MarketView for November 17

 

 

Summary 

 

The struggles recently experienced by stocks are far from over. A late-day selloff did not inspire confidence. Volume was light and early buying faded, as financials led the market downward. The S&P 500 is down nearly 4 percent since November 5 after rallying nearly 13 percent in September and October.

 

Financials sagged after the Federal Reserve said it will evaluate the ability of 19 large financial institutions to withstand losses in "adverse" economic scenarios. The announcement accompanied guidance on potential dividend increases, first reported on November 4. Banks rallied sharply that day and were still up 1 percent in the past two weeks before Wednesday's selloff.

 

Indexes also suffered from the continued uncertainty of Ireland's financial crisis, which contributed to Wall Street's drop of nearly 2 percent on Tuesday. Volume was light and some of the day's quietness was due to investors awaiting the pricing of General Motors' initial public offering after the market's close. The automaker set the terms for a landmark IPO that could be the largest in U.S. history. GM said after the closing bell the stock was priced at $33 a share.

 

Retailers kept a floor under the market Target rose 3.9 percent to $55.62. The retail giant forecast its best same-store sales numbers in three years for the upcoming holiday season.

 

The Street was also keeping a close eye on the situation in Ireland. Dublin agreed to work with a European Union-International Monetary Fund mission on urgent steps to shore up its shattered banking sector.

 

Target offered an upbeat fourth-quarter sales forecast on Wednesday, while earlier this week Wal-Mart said holiday sales would break a six-quarter streak of same-store sales declines. But much of the anticipated sales gains will be the result of price cuts. This implies inflation will remain low, though economists do not foresee an outright deflation.

 

The CBOE Volatility index .VIX, Wall Street's so-called fear gauge, declined 3.6 percent but remained above 20. On Tuesday, it closed at its highest point in more than a month.

 

In economic data, housing starts slumped to their lowest level in more than a year in October, while consumer prices rose, but the annual increase in core CPI was the smallest on record.

 

About 7.19 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, well below last year's estimated daily average of 9.65 billion.

 

Full QE2 Increasingly Likely

 

Federal Reserve said on Wednesday that it is likely to follow through on its entire $600 billion bond buying program based on an anticipated weak economic recovery.

 

"As the forecast looks right now it looks like we'll be purchasing at this pace through the end of the second quarter to add up to $600 billion," St. Louis Federal Reserve Bank President James Bullard said.

 

The Fed announced a second round of extensive long-term bond buying in November to fire up tepid growth. The program has come under fire at home and abroad from critics who say the Fed is devaluing the dollar at the expense of trading partners, sowing the seeds of inflation and poaching on the turf of fiscal authorities.

 

Fed Chairman Ben Bernanke on Wednesday took defense of the bank's actions to Capitol Hill, where he briefed skeptical lawmakers on the merits of the plan.

 

Data showing muted inflation for October is a concern and justifies the Fed's actions to stimulate the economy, Bullard said. The 12-month rise in the underlying consumer price index was a record low 0.6 percent last month, the government said earlier in the day.

 

"That's a low number and continues the disinflation trend that we've seen in 2010," said Bullard, who will be a voter for one more scheduled meeting of the Fed's policy-setting panel this year. Bullard is viewed as a centrist with dovish leanings on the spectrum of Fed officials, with doves most concerned about fostering growth and hawks intent on keeping inflation at bay at all costs.

 

"That disinflation trend is something that I'm worried about and I think we should take action to turn around; that's part of the reason I supported the second round of quantitative easing," he added.

 

Another Fed official, Boston Fed President Eric Rosengren said the easing policy should boost jobs and lift inflation to healthier levels.

 

The program "should be broadly effective and helpful to the economy going forward," said Rosengren, considered a monetary policy dove. By 2012, he said, the Fed's latest action will likely have trimmed half a percentage point from the U.S. unemployment rate, adding the equivalent of 700,000 jobs. The jobless rate was 9.6 percent in October.

 

Two Republican lawmakers on Tuesday called for rewriting the Fed's mandate to make the central bank focus solely on inflation. Currently, the Fed is required to pursue both price stability and full employment.

 

Bullard called the debate over the Fed's mandate interesting but declined to say whether he would support or oppose such a change.

 

"It's interesting," he said. "The European Central Bank has a price stability mandate. ... The only thing a central bank can do in the long run is control the long run rate of inflation, so from that point of view it makes sense to have single mandate."

 

Inflation Remains Bottled Up

 

Core consumer inflation touched a record low in October and new home building sagged, lending support to the Federal Reserve's move to boost the sluggish economy through additional monetary easing.

 

The Consumer Price Index rose 0.2 percent last month after edging up 0.1 percent in September, the Labor Department said. Economists had expected a 0.3 percent gain. Excluding food and energy costs, prices were flat for a third straight month and the increase from a year ago of 0.6 percent was the smallest since records started in 1957. Core producer prices last month recorded their biggest decline in more than four years as vehicle prices tumbled.

 

A separate report from the Commerce Department showed housing starts plummeted 11.7 percent to a 519,000 unit annual rate, the lowest since April 2009 and well below the 600,000 economists had projected.

 

Weak inflation as the economy recovers moderately from the worst recession since the 1930s lifted prices for Treasury debt, while the dollar fell against the euro and stayed close to a six-week high against the yen.

 

The 0.6 percent reading on core inflation is way below the Fed's comfort zone of between 1.7 percent and 2 percent.

 

In October, overall consumer prices were lifted by a 4.6 percent jump in gasoline prices, which built on a September increase of 1.6 percent. Food prices rose by a muted 0.1 percent after gaining 0.3 percent in September.

 

New motor vehicle prices, which depressed core wholesale prices in October, contributed to holding down the core CPI number, as well. New vehicle prices fell 0.2 percent, while the cost of used trucks dropped 0.9 percent. Shelter costs edged up 0.1 percent, while apparel fell 0.3 percent in October.