MarketView for October 29

Summary

Stock index futures fell in a shortened session on Monday and equity trading was canceled as hurricane Sandy bore down on the East Coast, closing equity trading for Tuesday also. Monday's shutdown was the stock market's first weather-related closure in 27 years. Furthermore, the markets will remain closed on Tuesday, the operator of the New York Stock Exchange said, depending on the damage from the huge and dangerous storm on financial center New York City overnight and on Tuesday. Index futures stopped trading electronically at 9:15 a.m., but will reopen at 7 p.m. for the overnight session during European and Asian hours, closing again at 9:15 a.m. Tuesday morning. NYSE Euronext and the Nasdaq Group said they made their decision in consultation with industry executives and regulators, and intend to reopen Wednesday, conditions permitting.

Italian political turmoil and Spanish hesitancy over seeking euro-zone assistance put the two countries on the front line of the region's debt crisis and back under market pressure on Monday as their leaders met in Madrid.

S&P 500 futures fell 4.9 points and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures fell 69 points and Nasdaq 100 futures fell 15.75 points. Futures closed well off their session lows. S&P 500 futures fell more than 10 points at the intraday low.

The storm forced the closure of the markets on Monday, the anniversary of the 1929 stock market crash. Futures did not reopen as usual during the day, including the popular S&P 500 e-mini contract that lets smaller traders access index futures. E-mini contracts typically trade around the clock, closing for just 45 minutes of each day.

A market closure for more than a day may start causing problems for investors who need to trade in and out of positions. CME closed its interest rate operations, including Treasury, Eurodollar and fed funds futures and options on futures markets on the trading floor at 12:00 noon on Monday in line with a closure of the cash market.

In Europe, Spanish and Italian bond yields rose and German Bund futures hit two-week highs on Monday, partly prompted by former Italian Prime Minister Silvio Berlusconi's threat to bring down the Rome government.

Greece's foreign lenders have refused to make any further concessions on changes to labor laws contested by a junior coalition partner, the country's finance minister said on Sunday, prolonging an impasse on a crucial austerity package. Athens has been locked in talks with its EU and IMF lenders on the austerity package for months, but a final agreement has been held up by the small Democratic Left party's refusal to back the new wage laws. European shares fell for the first time in four sessions on Monday, hit by worries over weak company results.

Consumer Spending Rises

According to a report released on Monday by the Commerce Department, consumer spending rose 0.8 percent, the largest increase since February, after an unrevised 0.5 percent gain in August, thereby putting the economy on a firmer footing heading into the fourth quarter even though households had to pull back on saving to fund purchases. When adjusted for inflation, consumer spending rose 0.4 percent after edging up 0.1 percent in August.

Spending accounts for about 70 percent of U.S. economic activity and last month's increase offered a strong hand off from the July-September period to the current quarter.

The spending figures were incorporated into last Friday's report on third-quarter gross domestic product. Consumer spending increased at a 2 percent annual pace during the quarter after rising at a 1.5 percent rate in the prior period. That helped to lift level of economic growth to a 2 percent growth rate, an increase over second quarters' 1.3 percent advance.

The spurt in spending as the quarter ended, which was concentrated in long-lasting goods such as autos and Apple's iPhone 5, provides momentum that should help support growth in the fourth quarter. However, spending could weaken near year-end if consumers start to worry about the potential for higher taxes at the start of the year.

Tepid income growth as the labor market struggles to gain speed also threatens to undermine spending, which is an even more important pillar for growth than usual given signs that businesses are cutting back on investment.

While personal income last month grew 0.4 percent, the most since March and a step-up from August's 0.1 percent gain, the amount of money at the disposal of households after inflation and taxes was flat. That meant households had to cut back on saving to fund purchases. The saving rate slipped to 3.3 percent last month, the lowest since November 2011, from 3.7 percent in August.

Spending last month rose even as households paid 13 cents per gallon more for gasoline. Spending on durable goods rose solidly, while outlays for services rebounded 0.2 percent after declining by the same margin in August.

The rise in gasoline prices kept inflation pressures somewhat elevated. A price gauge in the report increased 0.4 percent for the second month in a row, taking its gain over the past 12 months up to 1.7 percent from 1.5 percent in August. However, a core measure that strips out food and energy costs edged up 0.1 percent for a third straight month, suggesting the rise in overall inflation will be short-lived. In the 12 months to September, the core index was up 1.7 percent after rising 1.6 percent in August.