MarketView for September 22

 

 

Summary  

  

The Federal Reserve began a two-day policy-setting meeting on Tuesday; with Wall Street seemingly of the opinion that the Fed will continue its easy money policy, meaning low interest rates and continued support of sectors such as financials, technology and industrials. Given that the Fed will likely signal plans to maintain its easy monetary policy well into 2010, it was of little surprise that stock prices continued to move higher.

 

Broad-based in nature, the rally had prices in all but three of the 10 S&P 500 industry sectors gaining ground. Energy and other natural resources stocks were underpinned by resurgent global commodity prices as the dollar continued its free fall.

 

With no change expected in interest rates, investors probably will focus on the bank's assessment of the economic outlook, particularly after Chairman Ben Bernanke said last week that the recession was "technically" over.

 

Among financials, Citigroup rose 5 percent to $4.65 following news that Singapore wealth fund GIC has cut its stake in the company in half. Bank of America rose 2.1 percent to $17.61 after an analyst raised his price target on the stock, citing the bank's strengthened financial condition.

 

However, American International Group bucked the trend, falling 5.4 percent to $45.80 amid speculation it was planning to sell shares in a secondary offering. The stock had climbed as much as 12.4 percent to an intraday high of $54.39 before a late-afternoon reversal.

 

On the technology front, Google was a particular standout, hitting an intraday high of $501.99, its highest level since August 2008. Google's stock closed up 0.4 percent at $499.06.

 

Carnival increased its 2009 earnings forecast and said ticket prices for its cruises were stabilizing, sending the shares of the world's largest cruise operator up 4.8 percent to $33.52. Among major industrial firms, Caterpillar rose 3.6 percent to close at $54.34.

 

Newmont Mining added 1.8 percent to $45.22, and Alcoa rose 2.3 percent to $14.26. Signs that the Treasury's $43 billion auction of new two-year notes met strong demand added to the positive tone.

 

The dollar's slide to a one-year low against the euro helped propel global commodity prices higher, with the front-month price for crude oil gaining 2.6 percent, or $1.84, to settle at $71.55 per barrel, while spot gold rose toward an 18-month high approaching $1,020 per ounce.

 

Home Prices Begin to Rise

 

The Federal Housing Finance Agency reported on Tuesday that single-family home prices rose by a seasonally adjusted 0.3 percent in July from June but were 4.2 percent lower than a year earlier and 10.5 percent below their April 2007 peak. The regulator's monthly home price index for June was revised down to a 0.1 percent rise from a previously reported 0.5 percent increase. The index rose to 200.1 in July from 199.4 in June, but was down from 208.9 a year earlier.

 

For the nine census divisions, seasonally-adjusted monthly price changes from June to July ranged from a 0.9 percent decline in the East South Central division to a 1.6 percent gain in the Pacific division. The index is calculated using purchase prices of houses financed with mortgages that have been sold to or guaranteed by mortgage finance sources Fannie Mae or Freddie Mac.

 

Crude Oil Prices Do Rise

 

Oil prices rose more than 2 percent to top $71 per barrel on Tuesday as the dollar fell to a one-year low against the euro and top exporter Saudi Arabia said the economy was rebounding. The weaker dollar makes commodities cheaper for buyers holding other currencies. Saudi Arabian Oil Minister Ali al-Naimi said demand for the kingdom's oil was increasing and that there were signs of economic growth. He said the world economy seems to be recovering, could recover fast and therefore could impact demand. However, he did not expect OPEC to cut output next year.

 

Oil markets this year have found support from signs of a recovery in the wider economy that would bolster flagging fuel demand. Sweet domestic crude for November delivery settled up $1.84 per barrel at $71.55. London Brent crude settled up $1.84 per barrel at $70.53.

 

Further signs of strength came after data showed apparent oil demand from No. 2 oil consumer China rose 2.9 percent in August from a year earlier, the fifth consecutive rise. Still, Chinese domestic oil product demand has not kept up with the refinery operation rates, prompting oil companies to export fuels in large volumes.

 

Traders were also awaiting inventory data from the Energy Information Administration on Wednesday.

 

Economy Begins To Recover Says Geithner

 

Treasury Secretary Timothy Geithner said on Tuesday that the economy appeared to be picking up steam and G20 leaders gathering in Pittsburgh this week would strive to ensure the recovery was balanced.

 

"We are at the very beginnings of this recovery ... We need to make sure that we keep at this, so we have in place a recovery that is going to be self-sustaining, led by private demand, (and) a financial system that can actually provide the credit that is needed," he told a press briefing.

 

G20 leaders will meet in Pittsburgh on September 24-25 and Geithner said the aim was to take stock of the world economy and ensure better growth in the future.

 

"To make sure that as we recover from this crisis we are laying the seeds for a more balanced, more sustainable recovery. That is the agenda," Geithner said.

 

U.S. officials want the G20 to adopt a framework aimed at lifting growth in export-orientated members like China, Germany and Japan, while boosting savings and curbing consumption among import-hungry debtors like the United States.

 

GM Begins To Recover

 

General Motors Co said on Tuesday it planned to restore about 3,000 jobs and is getting set to raise production by up to 45 percent next year. GM said it would add shifts at three assembly plants as the automaker consolidates production from plants that are closing or retooling, a process that would not add immediately to its production schedule for 2009. Nonetheless, GM expects to increase North American production to about 2.8 million vehicles in 2010, up about 40 percent to 45 percent from 2009. GM had sharply curtailed North American production around its government-guided reorganization.

 

GM said it would add shifts at three U.S. assembly plants next year, restoring 2,400 jobs, and expected to restore 600 jobs at related facilities across the United States that produce engines, transmissions, stampings and castings.

 

The addition of shifts at plants in Kansas, Indiana and Michigan comes at a time when U.S. auto industry sales are thought to have hit bottom and manufacturers are raising production to restore depleted vehicle inventories.

 

Dealer inventories were reduced after the federal government's "cash for clunkers" program lifted sales in July and August with incentives of up to $4,500 to turn in gas-guzzling vehicles and buy new more fuel-efficient models.

 

GM has been addressing severely low inventories resulting from a combination of the "clunkers" program that ran from late July through the first three weeks of August and production cutbacks around its government-funded reorganization.

 

GM said it would add a shift at its assembly plant in Fairfax, Kansas, in January. Fairfax will become the sole builder of the Chevrolet Malibu sedan when GM ends production in Orion, Michigan, to retool that plant for a new small car. In April, GM plans to add a shift of heavy-duty pickup production in Fort Wayne, Indiana. The company is closing its Pontiac, Michigan, plant at the end of September.

 

GM also plans to add production of the Chevrolet Traverse SUV at its Lansing Delta Township, Michigan, plant in April. Production of the Traverse at GM's plant in Spring Hill, Tennessee, will end in November, and that plant will be put on standby status.

 

GM will draw from its pool of laid off workers first to fill the positions and expects virtually all of the spots to be filled by workers now on layoff or who would be subject to layoff once other plants are idled, executives said.

 

Earlier in September, GM said it expected to build 535,000 vehicles in North America in the third quarter and 655,000 in the fourth quarter, down about 20 percent from a year ago. GM expects U.S. auto industry sales of about 10.5 million vehicles in 2009, down from about 13.2 million last year. It expects U.S. auto industry sales of 11.5 million to 12 million in 2010.

 

Fed Starts Two Day Meeting

 

The Federal Reserve opened a two-day meeting on Tuesday that was expected to end with a statement that the economy is beginning to expand but there is unlikely to be any sort statement about a monetary policy shift.

 

The Fed's policy-setting Federal Open Market Committee began conferring at around 2 p.m. EDT, a spokesperson said. The central bank is expected to issue a statement about policy and the economic outlook at around 2:15 p.m. EDT on Wednesday.

 

The Fed seems certain to hold benchmark interest rates near zero, and most economists do not see it raising them until the middle of next year at the earliest.

 

Policy-makers, however, are widely expected to discuss ways to pull back their massive provisions of cash to the economy in a way that preserves the recovery, while preventing inflation. A key question that will be on the table is how soon and how rapidly the Fed should conclude its planned purchases of mortgage-related securities. It has said it will buy up to $1.25 trillion of mortgage-backed securities and $200 billion of housing agency debt by the end of the year. Look for the Fed to stretch its purchases of mortgage-related securities into the beginning of next year to allow a tapering off that is less disruptive to markets.

 

The Fed already has announced it would taper off purchases in a separate program to buy up to $300 billion in longer-term Treasury securities by the middle of next month.

 

The future of the mortgage security program is less clear cut than that of the Treasuries purchase plan, which many feel was ineffective at lowering borrowing costs and which raised worries the central bank was printing money to finance the increase in government spending.

 

Two voting members of the FOMC have said curtailing the mortgage securities buying program should be on the table in light of the improving economy. Richmond Federal Reserve Bank President Jeffrey Lacker, a noted anti-inflation hawk, questioned whether the economy needs the additional stimulus.

 

At the other extreme of the debate is San Francisco Fed President Janet Yellen, who said high unemployment and falling price indicators meant the central bank should worry about the risk of a damaging deflationary cycle rather than inflation.