Daily Market Reports | Apr 16 2008
By Greg Peel
The Dow closed up 60 points or 0.5% last night, and both the S&P and Nasdaq matched the 0.5% gain. Once again it was a rocky ride, and once again volume was uninspiring.
Early strength was provided by a very surprising result from the New York Fed’s Empire State manufacturing index. After a shocker in March of -22.2, the April result was +0.6, suggesting more than a full reversal in activity in the month. It remains to be seen whether New York is representative of the other 49 states.
But the enthusiasm was short lived once the March PPI was released. Economists were expecting a rise of 0.2% in the core (ex food & energy) number and a rise of 0.4% in the headline number. Well they got the core right, but the result on the headline was 1.1% – an extraordinary figure not only because it exceeded consensus by 0.7%, but because it exceeded the core by a whole 0.9%. It just goes to illustrate the enormous surge in food and energy prices recently.
In theory, the Fed usually ignores volatile food and energy and concentrates on core inflation in setting monetary policy. But these numbers are not just a reflection of seasonal swings. They are a reflection of a secular shift in the cost of headline items and cannot be ignored by the Fed. Even Uncle Ben has to fill his car and buy his Pop Tarts at Wal-Mart. On that basis the market read the PPI as a suggestion, in lieu of tonight’s more relevant CPI release, that the Fed will struggle to cut rates substantially further. It will still cut rates, given the core number provides some leeway, but if the CPI reflects a lot of the price increases being passed on to the consumer then the Fed will know it is cutting at its peril.
On the earnings front, it was actually a day of positives. Dow component Johnson & Johnson posted upbeat earnings and upbeat guidance, but as a consumer staple J&J was always expected by the market to do okay. More comforting was the result from the financial sector’s State Street which was a bit more positive than the weak result from Wachovia posted the day before. The good news carried on into the aftermarket where Washington Mutual posted a loss as well flagged, but also announced its US$7bn raising had been completed with private equity the buyer. This news offset the fact WaMu had doubled its provisions against bad loans in the first quarter from its fourth quarter provision.
And the world’s biggest chip maker and Dow component Intel also posted a strong result after the bell. Intel has suffered recently given the collapsing price of “flash memory” (have you noticed how you can now buy a-gig-on-a-stick for about A$15 and that computer ads are now talking in terabytes rather than gigabytes for the same cost?), but the result was in line with expectation and guidance was for stable margins into the second quarter. Intel’s shares shot up 7% in the aftermarket and should give the Dow good lead-in tonight.
At least until the CPI number comes out.
Oil was the other story of the day, as supply issues in Nigeria (as usual) and a fresh round of storms in Mexico pushed crude up yet another US$2.03 to yet another record at US$113.79/bbl. Oil’s move helped along Dow components Exxon and Chevron, but provides little comport for anyone else in the face of that PPI number.
Gold also rallied on the PPI news, closing up US$4.40 to US$928.80/oz. At present we are witnessing one of those rare decouplings, given the US dollar also rallied on the PPI number (it reduces the chance of a big rate cut). Gold responded to higher inflation, and oil was doing its own thing.
Base metals remain stuck in their will-I-won’t-I mode, with volume very thin. Price movements were unsubstantial as base metals continue to wait for a sign.
The SPI Overnight was up a very strong 48 points following the noticeable change in sentiment in yesterday’s market. It’s amazing what one little takeover offer for a basket case insurance company can evoke.
Yesterday also got a kick along from the release of the RBA minutes, which now sees economists abandoning their previous expectations that the bank would raise again in May following a nasty first quarter CPI. The rhetoric definitely suggests the RBA’s work is done. Interest rate rises are bad for stock markets, so no cut is positive news. Of course, this ignores the fact the reason the RBA will likely now go on hold is because the Australian economy has hit a brick wall and is suffering concussion. And that’s not very good for earnings prospects ahead.
