MarketView for October 15

Summary 

 

Wall Street had its worst day since the 1987 stock market crash on Wednesday, as bleak economic data fed worries that all the efforts to unlock credit markets may not stave off a severe recession. Federal Reserve Chairman Ben Bernanke added to those concerns when he said the economy faced a "significant threat" from paralyzed credit markets. The Dow and the benchmark S&P 500 suffered their worst one-day percentage drops since 1987.

 

Dismal monthly U.S. retail sales set the tone for the session, dropping the most in more than three years, while a measure of New York state manufacturing hit its lowest level since the index started in 2001. The gains by the NASDAQ from Monday's 11 percent rally have evaporated, while the benchmark S&P 500 is up only about 1 percent since Monday.

 

Recession fears intensified after the Federal Reserve's Beige Book report indicated that economic activity weakened across the United States in September as businesses revised capital investments and consumers curtailed spending.

 

Shares of companies considered economic bellwethers, such as Caterpillar fell sharply. Caterpillar's shares ended the day down 11.4 percent to $42.06. Fears of recession knocked commodities lower, with Exxon Mobil ending the day down 14 percent to $62.35, while Chevron lost 12.5 percent to $59.98, as crude futures slid to a new 13-month low below $75 a barrel.

 

Retailers skidded, with Wal-Mart falling 8.1 percent to $50.05 and Home Depot falling 5.9 percent to $19.83. The weak retail sales data underscored the severity of the squeeze on consumers faced with sliding home values, a tumbling stock market and tight credit.

 

Shares of State Street Corp, one of the world's largest institutional asset managers, plummeted 17.4 percent to $46.83. The company reported rising unrealized losses in its commercial paper program and investment portfolio, sparking concerns among investors.

 

Coca-Cola chalked up a quarterly profit that beat Wall Street's expectations. Coke's stock ended the day up 1.1 percent at $44.21, the only one of the 30 Dow industrials that finished higher.

 

Wholesale Inflation Up and Down

 

The Labor Department reported on Wednesday that the producer price index, a gauge of prices received by farms, factories and refineries, fell 0.4 percent in September, as declining energy costs eased price pressures. However, Core wholesale prices, which exclude volatile food and energy costs, rose by 0.4 percent, above street expectations of a 0.2 percent increase.

 

The decline in the overall level of wholesale prices indicates that recent increases in consumer inflation will likely slow, a bit of good news for the economy. Lower inflation makes it easier for the Federal Reserve to cut its target interest rate to stimulate economic growth. There is a rising expectation that the Fed will cut rates at its Oct. 28 meeting, if not before.

 

Wholesale prices rose sharply for three months this summer, as oil prices rose to a record level near $147 a barrel in July and prices of agricultural commodities, such as corn and soybeans, also soared. However, those trends have reversed in recent months as the economy has slowed amid the financial crisis. Oil is now down below $80 per barrel and the price of corn is down almost 50 percent from its mid-summer high.

 

Some of the drop in wholesale prices already has been passed onto consumers. The consumer price index fell 0.1 percent in August, the Labor Department said last month. That was down from a 0.8 increase in July, when consumer prices were 5.6 percent higher than a year ago, the largest increase in 17 years.

 

Unfortunately, consumers may not have seen similar relief in September. The CPI for last month, which will be released Thursday, is expected to increase by 0.1 percent. The drop in energy prices has hurt the shares of oil companies. Exxon Mobil Corp. shares closed Tuesday at $72.46 and Chevron finished at $68.54, both down from prices above $90 per share this spring.

 

Retail Sales Fall

 

The Commerce Department reported on Wednesday that retail sales last month fell 1.2 percent in September to a seasonally adjusted $375.5 billion; the largest drop since August 2005 and far greater than the 0.7 percent decline economists had expected.

 

Falling oil prices cooled overall inflation, but a closely watched measure of prices that strips out food and energy costs posted a surprisingly steep increase. The so called core number rose 0.4 percent last month, twice the rate Wall Street had been expecting.

 

Still, there was some evidence that price pressures could be easing a bit throughout the supply chain. For example, the prices for intermediate goods fell 1.2 percent, while crude prices fell a sharp 7.9 percent.

 

A separate report from the Commerce Department showed business inventories rose a modest 0.3 percent in August, less than the 0.5 percent expected. Retailers trimmed inventory to cope with consumers cutting back on all but the essentials. The reason is that the credit crisis, which has been going on for some 14 months, has taken a heavy toll on consumer confidence and spending.

 

Excluding autos, retail sales were off 0.6 percent for September, double the 0.3 percent decline that economists had forecast. The house downturn continued to take a toll on furniture and home furnishings, with sales of those items falling 2.3 percent, the sharpest decline since February 2003.

 

The sales declines were broad, covering everything from auto parts to clothing, department stores to online retailers. Even grocery sales, which had held up long after discretionary spending faded, fell 0.4 percent.

 

Crude Hits 13-Year Low

 

The price of crude oil fell nearly $3 per barrel on Wednesday, touching 13-month lows on expectations that the deepening economic slowdown will cut into already weakening demand.

Domestic sweet crude futures for November delivery settled down $4.09 per barrel, or 5.2 percent, at $75.54, after hitting $74.62, the lowest level since September 2007 and down nearly 50 percent since hitting a record over $147 in July. London Brent crude settled down $3.20 per barrel at $71.33. It was crude's lowest settlement prices since Aug. 31, 2007.

 

Slumping demand in the United States and other developed economies, as well as a flight of speculators out of oil has sent oil tumbling from July's record. On the Street, analysts have scaled back their global demand growth estimates, with OPEC cutting its forecasts for world demand for crude next year in its latest monthly report.

 

Crude's stunning collapse has sent pump prices tumbling. A gallon of regular gas fell nearly 4 cents overnight to a new national average of $3.125, according to auto club AAA, the Oil Price Information Service and Wright Express. That left prices nearly 10 percent lower from where they were only a week ago.

 

OPEC is saying that said rich nations are expected to need only 400,000 barrels a day more oil in 2009 than this year, whereas demand from developing countries will increase by an estimated 1.1 million barrels, with most of that growth coming from China, the Middle East and India.

 

OPEC's report comes about a month before the cartel is scheduled to hold a special meeting to discuss ways to deal with oil's slide, including the possibility of tightening output. OPEC controls 40 percent of the world's oil supply.

 

"Even if governments are successful in calming equity markets and unfreezing credit markets in the near future, the fallout on the real economy from financial market headwinds is expected to be considerable," OPEC said. OPEC is due to hold an emergency meeting in Vienna next month to review the impact of the global financial crisis on the oil market.

 

JP Morgan cut its forecast for average oil prices next year to $74.75 a barrel, citing the weak economic outlook. "The oil market is caught in the wake of four tsunamis," Morgan said. "A global recession, tighter credit, increased refining capacity and rising non-OPEC supplies."

 

Some support came as Hess Corp began shutting units at its Hovensa refining joint venture in the U.S. Virgin Islands ahead of Hurricane Omar. The storm briefly shut Venezuela's Puerto La Cruz refinery, but operations were restored on Wednesday.

 

Traders will scrutinize weekly U.S. inventory data on Thursday for indications on U.S. oil demand.

The data was forecast to show a 1.9 million barrel build in crude stocks, a 600,000 barrel build in distillates and a 2.9 million barrel rise in gasoline inventories last week.

 

Bernanke Says Times Are Not Good

 

The turmoil in credit markets poses a "significant threat" to an already slowing U.S. economy, Federal Reserve Chairman Ben Bernanke said on Wednesday. Bernanke said it will take some time to restore normal flows of credit. He pledged that the U.S. central bank would continue to act aggressively to fight the crisis.

 

"By restricting flows of credit to households, businesses, and state and local governments, the turmoil in financial markets and the funding pressures on financial firms pose a significant threat to economic growth," Bernanke said.

 

"We will continue to use all the tools at our disposal to improve market functioning and liquidity, to reduce pressures in key credit and funding markets and to complement the steps the Treasury and foreign governments will be taking to strengthen the financial system," he said.

 

In a bid to restore financial market stability, the government announced on Tuesday a plan to recapitalize banks, beginning with a $125 billion equity investment in nine major financial institutions.

 

The Fed, acting in concert with central banks around the globe, last week cut benchmark interbank lending rates by a half-percentage point to 1.5 percent in an emergency move. The rate cuts were called for by the intensification of the financial crisis, which raised risks to growth and diminished chances that inflation could spike higher, the Fed said.

 

Bernanke cited weakness in the housing sector, slowing consumer and business spending and a softening labor market as evidence that economic activity is shaky. He also said credit markets would take time to unfreeze. He pointed out that export sales, until recently a bright spot, were likely to slow as well.

 

While Bernanke noted that inflation had been high recently, he said expected inflation has held steady or eased, import prices were moderating and commodity prices had fallen. Those factors, along with the softness in the economy, "should lead to rates of inflation more consistent with price stability," he said.

 

Beige Book Reaffirms Relatively Gloomy Outlook

 

The release today of the Federal Reserve’s Beige Book report on the state of the economy through October 6, reaffirmed what everyone already knew...that economic activity weakened across the United States in September as businesses revised capital investments, consumers curtailed spending and the general outlook darkened.

 

"Economic activity weakened in September across all twelve Federal Reserve Districts," the Fed said in its Beige Book report on the state of the economy through October 6. "Several districts reported that capital spending decisions were being influenced by economic uncertainty," read the anecdotal report that the Fed uses to help it shape monetary policy. "Credit conditions were characterized as being tight" across the country, the report stated.

 

There is increasing optimism on Wall Street that the Fed will trim interest rates by a quarter of a percentage point at the next scheduled meeting on October 28th and 29^th, in the face of a wrenching credit crunch and broader economic woes.

 

Meanwhile, inflationary pressures moderated a bit in September, the Fed said, while labor market conditions weakened in most areas. The report had a bright spot for agriculture and reported "conditions remained favorable" in most districts. Reports on natural resources were also upbeat, the report said.