Markets Fall from Multi-Year Highs as Strong Economic Reports Fuel Rate Fears
By Chris Puplava, May 3, 2006
The Fed has indicated that its rate hike decisions will be data dependent and recent economic reports point to more rate hikes. The ISM manufacturing data came out on Monday, with the data showing continued business expansion as well as rising prices. The production index in April increased nearly 5% over March to 60.4, the highest reading since last October. The imports index rose to 59, marking the highest reading in over a year as businesses imported materials to meet production needs. Employment was also up more than 5% though other indicators point to a possible slowdown in manufacturing.
The main forward-looking indicators of manufacturing production, new orders, new export orders, and backlog of orders, all dropped with the biggest fall in new export orders of 7.3% followed by a 4.4% decline in order backlogs that would put further pressure on already rising inventories. New export orders fell 1.4% despite the fact that the trade-weighted dollar fell during the month, falling nearly 5% in the past two weeks alone.
The ISM services data came out today with the Business Activity Index rising 4% to 63 over March to an eight month high that is above its 2005 average of 60.1. Like the manufacturing index, gains were seen in employment and a decline in exports was also seen with exports falling 6.7%. Unlike the manufacturing report, new orders surged nearly 8% with backlog orders rising in suit with an increase of 6.5% while imports fell 6%.
Figure 2. ISM Service Report
Adding more fuel to the troubling trends is a surge in prices yet again, with manufacturing prices rising 7% while service prices soared over 14% from March alone. These two figures as well as the two ISM, surveys business activity and production indexes rising above 60 for the first time since July 2005, providing strong support for the Fed to continue their rate raising cycle as the economy remains resilient and inflation remains a continued concern.
Source: Data from Institute for Supply Management
U.S. vehicle sales for April were slightly higher than March sales, rising 0.1 million units to 16.7 million. A flat sales trend in autos despite rising energy prices and interest rates further support the resiliency of the U.S. economy as consumers do not seem to be deterred. Higher energy prices do not seem to be dampening consumer purchases, but they are having an effect on consumer preferences (as I mentioned they would last week), as the share of autos to total vehicle sales increased to 48% from 45% in March, while trucks share of the total sales fell from 55% to 52%. Looking even deeper into the auto sales figures shows the U.S. consumer�s preference switching from domestic vehicles to import brands, as Ford's sales dipped while GM�s were flat as gains were seen for both Honda and Toyota, who lead in hybrid technology and have a greater emphasis on smaller, more fuel efficient vehicles. Sales of imported vehicles rose measurably and account for 23.5% of total sales, up from 20% at the start of the year. Domestic brand sales fell 9% (not adjusted) compared to last April, as all three domestic manufacturers experienced year-over-year declines in sales.
Also out today were factory orders, which increased 4.2% in March, with durable goods orders revised higher to 6.5% from 6.1% in the advance release. The increase in orders in March puts the annualized expansion in the first quarter at 12.3% for durable goods. Nondurable new orders rose 1.5% in March with the impetus coming from strong gains in petroleum and coal production. The report confirms many analyst expectations of strong first quarter GDP, which will weigh on the Fed decision to continue or pause in its rate hikes which it says is data dependent.
The markets fell after digesting the strong economic reports with the DOW down 16.17 points to finish at 11400.28, with the S&P 500 down 5.36 points to close at 1307.85, and the NASDAQ fell 5.87 points to close at 2303.97.
Declining issues lead advancing issues on both the NYSE and Nasdaq, with 54% and 48% of issues declining on the NYSE and Nasdaq respectively on volume nearly twice that of advancing issue volume.
PDL BioPharma (PDLI) released below analyst expectations for earnings, with earnings coming in at 2 cents per share while analysts were expecting 14 cents a share, falling 26.57% to close at 20.26. NPS Pharmaceuticals (NPSP) fell 39.22% to $4.99 as the company reported in its quarterly earnings report late Tuesday that the FDA is seeking additional clinical information for its bone drug candidate Preos. Both stocks weighed on the Amex Biotechnology Index (BTK) which was down 1.00% to close at 655.65, while the Amex Pharmaceutical Index fell marginally (DRG), down 0.35% to close at 331.41.
Energy stocks fell in light of supply data that showed U.S. crude inventories grew to their highest levels in eight years. Gasoline supplies rose for the first time in nine weeks though gasoline inventories remain below their lower average due to refiner repairs and maintenance.
Crude-oil prices fell under $74 a barrel, falling more than 2%. The Amex Oil Index (XOI) fell 1.5% to 1147.19, while the Amex Natural Gas index (XNG) fell 1.01% to close at 421.06 and the Philadelphia Oil Service Index saw the biggest drop, falling 2.22% to close at 229.77.
The June gold contract was down slightly, falling before reversing to finish up 0.34% to $670.80 with the June silver contract falling 2.93% to close at $13.747. The 10-year bond yield rose 0.34 to close at 5.144% while the trade-weighted dollar index was up 0.05 to close at 85.86.
Have a pleasant weekend,
© 2006 Chris Puplava