Stronger Dollar and Weak Data Pressurise Wall Street

Posted on | December 17, 2009 |

Stock prices came under pressure this afternoon on Wall Street, with a resurgent Dollar affecting foreign investment flows, and also affected by the release of unexpectedly weak initial jobless claims figures for the week ending 12 December and a lower profit forecast by FedEx Corp.

Shortly after the open, the DJIA was trading down 62 points or 0.6% at 10380, while the S&P 500 was down the same proportion at 1102.5.

The US labor department announced that the number of workers filing new applications for unemployment benefits increased last week by 7,000 to a seasonally adjusted 480,000, up from a downwardly revised 473,000 the week before.

Initial claims of 465,000 had been forecast by surveys from both Bloomberg and Reuters, so that the data came as something of an unpleasant surprise. That said, there is nothing shocking in these figures: compared to earlier in the year when we were seeing huge numbers being systematically added to the ranks of the unemployed, it is palpable that the labour market is at least stabilising.

‘Overall, the labor market is recovering, although the last two jobless claims numbers suggest that the pace is still fairly gradual,’ said Vassili Serebriakov of Wells Fargo. [1]

Last night the Fed maintained the Fed Funds Rate at essentially 0% and reaffirmed its intention to maintain rates at these exceptionally low levels for an ‘extended period’, citing the labour markets as showing signs of optimism, though also noting that companies are not rushing to add to payrolls.

Today’s jobless figure suggest the Fed has probably got it about right: with no major inflation to contend with and the job market stabilising but still fragile, keeping rates low is the best plan of action.

The four-week moving average for initial claims decreased by 5,250 to 467,500 last week, which is the lowest since September 2008, and the 15th consecutive weekly drop. The four-week moving average smoothes out any week-to-week volatility and so can provide a more rounded picture of the overall trend.

‘I would say the four-week MA [moving average] has got to fall below 450,000 before we can really say that we’ve definitely got stability in the US job market,’ was the view of Tim Hughes, head of Sales Trading at IG Group. ‘We’re nearly there’.

There were more US macroeconomic figures out at 3.00pm: leading indicators from the Conference Board and the ‘Philly Fed’ index of business conditions.

Both were fairly positive, with the leading indicators index, which is a composite index made up of ten indicators believed to predict economic activity, increasing more than anticipated by 0.9%.

The Philly Fed rose to 20.4 in December, also more than anticipated, and indicating that the manufacturing sector is improving. [2]

The manufacturing sector is generally seen as leading the wider economy, and so the data should have been good news for the stock market.

Traders in the market weren’t bowled over though, and by 3.00pm the Dow Jones had slipped to being down 100 points (close to a full percentage point). This is perhaps an indication of how much dollar-weakness has been affecting US share prices.

In response to all the economic news, the US dollar has been making great strides against other currencies today, with Cable trading around 1.6120, approaching lows last seen in the middle of October, and EUR/USD down at around 1.4350, hitting its lowest level in over three months today.

Also affecting the overall stock market was the performance of FedEx, which was trading sharply down today, shedding $4.67 (5.2%) to stand at $85.28. FedEx deals with a massive chunk of overall US shipping, to the extent that the company’s performance can be used as a gauge of the overall economy.

FedEx had raised forecasts for its second quarter performance on 7 December, but today said that it now forecast earnings for the current quarter of 50 cents to 70 cents a share, well below analysts’ estimates. [3]

‘The market had decided this [the early December forecast] meant the economy was going gangbusters. Then out comes the details. The economy is improving but it’s still on shaky ground. So the stock is back to where it was before the pre-announcement,’ Ortwerth said. ‘It’s almost comical. The price goes up, the price goes down.’ [4]

It’s worth keeping an eye out for Oracle and General Mills which both report later today.

Source: [1], [4] Reuters, 17 December 2009, [2] Based on a Bloomberg survey, [3] Based on a Thomson-Reuters survey

By Peter Martin, Director, Client Education and Training, IG Index.

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