MarketView for September 25

 

 

Summary  

  

Wall Street made it three in a row on Friday, as its major equity indexes fell for the third consecutive day. Much of the day’s decline could be attributed to disappointing housing and durable goods data, while Research In Motion's lackluster results dented optimism about technology spending. Shares of RIM closed down 17.04 percent at $68.91 and were a top drag on the Nasdaq. The decline came a day after RIM posted quarterly revenues below Street forecasts and offered a disappointing outlook. However, besides worrying about the recovery, the market also is nervous that authorities might curb stimulus measures too soon.

 

Economically sensitive stocks bore the brunt of the selloff, including technology, big manufacturers, banks, home builders and some consumer companies. A rise in shares of companies which fare better in an uncertain economy, including Coca-Cola, helped indexes finish the session off their worst levels. Even so, the S&P 500 snapped a two-week winning streak and suffered its biggest weekly drop since early July.

 

Wal-Mart was off 2.4 percent to $49.47 and was the worst drag on the Dow Jones industrial average, followed by United Technologies, down 1.3 percent to close at $61.54. For the week, the Dow fell 1.6 percent, the S&P 500 was down 2.2 percent and the Nasdaq fell 2 percent.

 

KB Home closed down 8.5 percent to $16.96 after reporting a wider-than-expected quarterly loss and its CEO indicated that he does not expect meaningful improvement in the U.S. housing market in the near future. American Express fell 2.3 percent to $33.07, while JPMorgan closed down 1.6 percent to $43.65.

 

Economic News Mixed

 

According to reports by the Commerce Department on Friday, new durable goods orders fell in August, while new home sales came in above expectations. Those reports overshadowed the increase in consumer confidence this month to its highest point since January of last year.

 

Durable goods orders fell 2.4 percent in August, the largest percentage drop since January, after rising 4.8 percent in July, the Commerce Department said. The department also reported that sales of newly built single-family homes rose 0.7 percent in August for a fifth straight month to a 429,000 unit annual pace, the highest since September last year.

 

The drop in durable goods orders, a leading indicator of manufacturing activity, was largely caused by a decline in new orders for commercial aircraft -- likely reflecting a drop in orders received by Boeing.

 

Still, new durable goods orders excluding transportation were flat in August after rising for three straight months, the Commerce Department report showed. The market had expected a 1 percent gain after a 1.1 percent rise in July.

 

Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, also fell unexpectedly by 0.4 percent in August. At the same time, core capital goods fell 1.3 percent in July.

 

In Friday’s housing report, the Commerce Department reported that total new homes sales fell 3.4 percent compared with August last year. At the same time, the median home sales price in August fell 11.7 percent from a year earlier to $195,200, the lowest since October 2003. In July, the median home price was $215,600.

 

The inventory of new homes available for sale at the end of August fell 3.0 percent to 262,000 units, a near 17-year trough. The August sales pace left the new inventory at 7.3 months, the lowest since January 2007, the department said.

 

The Reuters/University of Michigan Surveys of Consumers' final index of sentiment for September rose to 73.5, the highest reading since January 2008, from a reading of 65.7 in August.

 

Fed Unsure When And How To Keep Markets Informed

 

Federal Reserve officials are concerned about when to start and how quickly to act and furthermore how to inform the markets as to the timing and pace of the central bank's removal of its support for the economy stating that the change in policy could come quickly and might be hard to communicate to financial markets.

 

A shift in the Fed's policy could come before it is clearly necessary based on economic data and could be swift, Fed Governor Kevin Warsh said at a Chicago Fed/World Bank conference.

 

"If policymakers insist on waiting until the level of real activity has plainly and substantially returned to normal -- and the economy has returned to self-sustaining trend growth -- they will almost certainly have waited too long," he said.

 

The Fed earlier this week announced it would begin tapering off some of its exceptional support for the economy amid early signs of growth after a painful recession while renewing a pledge to hold benchmark interest rates exceptionally low for a long time.

 

Warsh is apparently quite concerned that there is concern among the Fed’s policy-makers that a too-slow removal of support policies and raising of interest rates risks igniting inflation. However, he played down any notion that his remarks are a sign a shift in Fed policy would come soon.

 

"I'm confident markets will not conflate those (frank discussions of the policy outlook) with imminence," Warsh said while answering questions after a speech in Chicago. The economy may be looking up, but is still in a "long, long period of repair," he added.

 

Fed Chairman Ben Bernanke said earlier in the day to a congressional group that demand for the Fed's program backing consumer and small business loans remains strong but that demand for many of the Fed's facilities aimed at making short-term funds available is fading.

 

Warsh said velocity of the policy turn could also be faster than many expect and echo the dramatic moves made by the U.S. central bank during 2007 through 2009.

 

"If 'Whatever it takes' was appropriate to arrest the panic, the refrain might turn out to be equally necessary at a stage during the recovery to ensure the Fed's institutional credibility," he said.

 

The hawkish remarks echoed those made by Warsh in an op-ed piece in The Wall Street Journal published on Friday.

 

That article, which suggested a more pro-active policy shift, prompted dealers to push up the implied chances for Fed rate hikes in the first half of 2010.

 

Warsh said that data in the past couple of months show continued improvement in the economy and that a virtuous circle could be developing between more stable financial markets and real economic activity.

 

In contrast to the languid pace of policy change suggested on Thursday by White House aide Christina Romer, who said that talk of a fast exit strategy made her "cringe," Warsh suggested the Fed act decisively.

 

"Ultimately, when the decision is made to remove policy accommodation further, prudent risk management may prescribe that it be accomplished with greater swiftness than is modern central bank custom," he said.

 

St. Louis Fed Reserve President James Bullard said on Friday it is difficult to communicate the Fed's likely monetary policy direction clearly to markets with benchmark interest rates near zero.

 

He suggested in a presentation at a Swiss National Bank conference in Zurich that policymakers settle on some type of rule for explaining how the U.S. central bank's purchases of long-term securities should be adjusted in response to changing economic conditions.

 

"Quantitative rules are generally not as satisfactory as interest rate rules," Bullard said. "But it is still worthwhile to use them because of the need to communicate future monetary policy to markets."