some signs of stabilization, while April trade data showed both exports and imports returned to slight growth as orders to the United States and European Union increased sharply.