Wall Street Under Pressure from Macroeconomic Data

Posted on | June 17, 2009 |

The release of downbeat US macroeconomic data as well as poor results from package delivery company FedEx, which forecast an ‘extremely difficult’ operating period ahead, weighed on Wall Street’s open today.

An official government report released this afternoon has revealed that the cost of living in the United States rose at a slower pace than anticipated in May, showing no evidence of a threat from inflation – a phenomenon that the market thought would haunt the economy following the Federal Reserve’s decision to adopt quantitative easing. If anything, today’s data has revived the spectre of deflation.

‘The number confirms the weakness we saw at the wholesale level yesterday,’ said Martin Mitchell of Stifel Nicolaus & Co. ‘The pressures have to be deflationary and not inflationary.’ [1]

The US Labor Department today unveiled that the Consumer Price Index (CPI) increased by a less-than-expected 0.1% in May from a month earlier, when the CPI had remained flat. In addition, the annual rate of inflation dropped by a steeper-than-expected 1.3% in May, the biggest drop in 60 years, following a 0.7% decline in April. Bloomberg’s median estimates were pointing to a monthly rise of 0.3% and an annual decline of 0.9% in the CPI for May.

The core CPI, which excludes volatile food and energy costs, rose 0.1% over the month of May, following a 0.3% increase in April. The annual rate, meanwhile, climbed 1.8% last month after rising 1.9% in April. Both monthly and annual core CPI data matched Bloomberg’s median forecasts.

Optimists would say that today’s data is encouraging because inflationary risks have been tamed, but realists may look at the underlying trend with more scepticism, understanding that it is pointing downwards because companies are finding it more difficult to increase prices on the back of rising unemployment, shrinking income and, consequently, weaker consumer spending.

In the meantime, another report released by the Mortgage Bankers Association showed that mortgage applications fell by a staggering 15.8% last week as higher mortgage rates discouraged refinancing activity – a development that threatens to derail a recovery in the US housing market if it persists. A separate report, meanwhile, revealed that America’s current account deficit shrank at a slower pace than anticipated, coming in at $101.5 billion in the first quarter from an upwardly revised $154.9 billion in the fourth quarter. Although this is smallest deficit since the fourth quarter of 2001, Bloomberg’s median forecasts were pointing to a first quarter gap of $85 billion, so clearly there’s a bit of disappointment here as well.

Unfortunately, the flow of corporate news wasn’t particularly good either, with FedEx knocking off 3.4% to $49.85 a share after forecasting quarterly profits that trailed consensus estimates. The second-biggest US packing-shipping firm said that earnings for the period ending August will come in between 30 and 45 cents a share, substantially below Bloomberg’s median analyst estimates of 70 cents a share.

FedEx’s chief Executive Fred Smith said the company faces the ‘most difficult economic conditions’ in its history, while Chief Financial Officer Alan Graf said the ‘operating environment for first two quarters in the 2010 fiscal year is expected to be extremely difficult.’ [2]

Fortunately, the company’s fourth-quarter bottom line wasn’t as discouraging; profits came in at 64 cents a share, excluding writedowns, beating Bloomberg’s 51-cent median forecast. Fourth-quarter revenues, however, declined 20% to $7.85 billion. Shares in rival UPS declined 1.7% to $47.59 following FedEx’s announcement today.

E*Trade Financial Corp was another casualty today, tumbling 15.15% to $1.40 a share after saying it would raise at least $1.2 billion by selling common stock and launching a debt exchange to shore up its capital.

Losses were seen across the wider financial sector today as well after Standard & Poor’s lowered its credit ratings and revised its outlook for a number of US banks including Wells Fargo, PNC Financial Services Group and KeyCorp.

‘Financial institutions are now shedding balance-sheet risk and altering funding profiles and strategies for the marketplace’s new reality,’ S&P credit analyst Rodrigo Quintanilla said in a statement today. ‘Such a transition period justifies lower ratings as industry players implement changes.’ [3]

S&P intends to hold a conference call tomorrow to discuss the ratings changes. This news comes ahead of the US government’s plan to unveil reforms for the financial services sector.

Shares in Wells Fargo plunged 5.45% to $23.05 and PNC Financial declined 4.6% to $37.56, while KeyCorp tumbled 13% to $5.15 a share this afternoon. Bank of America slid 4.5% to $12.16 while Citigroup was 6.12% lower at $3.05 a share.

Elsewhere, Watson Pharmaceuticals was among the handful of gainers today, up 3.2% to $29.76 after saying that it will acquire privately held Arrow Group, a generic drugmaker, for $1.75 billion in a cash-and-stock deal. This transaction is meant to add to the pharmaceutical firm’s bottom in the near future.

By around 3.40pm (London time) the Dow Jones Industrial Average was down by 37.94 points (-0.45%) to 8466.73, while the S&P 500 had declined 7.74 points (-0.85%) to 904.23.

[1] Source: Bloomberg News (17 June 2009)
[2] Source: Bloomberg News (17 June 2009)
[3] Source: Bloomberg News (17 June 2009)

By Anthony Grech, Research Analyst, IG Index.

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