Daily Market Reports | Jun 25 2008
By Greg Peel
The Dow closed down 34 points or 0.3% while the S&P lost 0.3% and the Nasdaq 0.7%. Once again decliners on the NYSE outnumbered advancers by 2 to 1.
The Fed is now half way through its rate decision meeting, which will culminate at 2.15pm tomorrow NY time with a rate announcement and accompanying statement. The world is expecting the Fed to remain on hold, if for no other reason than credible arguments can be made to either hike or cut.
The argument to hike is simple. Inflation is ticking up month on month as the US dollar remains weak and the oil price refuses to budge from around US$135/bbl. The longer the oil price remains at this level, the more likely retailers will be forced to pass on higher energy costs to consumers. The PPI/CPI spread to date has indicated most retailers have been wearing the pain, reluctant to raise prices in a weak economic environment. Thompson Analytics announced last night that it had revised its US second quarter corporate earnings forecast from a loss of 7.3% to a loss of 10.2% on average. While the bulk of this loss is provided by financial stocks, the fact remains the general stock market remains weak and is only weakening further as long as oil remains at a high level.
Which might suggest that a raise in rates is the answer. A subsequent surge in the US dollar should tip oil over, and thus the stock market can find some renewed confidence and rally again. However, it’s not that simple. To understand why not, one need only look at the latest economic data released in the US last night.
The official June consumer confidence index fell to 50.4, down from 58.1 in May. Not only is this the lowest reading since 1992, it was well below the consensus forecast of 56.0. The Richmond Fed manufacturing index fell to -12 in June from -2 in May, on the back of a slowdown in activity and increased prices. And the Case-Shiller house price index over a 20-city average for twelve months reached a decline of 15.3% in April – the greatest fall ever recorded. Average US house prices are now back to 2004 levels.
With those sorts of data at hand, a central bank should be cutting rates to save the economy, not raising them. And that’s before one considers the ongoing woes in the financial sector, which every day threaten to throw up another Bear Stearns. What is a poor central bank to do?
Stay on hold is the answer. The big question is, however, what would happen if it didn’t? How would the market respond to a hike/cut? They both appear equally ominous. But if the Fed does stay on hold as everyone is expecting, the next step will be to comb the accompanying statement for clues as to which way the Fed might be leaning. Is there likely to be a later hike or a later cut?
All will be revealed tonight.
The stock market opened weaker last night on the poor economic data before bottom-fishers started moving in to pick up cheap financial stocks. This lasted most of the day, but faded at the death. There were also rumours bouncing around about the ongoing Yahoo saga – none substantiated – which added to the choppiness. Energy stocks were, for once, a bit weaker.
Elsewhere it was relatively quiet, as one might expect before a rate decision. The US dollar drifted back from yesterday’s surge, and oil ticked up a mere US26c to US$137/bbl. Gold clawed back US$5.70 to US$888.90/oz. The Aussie moved higher again, to US$0.9553.
Trading on the LME was described as apathetic, allowing most prices to drift off slightly despite the weaker US dollar. A lift in aluminium inventories saw its price fall 1.5%.
The SPI Overnight fell 53 points, which seems like a lot. The SPIO has this week proved a good indicator of the open, but not of the close. The ASX 200 keeps trading close to 5200 and then pulling back, whether it be banks or energy which spark the recovery. The local market is clearly consolidating, but it remains to be seen which direction the break-out will take.