MarketView for May 7

MarketView

Events defining the day's trading activity on Wall Street

Lauren Rudd

Wednesday, May 7, 2008

Summary

Stock prices fell sharply on Wednesday, as concerns over the possibility that inflation will grip the economy forcing the Fed to raise interest rates as a result of crude prices reaching a record $123 per barrel. Adding to the level of concerns were comments from Kansas City Fed President Thomas Hoenig, who said the U.S. central bank must be ready to raise interest rates in a timely manner, given the "troublesome" inflation outlook. The session's losses marked the broader market's worst slide in nearly a month.

As a result, traders and investors saw little reason to hold onto the shares of banks, home builders and companies dependent on consumer spending amid fears that inflationary pressures will crimp demand and exacerbate the fallout from the housing debacle.

American International Group dragged down the Dow Jones industrial average and the S&P 500 after the insurer's stock fell $3.32, or 6.86 percent, to close at $45.08, a day before it was expected to report a second straight quarterly loss due to its exposure to toxic mortgage investments.

Meanwhile, the shares of Citigroup slid $1.39, or 5.37 percent, to close at $24.48, while Bank of America was down $1.24, or 3.16 percent, to close at $38.00. American Express fell $2.26, or 4.43 percent, to close at $48.70.

On the New York Mercantile Exchange, June crude futures were up $1.69, or 1.39 percent, to settle at a record $123.53 per barrel, after climbing to $123.80, a new intraday peak. The run-up occurred despite data showing a larger-than-expected buildup in U.S. crude oil inventories last week. Nonetheless, the shares of Exxon Mobil ended the day down $, or 1.4 percent, to close at $88.82.

Among consumer-oriented stocks, Gap fell 33 cents, or 1.78 percent, to close at $18.24, while Home Depot ended the day down 72 cents, or 2.46 percent, to close at $28.56. The S&P retail index fell 1.6 percent.

The Street also took its frustration out on the shares of big manufacturers that are heavily reliant on energy, including heavy equipment maker Caterpillar. As a result, Caterpillar ended the day down $1.60, or 1.92 percent to close at $81.63. Boeing was in much of the same predicament, ending the day down $1.20, or 1.40 percent, at $84.55. Toll Brothers saw its share price end the day down $1.16, or 4.64 percent, to close at $23.86. The Dow Jones home construction index closed out the day down 4.3 percent. Apple was the top drag on the NASDAQ, ending down $4.07, or 2.18 percent, to close at $182.59.

After the closing bell, Rupert Murdoch's News Corp posted a three-fold rise in quarterly profit and its shares gained almost 2 percent to $18.72 from a regular trading close of $18.42. 

Consumer borrowing rose $15.29 billion in March, far more than expected and the biggest gain since November, a Federal Reserve report showed. For the month of March consumer credit rose at an annual rate of 7.21 percent, coming in at $2.558 trillion as both credit card borrowing and installment loans grew at healthy paces.

Crude Prices Hit Record High

The price of crude oil rose 1.4 percent on Wednesday, reaching a new high and intensifying worry over tight world supplies of diesel fuel. Domestic sweet crude settled up $1.69 per barrel at $123.53. London Brent settled up $2.01 at $122.32. Crude prices have doubled in a year, in part because of rising demand from China and other developing countries. The subsequent fallout is adding pressure to economies already hard hit by a housing and credit crunch.

Helping to send crude prices upward was a government report showing a decline last week in distillate inventories, which includes diesel and heating oil that brought stockpiles in the world's largest energy consumer nearly 13 percent below the levels of a year ago.

Tight power supplies in China, South Africa, Chile, Argentina and parts of the Middle East have set off a worldwide boom in demand for diesel for use in electric generators, adding to robust demand for use in Europe's passenger vehicle fleet.

The report from the Energy Information Administration Wednesday morning also showed an increase in crude oil stockpiles of 5.7 million barrels and an increase in gasoline supplies of 800,000 barrels, tempering the market's gains.

The advance in crude oil prices came a day after Goldman Sachs said oil prices could scale $200 a barrel in the next two years as part of an ongoing "super spike" in the market. Shokri Ghanem, the head of Libya's National Oil Corp, also said oil prices would likely rise as a result of speculation and geopolitics.

Meanwhile concerns remain over the supply disruptions in Nigeria, despite the end last week of a strike that halted Exxon Mobil’s output in the West African country, and the news that Tehran said it would refuse nuclear inspections.

Pending Home Sales Plummet

According to a statement released by the National Association of Realtors, its pending home sales Index, based on contracts signed in March, fell 1 percent to 83.0, the lowest reading for that index since it began in 2001. The index was also 20.1 percent lower than a year ago.

Pending home sales are an important barometer of future home sales, as homeowners have been increasingly skittish about buying homes in a market where prices are declining and mortgage financing more difficult to obtain.

Productivity Rises

Businesses, faced with a slump in demand, slashed worker hours in the first quarter to increase productivity and safeguard profits, Government data showed on Wednesday that non-farm productivity in the first quarter grew at a faster-than-expected pace as workers saw the biggest cut in hours since 2003, when the economy was in a jobless recovery from its last recession.

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At the start of this year, U.S. non-farm productivity rose at a 2.2 percent annual clip, much faster than the 1.5 percent pace economists were expecting. However, the Labor Department said worker hours fell at a 1.8 percent rate in the first quarter, making it the biggest decline since the start of 2003.

The aggressive efforts to cut back on hours worked should help businesses shield their profits and keep wage-related price pressures under control. Generally, weaker productivity amid tight labor markets can spell wage-driven inflation. But faster productivity growth may help the economy expand without sparking that wage push.

Unit labor costs, a gauge of inflation and profit pressures under close scrutiny by the Fed, rose at a 2.2 percent annual pace, slower than the 2.5 percent increases analysts were expecting. Compensation per hour rose at a 4.4 percent annual rate, but adjusted for inflation, it rose a scant 0.1 percent.