MarketView for May 14

 

Summary

 

Share prices were lower on Wednesday, pretty much across the board. The Dow Jones Industrial Average and the S&P 500 indexes retreating from recent record highs, as small caps resumed their sell-off and consumer discretionary shares lagged.

 

Macy's fell 0.2 percent to $57.83 after the retail chain reported sales that did not meet consensus Street expectations. Fossil was also buried a day after it gave a second-quarter profit outlook that was considerably lower than expected. The retailer’s shares ended the day down 10.3 percent to close at $100.00.

 

The Russell 2000 index of small-cap stocks fell1.6 percent, underperforming the benchmark S&P 500 and extending a divergence that has been pronounced throughout 2014.

 

The S&P 500 ended three straight daily advances, marking record closing highs for the last two sessions. On Tuesday it climbed above 1,900 for the first time. The Dow ended at record highs for the three previous sessions.

 

The biggest drag on both the Dow and the S&P 500 on Wednesday was IBM, whose shares fell 1.8 percent to $188.72. IBM said in a filing it expects hardware earnings to be flat year-over-year in 2014.

 

Among other decliners, Deere fell 2 percent to $91.70. The farm equipment company cut its full-year sales outlook even as it reported a better-than-expected quarterly profit.

 

In late afternoon trading, Wal-Mart fell sharply in an instant as volume spiked in an out-of-the-ordinary mini "flash crash," data showed. The stock ended down 0.5 percent at $78.74.

 

Shares of online retailer Zulily rose 9.3 percent to $34.99 in heavy volume of more than 9.7 million shares, after dropping to a record low earlier in the day following the expiration of the lockup period after its initial public offering in November.

 

The producer price index recorded its largest increase in 1-1/2 years in April as food prices surged.

 

Shares of The New York Times fell 4.5 percent to $15.06 after an unexpected announcement by the company that managing editor Dean Baquet would take over as executive editor of the company's flagship newspaper, effective immediately. The company did not say why Jill Abramson was departing as executive editor.

 

Approximately 5.3 billion shares changed hands on the major equity exchanges, a number that was below the 6.1 billion share month-to-date average number, according to data from BATS Global Markets.

 

Sharp Rise in Producer Prices

 

The Labor Department reported on Wednesday that its Producer Price Index recorded its largest increase in 1-1/2 years during the month of April as food prices surged, in a potential sign inflation pressures may be creeping up. According to the Department, the index rose 0.6 percent, the largest gain since September 2012. That increase came on the heels of a March increase that was nearly as large.

 

The department revamped it PPI series at the start of the year to include services and construction. Since then, it has been surprisingly volatile, largely because of big swings in prices received for trade services.

 

Nonetheless, the expectation had been for an increase of about 0.2 percent. The latest increase could be viewed as an indication that price pressure may be building. Officials at the Federal Reserve have long worried that inflation was running too low.

 

In the 12 months through April, prices received by the nation's farms, factories and refineries advanced 2.1 percent. That was the largest gain since March 2012 and up from a 1.4 percent rise in the period through March.

 

Last month, wholesale food prices rose 2.7 percent, a fourth straight monthly gain and the biggest since February 2011. The cost of meats rose by the most since October 2003. A drought in California has put upward pressure on prices, which has already filtered through to the supermarket. However, rising food costs were far from the only factor driving producer prices higher last month.

 

Prices received for services at the final demand level gained 0.6 percent after rising 0.7 percent in March. Increasing margins for trade - an implicit profit measure - accounted for two-thirds of the rise in services last month. In contrast, energy prices rose a tame 0.1 percent.

 

Producer prices excluding food and energy costs increased 0.5 percent in April after the prior month's 0.6 percent gain. Part of the increase in this core PPI measure was due to a 1.4 percent jump in light motor truck prices.

 

In the 12 months through April, the core PPI for final demand rose 1.9 percent, the most since December 2012 and a sharp step up from the 1.4 percent increase logged in the period through March.

 

Despite the quicker pace of inflation at the wholesale level, the overall inflation backdrop in the United States remains benign given the slack in the labor market left over from the Great Recession. With wage growth tepid, it will be difficult for producers to pass on all the price increases to consumers.

 

Low inflation is one of the main reasons the Fed is keeping monetary policy extraordinarily loose. Although it is cutting back the amount of money it is injecting into the economy through monthly bond purchases, it is not expected to raise overnight interest rates before the second half of 2015.

 

Consumer price data is scheduled for release on Thursday and is expected to show the consumer price index rising 0.3 percent in April. Excluding food and energy, prices are expected to increase by a minimal 0.1 percent.

 

Rise in Mortgage Applications

 

The Mortgage Bankers Association reported on Wednesday that it saw an increase in the number of applications for home mortgages last week as interest rates declined, an industry group said on Wednesday.

 

The MBA said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, rose 3.6 percent for the week ended May 9.

 

The MBA's seasonally adjusted index of refinancing applications rose 6.8 percent, while the gauge of loan requests for home purchases, a leading indicator of home sales, dipped 0.1 percent.

 

Fixed 30-year mortgage rates averaged 4.39 percent in the week, the lowest rate since November 2013. It was down 4 basis points from 4.43 percent the week before. The survey covers over 75 percent of retail residential mortgage applications, according to MBA.

 

Chinese Growth Target in Jeopardy

 

China’s economic growth target could be in jeopardy for the first time in 15 years as data points to a sharper-than-expected loss of momentum and top leaders are talking about a "new normal" of slower growth. The Chinese government has already given itself some room on its growth target, refining it to about 7.5 percent and saying a couple of percentage points either side of that was acceptable.

 

However, after annual economic growth slowed to an 18-month low of 7.4 percent in the first quarter, April’s data has raised the possibility slower growth could be on the horizon.

 

Financial markets are taking it in stride because the expectation is that despite the rhetoric of accepting slower growth, authorities will step in to safeguard the target with some sort of stimulus measures, as they did in 2013. A cut in the official target, which would require parliamentary approval, would be unprecedented.

 

If the economy just meets its target for 2014, it will still be the slowest growth since 1990. If it comes in below that, it will be the first time the target has not been met since 1999, when the economy grew 7.6 percent compared with a goal of 8.0 percent.

 

China's leaders have been at the forefront of lowering expectations, talking of the need to accept slower but more sustainable growth as they try to remake the economy to be driven more by consumption rather than the traditional engines of exports and investment.

 

"We must adapt ourselves to a new normal of economic growth," President Xi Jinping said at the weekend.

 

To that end, authorities have ruled out major stimulus to accelerate growth. However, they are expected to put a floor under activity and head off any surge in unemployment that could be seen as a threat to social stability.

 

Premier Li Keqiang has said the economy has to grow by around 7.2 percent each year to create enough jobs.

 

However, there is concern over the uneven growth patterns in the country as the reforms are pushed through, with data showing growth slowing markedly in some provinces.

 

People's Bank of China Governor Zhou Xiaochuan has said the central bank would only fine-tune its policy to counter economic cycles and would not be taking any large-scale steps to increase growth. This week the PBOC told banks to improve the efficiency of mortgage lending, as a flagging property market becomes a major risk factor.

 

Some Chinese cities are relaxing property controls after near five years of national government efforts to restrain house prices. On the fiscal side, measures have been targeted, such as tax cut for small firms and faster construction of railway lines.