Wall Street Equity Market Indices Update

Posted on | June 16, 2009 |

Further signs of stabilisation in the US housing market fuelled a positive start to Wall Street trading today.

However, separate reports also released today showed elevated deflationary risks and a sharp drop in industrial production data – a rather conflicting sign, in my opinion, which is not in any way characteristic of a sustainable economic recovery.

The first report released this afternoon showed that the number of homes being constructed in the United States in May climbed substantially higher than consensus expectations. Housing starts surged 17.2% to a seasonally adjusted annual rate of 532,000 in May, beating Bloomberg’s median estimate for a rise to 485,000 from 454,000 (revised).

A breakdown reveals that construction of single-family homes rose 7.5% to an annual rate of 401,000, the third straight monthly gain, while work on multifamily homes, such as townhouses and apartment buildings, soared 62% to an annual rate of 131,000.

Building permits, a gauge of future construction activity, jumped 4% to a seasonally adjusted rate of 518,000 in May. This was also better than Bloomberg’s projections for a rise to 508,000 from a revised 498,000 in April, when permits had fallen by 2.5%. The Commerce Department attributed the improvement in May’s housing data to the low interest rate environment, tax incentives and the recent drop in house prices.

‘It’s fair to say that we have found a bottom in housing, though the concern is that the bottom is at a very low level,’ said Zach Pandl of Nomura Securities International. ‘We have a long way to go to reach more normal levels of activity.’ [1]

In the meantime, a separate report released today has revealed that US wholesale prices experienced their largest annual decline in 60 years as ongoing recessionary pressures continued to depress inflation.

The Labor Department today reported that its producer price index had declined 5% on the year in May. That decline was steeper than Bloomberg’s median estimate for an annual drop of 4.4% from April, when it had fallen by 3.7%. On the month, wholesale prices grew by only 0.2% in May, weakened by a drop in food costs and lower than Bloomberg’s median expectations for a 0.6% rise (compared with a 0.3% increase the month before). This data is clearly pointing to elevated deflationary risks and it would be interesting to see if tomorrow’s US consumer price index continues to point to the same phenomenon.

Another macroeconomic report, meanwhile, indicated that US industrial production, a measure of output from factories, mines and utilities fell 1.1% in May. This was in line with Bloomberg’s median estimates and followed a revised 0.7% decrease in April.

The auto sector was the biggest drag on industrial production; motor vehicle and parts production plunged 7.9% in May after declining 1.2% the month before – not surprising given the restructuring efforts taking place at Chrysler and General Motors. Excluding automobiles, factory production in May dropped 0.6%, utility production decreased 1.4% and mining output, which includes oil drilling, fell 2.1%.

An hour after the opening bell, at 3.30pm (London time), Wall Street equity market indices had lost some steam; the Dow Jones Industrial Average was trading only 1.67 points (+0.02%) higher at 8613.80, while the boarder S&P 500 had risen by 1.17 points (+0.13%) to 924.89.

Supporting US stock markets were steel and oil stocks, which snapped their two-day losing streak after bargain hunters re-entered the market following yesterday’s aggressive sell off.

US Steel Corp was seen advancing 3.34% to $38.34, while Nucor Corp jumped 4.7% to $47.92 and AK Steel surged 6.2% to $19.45. In the energy sector, ConocoPhillips gained 1.95% to $43.94, Chevron added 0.4% to $71.37 and Schlumberger rose 0.7% to $58.99. Energy companies were given a boost by a rebound in crude oil prices today; July Light Sweet crude oil was up by 2.3% to $72.26 a barrel, while August Brent climbed 2.4% to $71.93 a barrel this afternoon.

Elsewhere, electronics retailer Best Buy made the headlines after reporting a 15% drop in first-quarter profits, which fell on the back of restructuring charges and a decline in same-store sales – a reflection of weakening consumer demand. The retailer’s first quarter net income came in at $153 million, or 36 cents a share, down from $179 million, or 43 cents a share a year earlier. Revenues, meanwhile, increased 12% to $10.1 billion helped by Best Buy Europe, but same-store sales, or sales at stores open at least 14 months (including internet sales) fell 6.2%. Shares in Best Buy plunged 5.2% to $36.67.

Biotech company Amgen, meanwhile, garnered support jumping 3.5% to $51.17 after Sanford C Bernstein upgraded the company from ‘market perform’ to ‘outperform’, saying the stock ‘should benefit from a significant re-acceleration in revenue and earnings growth’ over the next year. [2]

Banks were somewhat lacklustre, with Citigroup down 1.2% to $3.33 despite Reuters reporting that five companies were in the bidding for its Japanese asset management arm. Bank of America slid 2.9% to $12.94 and JP Morgan Chase edged 0.5% lower to $33.82.

[1] Source: Bloomberg News (16 June 2009)
[2] Source: Bloomberg News (16 June 2009)

By Anthony Grech, Research Analyst, IG Index.

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