MarketView for November 24

 

 

Summary 

 

The major equity indexes ended the day lower on Tuesday, the result of some relatively lackluster economic data in a session marked by low volume and choppy trading. Nonetheless, the day negative numbers eased somewhat after the Federal Reserve raised its expectations for growth in 2010. Much of the day’s negative influence was the result of the latest government data revising the gross domestic number downward for the third quarter. Financial stocks showed weakness throughout the session. JPMorgan Chase fell 1.9 percent to $42.48.

 

Hewlett-Packard led the companies making up the Dow Jones industrial average downward a day after H-P said in its results that its economic outlook remained challenging. H-P fell 1.6 percent to $50.19. H-P also said it saw growth in its share of the enterprise marketplace, which is rival Dell's key market. Dell's shares were down 3.2 percent to $14.32 and ranked as a top drag on the Nasdaq 100.

 

Residential home prices rose in September, according to the Standard & Poor's/Case-Shiller index, but the increase was less robust than forecast. Home prices for that month were unchanged, according to a separate report from the U.S. Federal Housing Finance Agency.

 

The stock market will be closed on Thursday in observance of Thanksgiving Day. On Friday, it will be open for only half a day due to the holiday.

 

Fed Has Positive Outlook

 

Federal Reserve officials are increasingly confident of the economic recovery being of the opinion at this time that it will continue to push ahead. Tthey do see employment or inflation picking up soon, minutes from their November meeting showed.

 

Senior Fed officials, meeting on November 3-4, also expressed concern their plans to keep interest rates low for a prolonged period could have negative repercussions, including possible speculative activity in financial markets.

 

"Most participants now view the risks to their growth forecasts as being roughly balanced rather than tilted to the downside," according to the minutes, which were released on Tuesday and were accompanied by upward revisions to policy makers' growth forecasts.

 

"Some negative side effects might result from the maintenance of very low short-term interest rates, including the possibility that such a policy stance could lead to excessive risk-taking in financial markets or an un-anchoring of inflation expectations," they said.

 

After their meeting earlier this month, policy makers repeated a pledge to keep rates exceptionally low for "an extended period."

 

Some have argued that the Fed's policy of rock-bottom borrowing costs may be driving investors to lever up their bets by using the falling dollar to fund their trades. President Barack Obama was lectured on the subject by top government officials in China.

 

The Federal Open Market Committee said it did not believe such speculative activity had taken place to date, saying the dollar's decline had thus far been "orderly."

 

"Any tendency for dollar depreciation to intensify or to put significant upward pressure on inflation would bear close watching," the minutes said. The dollar dropped to a 15-month low against a basket of major currencies last week.

 

Fed Chairman Ben Bernanke said recently that he was keeping an eye on the dollar’s movements but suggesting it was not an overwhelming influence on policy for now.

 

The minutes indicated policy makers are not widely concerned about inflation in the medium term. That stance has been evident in a string of recent speeches, in which even the normally hawkish presidents of the Dallas and Philadelphia Federal Reserve banks showed little concern over the prospects for a sustained rise in consumer prices.

 

The "central tendency" forecasts of policy makers appeared slightly more sanguine on the economy's prospects. U.S. gross domestic product was expected to shrink substantially less this year, somewhere in a range of -0.4 percent and -0.1 percent. The Fed had previously expected a contraction between 1.5 percent and 1 percent.

 

Similarly, the jobless rate, currently at a 26-1/2 year high of 10.2 percent, was seen easing more quickly than policy makers had believed back in June.

 

Nonetheless, there was a sense that any turnaround in the labor market would not be fast enough to stem the rising tide of joblessness. Estimates from FOMC members foresaw uncomfortably high unemployment of as much as 7.5 percent by the end of 2012.

 

"The weakness in labor market conditions remained an important concern," the minutes said. "The considerable decelerations in wages and unit labor costs this year were cited as factors putting downward pressure on inflation."

 

Core inflation, which excludes volatile food and energy costs, was seen well within the Fed's presumed ceiling of 2 percent through 2012, suggesting increases in interest rates are a way off. Still, some officials worried a recent spike in commodity prices, which some analysts say is a byproduct of the Fed's emergency liquidity measures, could hold the seeds of future inflation. In addition to slashing interest rates sharply as the global financial crisis gathered pace last year, the Fed also instituted a number of special lending programs to keep the financial system afloat.

 

Despite a general agreement on the prospects for a weak but enduring economic rebound, the minutes showed Fed officials had not yet reached consensus on how best to orchestrate an exit from their emergency policy measures. Some favored selling some of the assets the Fed has accumulated back into the markets.

 

The Fed has purchased $300 billion in longer-term government debt and is on its way to purchasing more than $1.4 trillion of mortgage-related securities as a way to drive down borrowing costs with overnight rates already near zero.

 

Others thought asset sales would be disruptive, believing instead that the Fed should first employ other tools, like reverse repurchases agreements and the payment of interest on bank reserves, to draw money out of the financial system.

 

"Such sales might elicit sharp increases in longer-term interest rates that could undermine attainment of the committee's goals," some members said.

 

GDP Growth Revised Downward

 

In its second estimate of third quarter gross domestic product published on Tuesday, the Commerce Department reported that the economy expanded at a 2.8 percent annual rate, probably ending the most painful recession in 70 years.

 

It was slower than the previous estimate of 3.5 percent but still the fastest pace since the third quarter of 2007, reflecting government fiscal stimulus. The new estimate was slightly below expectations for a growth rate of 2.9 percent.

 

With federal programs the main force behind the recovery, some economists are wary of risks of a double-dip recession -- a scenario where output perks up briefly only to fall again when government support ends.

 

The return to growth in the July-September period, after four straight quarters of declining output, followed a 0.7 percent contraction in the April-June period. Output was constrained by consumer spending that was not as robust as first thought. Strong imports and weak investment in commercial buildings also held back growth. However, corporate profits rose as businesses raised output even as they were cutting payrolls.

 

Tuesday's GDP data showed imports were revised higher, showing more domestic demand was satisfied by overseas production. Imports jumped at 20.8 percent annual rate, the largest gain since the second quarter of 1985, instead of 16.4 percent. The rise in imports eclipsed a strong recovery in exports, thanks to a weak U.S. dollar, leaving a wider trade gap that took off just over half a percentage point from GDP.

 

A drop in the construction of nonresidential structures also restrained growth in the last quarter. Commercial building activity dropped at a 15.1 percent pace rather than 9 percent, as previously reported, highlighting the problems in commercial real estate. It shaved just over half a percentage point off GDP growth.

 

Consumer spending, which normally accounts for more than two-thirds of U.S. economic activity, rose at a 2.9 percent rate, instead of the 3.4 percent pace reported last month. It was still the largest rise since the first quarter of 2007 and represented a turnaround from a 0.9 percent second quarter fall. Businesses also reduced inventories at a slightly faster rate than had been anticipated.

 

Crude Prices Fall

 

Oil prices fell 2 percent on Tuesday after data showed the U.S. economy grew at a slower-than-expected pace last quarter and ahead of weekly U.S. inventory data expected to show crude stocks rose.

 

A slower recovery from the worst U.S. recession in seven decades may hurt demand for crude. The world's largest economy grew at an annual rate of 2.8 percent last quarter, the Commerce Department said, revising downward its earlier estimate of 3.5 percent growth.

 

Sweet domestic crude for January delivery settled down $1.54, or 2 percent, at $76.02 per barrel. In London, Brent crude settled down $1.00 at $76.46. Data may show that domestic crude oil and fuel stocks rose last week, as Gulf of Mexico production recovered after a tropical storm shut platforms in the previous week.

 

Retail gasoline demand fell 1.6 percent last week versus the previous week, and it was down 1.4 percent from the same week of 2008, according to a report from MasterCard SpendingPulse on Tuesday.

 

OPEC, the exporters' group that pumps one in three barrels of oil worldwide, must be careful not to collapse oil prices by oversupplying the market, Nigerian Oil Minister Rilwanu Lukman told reporters in Washington on Tuesday. Members of OPEC next meet to discuss output policy in Angola on December 22. The group has not changed its production targets since it agreed to trim output by a total of 4.2 million barrels per day in a series of cuts that began last year.