December 8, 2023

Markets Try to Reverse Losing Streak

The stock market rose on Thursday after positive data about the job market was released, with the Standard Poor’s 500-stock index and the Dow Jones industrial average snapping five-day losing streaks.

But the gains were limited as investors continued to worry whether Washington lawmakers would manage to avoid a government shutdown and a possible federal debt default.

Initial claims for unemployment benefits dropped last week near a six-year low, the Labor Department said, a development that could bode well for employers adding workers to their payrolls. The encouraging data on jobless claims comes just over a week before September’s employment report is due.

“If today’s number was a good number, that means when we see the job report on Oct. 4, that number ought to be pretty strong,” said Philip Orlando, chief equity market strategist at Federated Investors.

The Dow industrials rose 55.04 points, or 0.4 percent, to close at 15,328.30. The S. P. 500 gained 5.90 points, or 0.4 percent, to 1,698.67. The Nasdaq composite index picked up 26.33 points, or 0.70 percent, to 3,787.43.

Among notable gainers on the Nasdaq, Bed Bath Beyond rose $3.32, or 4.5 percent, to $77.54, a day after it reported a jump in its second-quarter profit.

After the closing bell, shares of Nike jumped $4.36, or 6.2 percent, to $74.70 after it reported a profit that exceeded analysts’ estimates. This was the first earnings report for the retailer as a member of the Dow. The stock ended the regular session up 2.1 percent at $70.34.

In the bond market, interest rates inched higher. The price of the Treasury’s 10-year note slipped 6/32, to 98 23/32, while its yield rose to 2.65 percent, from 2.63 percent late Wednesday.

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A Rise in Technology Keeps the Market Ahead

The stock market eked out small gains on Tuesday after an upturn in technology companies offset weakness in other parts of the market, including a drop in airline shares.

The gain in technology stocks was driven by Apple, which surged $22.21, or 4.8 percent, to $489.57 after the billionaire investor Carl C. Icahn posted on Twitter that he held a large position in the company and that its stock was undervalued.

August has begun as a lackluster month for the stock market as major indexes fail to add significantly to gains made in July. The Standard Poor’s 500-stock index has drifted lower since closing at a nominal high on Aug. 2. Still, the index is up 18.8 percent this year.

On Tuesday, the S. P. 500 rose 4.69 points, or 0.3 percent, to close at 1,694.16. The Nasdaq composite index gained 14.49 points, or 0.4 percent, to 3,684.44. The Dow Jones industrial average rose 31.33 points, or 0.2 percent, to 15,451.01.

A sharp rise in Treasury yields rippled through the stock market on Tuesday. The yield on the 10-year note climbed almost to its highest point in two years after an increase in July retail sales added to speculation that the Federal Reserve will begin to wind down its economic stimulus program sooner rather than later.

The president of the Federal Reserve Bank of Atlanta, Dennis P. Lockhart, said on Tuesday that it was too early to say when the bank would reduce its stimulus, but hinted that it probably would happen this year.

“You could argue that stocks would be up higher today if the bond market was behaving,” said John Canally, an investment strategist for LPL Financial. “The market’s trend right now is higher.”

Airline stocks slumped after the federal government challenged the proposed merger of US Airways and American Airlines, which is seeking to leave bankruptcy.

The Justice Department, which filed an antitrust lawsuit to block the merger of the airlines, which are among the nation’s largest, said the deal would substantially reduce competition, increase fares and curtail service. US Airways plunged $2.46, or 13.1 percent, to $16.36.

Among the stocks on the move, J. C. Penney fell 49 cents, or 3.7 percent, to $12.68. The struggling department store chain faces uncertainty after the activist investor William A. Ackman resigned from its board.

In government bond trading, the price of the 10-year Treasury note fell 27/32, to 98 3/32, while its yield jumped to 2.72 percent from 2.62 percent late Monday.

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DealBook: JPMorgan and Wells Fargo Feel First Chill of Rising Interest Rates

Jamie Dimon, the chief executive of JPMorgan Chase.Mark Wilson/Getty ImagesJamie Dimon, the chief executive of JPMorgan Chase.

Even as two of the nation’s largest banks reported record profits on Friday, beneath the rosy earnings were signs that a sharp uptick in interest rates could spell trouble ahead for Wall Street and the broader housing market.

Kicking off bank earnings season, JPMorgan Chase and Wells Fargo handily beat analysts’ expectations. Profit at JPMorgan surged 31 percent, bolstered by gains in the bank’s trading and investment banking business. Wells Fargo, the biggest home lender in the country, posted a 19 percent increase in its second-quarter profit.

The gains were spread across the banks except for one important source: mortgage banking. The results showed that refinancing activity slowed, as did demand for mortgage loans.

The results could worsen. If rates continue to rise, fewer borrowers are likely to refinance or buy a house. And if the mortgage bond market weakens, banks will take a smaller gain when selling the mortgages.

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While these concerns have loomed for months, the earnings on Friday offered the clearest picture yet of how the interest rate turmoil could affect the banks, whose fortunes hinge in part on their lending businesses.

“We’re trying to be clear with you that this would be a significant event,” Marianne Lake, JPMorgan’s chief financial officer, said on Friday, referring to the potential effect of rising rates on the industry. She cautioned analysts that the volumes of mortgage refinancing could plunge by an “estimated 30 percent to 40 percent” in the second half of this year.

The results from JPMorgan and Wells are a barometer for the housing market because the two banks together account for the majority of all mortgages in the United States. In recent years, the recovery in the market has fueled the earnings of both companies and has also played a significant role in the broader economic rebound.

Until now, the banks have benefited from government policies intended to stimulate the economy in the wake of the financial crisis. As the Federal Reserve cut interest rates in recent years, for example, it spurred millions of borrowers to refinance their home loans to take advantage of the lower costs.

But the Fed has signaled in recent weeks that it could ease its stimulus as the economy continues to recover. The warning has prompted investors to drive up interest rates around the globe. Since Fed officials first hinted that they might retreat, the rate for a 30-year fixed mortgage has risen to 4.78 percent from a low of 3.54 percent.

The banks’ second-quarter results show the early results of the sudden surge. In the second quarter, Wells Fargo received $146 billion worth of quarterly home loan applications, down from $208 billion in the period a year earlier. Its mortgage originations totaled $112 billion, down from $131 billion.

At JPMorgan, mortgage originations rose 12 percent in the quarter, to $49 billion, but overall profit in mortgage banking fell by 14 percent, to $1.1 billion.

On Friday, JPMorgan executives said the slowdown could be even more extreme than previous forecasts have suggested. While both banks might be able to seize on the uptick in interest rates to create a bigger spread between the income they derive from lending and the ultimate cost of borrowing, those benefits proved elusive.

Net interest margin, a critical measure that reveals how much profit banks earn on their loans, fell at JPMorgan, settling in at 2.60 percent for the quarter, from 2.83 percent in the previous quarter. At Wells Fargo, it was 3.46 percent, down from 3.48 percent in the first quarter.

The results suggested that the surge in interest rates came too late in the second quarter to significantly affect the banks, but that the increase could cause deeper problems in the second half of the year.

Christopher Whalen, an investor and housing market analyst at Carrington Investment Services, said that the numbers that Wells and JPMorgan presented were a “very big deal.”

“Everybody in the mortgage industry is going to have to reassess their view of this year and next,” Mr. Whalen said.

Rising rates, though, might help other parts of the banks’ business. Within its fixed-income trading operations, for example, JPMorgan reported an 18 percent increase in revenue. Fees in JPMorgan’s investment banking unit surged 38 percent, to $1.7 billion.

Wells Fargo executives played down the significance of the rate change, noting that mortgage rates were still extremely low by historical standards. John Stumpf, the bank’s chief executive, pointed to the interest he paid for his own mortgages.

“If you were in the mortgage market before 2000, you know that these are unbelievably good rates,” Mr. Stumpf said. “My first mortgage was at 8.5 percent. My second one was at 11.5 percent, and I thought those were great rates at those times.”

Mr. Stumpf noted that the uptick in rates stemmed from the Fed’s indication that the economy was improving. Housing prices are rising and demand for homes has soared.

As the improvements continue, he said, a growth in loans for new home purchases will more than make up for any losses in refinancing.

“I’ll take that trade all day,” Mr. Stumpf said. “It’s good for America, it’s good for the economy and in the long term, it’s good for our business.”

Wells’s overall loan portfolio, which includes commercial and consumer lending, actually rose 3 percent to $802 billion in the second quarter. A bump in credit cards and commercial lending — and record origination of auto loans — further offset the home loan slowdown. The bank’s total average deposits reached $1 trillion, up 9 percent from a year ago.

But important drivers of the returns at Wells Fargo and JPMorgan did not stem from substantial growth in the underlying businesses. Instead, they came from reduced expenses.

Wells Fargo, for example, reduced a crucial expense — building a reserve for bad loans. This move reflected improvements in the quality of loans.

In the second quarter, JPMorgan also lifted its profits by reducing loan-loss reserves by $1.5 billion. The bank defended the practice, saying it pointed to the improving condition of its loans.

Yet Jamie Dimon, JPMorgan’s chief executive, conceded that fresh loan growth was still “soft.”

Nathaniel Popper contributed reporting.

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Economix Blog: For the Markets, a Steady Outlook

10:04 a.m. | Updated with reaction in the bond market.

The latest jobs report appears to maintain the status quo, and for Wall Street, that’s not a bad thing.

Stocks rose on Friday morning after the Bureau of Labor Statistics announced that the United States economy had created 175,000 jobs in May. Soon after the opening bell, the Standard Poor’s 500-stock index rose 0.4 percent.

The number of jobs created in May was slightly higher than many on Wall Street had expected, but the much more important consideration for most strategists was what the number will mean for the policy makers at the Federal Reserve.

“These days, the specifics of the report are far less important to our clients than is the effect it may or may not have on Fed activity,” Dan Greenhaus, the chief strategist at the brokerage BTIG, wrote to clients immediately after the data was released.

The consensus so far is that the number isn’t so low that it points to a shrinking economy, but it also isn’t so high that it will force the Fed to reconsider its monetary stimulus programs. Wall Street has been worried for the last few weeks that the Fed might be looking to pull back on its stimulus sooner than had been previously expected if the economy showed signs of faster-than-expected growth.

“Today’s report, is exactly as we predicted; it does nothing to change the broader view that the Fed is set to steadily reduce its pace of asset purchases at the September meeting and that all else equal, good news should be taken as good news,” Mr. Greenhaus wrote.

Because the Fed has been injecting money into the economy by buying government bond markets, those bond prices are a closely watched indication of sentiment about the Fed. In early trading on Friday morning, investors were buying United States government bonds in a bet that the Fed will be doing so as well. That helped push down the interest rate on the benchmark 10-year bond to 2.11 percent, from 2.08 percent on Thursday night.

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Italy Sees Borrowing Costs Fall

But Rome’s financial position remains precarious and investors said it would require continued support from the European Central Bank to avoid seeing its funding costs rise again.

The auction of 10-year bonds was the first since the E.C.B. started buying Italian and Spanish debt in the secondary market three weeks ago — an extraordinary measure begun after their borrowing costs soared to 6 percent.

On Tuesday, the Italian Treasury sold €3.75 billion, or $5.4 billion, of 10-year securities at 5.22 percent. That compared to a rate of 5.77 percent at a sale of similar bonds in late July.

Demand at the auction was 1.27 times the amount on offer, down from the level at the last auction of 1.38 times. The Treasury also sold €2.99 billion of bonds maturing in 2014.

“Italy is still able to fund itself at ‘market rates’ but those are being artificially depressed by the E.C.B.’s bond buying,” said Eric Wand, an interest rate strategist at Lloyds Bank Corporate Markets in London.

He said that there had been speculation among traders that the E.C.B. had bought Italian bonds in the market after the auction. “If the E.C.B. was not around, the situation would be a lot worse,” Mr. Wand said.

The E.C.B. is not permitted under European treaties to buy bonds directly from governments, meaning it can only provide secondary market support.

The yield on the country’s benchmark 10-year bond was stable around the auction at about 5.13 percent. It has dropped more than 100 percentage points since the E.C.B. began buying Italian and Spanish debt on Aug. 8.

Italy had €1.6 trillion of debt at the end of last year, according to its debt management office, making it Europe’s biggest national bond market.

Seeking to address concerns about its fiscal position, Prime Minister Silvio Berlusconi and other senior officials met Monday to amend a recently drawn-up fiscal package designed to net €45.5 billion in savings. Among the changes being discussed are dropping a tax on the high earners and limiting funding cuts to regional governments, Bloomberg News reported from Rome.

The Lower Chamber of Parliament will start debating the program next week and it is expected to be voted on by mid-October.

Euro-area governments are working on ratifying changes aimed at bolstering the region’s primary bailout mechanism, known as the European Financial Stability Mechanism. But analysts said that will take time and in the interim, countries like Italy and Spain will continue to need support from the E.C.B.

Last week, the bank bought €6.651 billion in euro-area bonds, and that figure is expected by analysts to rise this week.

Spain is also planning a bond sale of five-year paper on Thursday.

While the Italian bond auction appeared tepid, there was also more evidence Tuesday that the European economy is slowing amid the escalation in the sovereign debt crisis and recent turmoil in financial markets.

The European Commission’s economic sentiment index for the euro area fell to 98.3 in August from a revised 103.0 in July. The reading was lower than analysts’ estimates of 100.5 and was the lowest level since February 2010.

The weakening in sentiment in August was across the board, with both industry and services confidence shedding around 4 percentage points, while consumer confidence was down more than 5 percentage points.

“All in all the current level of the economic sentiment indicator, if confirmed in September, probably indicates that the recovery in the euro-zone has come to a standstill,” said Peter Vanden Houte, an analyst at ING. “A small negative growth figure in the third quarter seems no longer excluded.”

Bucking the general trend, however, Italian business confidence unexpectedly rose in August as manufacturers become more optimistic about demand for their goods, another report showed.

Over all, the recent data on the economy and growth are adding to expectations that the inflation rate in the euro area may have peaked.

Jean-Claude Trichet, the E.C.B.’s president, told a committee of the European Parliament on Monday that the economic recovery might be weaker than expected, suggesting the bank might lower its growth and inflation assessments.

Preliminary inflation figures for August from Germany and Spain have both been below market expectations. Euro-area data will be released Wednesday.

Stock markets were mixed Tuesday. The FTSE-100 rose by over 2 percent in London, following a public holiday in Britain Monday. But other European indexes declined. The SP 500 futures contract slid 0.5 percent, indicating a weaker start on Wall Street.

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Central Banks in Europe Keep Rates on Hold

FRANKFURT — Once again using its firepower to try to calm market tension after efforts by euro zone governments failed, the European Central Bank unexpectedly intervened in bond markets Thursday in an apparent attempt to prevent the region’s sovereign debt crisis from engulfing Italy.

The E.C.B. also moved to prop up weaker banks that may be having trouble raising funds, expanding its lending to euro zone institutions at the benchmark interest rate. The E.C.B. left that rate unchanged at 1.5 percent on Thursday, while the Bank of England left its benchmark rate at a record low of 0.5 percent.

Jean-Claude Trichet, the president of the E.C.B., declined to say what bonds the bank was buying or how much. He said the bank acted in response to “renewed tensions in some financial markets in the euro area.” It was the first such intervention since March.

Mr. Trichet also said that uncertainty created by the U.S. budget debate had unsettled European markets. “It’s clear the entire world is intertwined,” he said. “What happens in the U.S. influences the rest of the world.”

As markets demanded higher risk premiums on Spanish and Italian bonds during the past week, analysts began to speculate that the E.C.B. would return to the bond market. But most had not expected the bank to act so quickly.

Yields on Spanish and Italian bonds fell Thursday, though experience shows the decline could be short-lived. Similar action last year helped push down yields on Greek debt, but they later rose to record levels.

The E.C.B. will not disclose the scope of its bond-buying until next week at the earliest, but early indications were that the amounts were relatively modest. “It might be interpreted as more of a warning shot rather than a broad-based onslaught,” analysts at Barclays Capital said in a note.

The E.C.B. also responded to signs of stress in interbank markets as banks, wary of each other’s exposure to troubled government paper, became reluctant to lend to each other. One worrisome sign was a spike in the cost for European banks to borrow dollars in the open foreign exchange market.

Mr. Trichet said that next week the E.C.B. would lend banks as much cash as they wanted for six months at the benchmark interest rate, assuming they can provide collateral. A six-month term is longer than is customary.

The bank’s actions on Thursday provided another example of the E.C.B. acting as the euro area’s firefighter after efforts by governments fell short.

European leaders decided last month to authorize the European Financial Stability Facility — the European Union’s bailout fund — to buy bonds in open markets, relieving the E.C.B. of that responsibility. But it will take months before the E.F.S.F. is able to start making purchases. In addition, European leaders did not increase the size of the fund, leaving questions about whether it would be up to the task if a country as big as Italy or Spain needed help.

Speaking to reporters after a regular meeting of the E.C.B. governing council, Mr. Trichet beseeched political leaders to speed up efforts to cut their budget deficits and remove impediments to growth, such as overly protected labor markets.

“The key for everything is to get ahead of the curve, in fiscal policy and structural reform,” he said.

Mr. Trichet also gave a more subdued view of the economy. “Recent economic data indicate a deceleration in the pace of economic growth in the past few months, following the strong growth rate in the first quarter,” he said. Mr. Trichet said that while he expected moderate growth to continue, “uncertainty is particularly high.”

That assessment suggests the E.C.B. may wait to raise its benchmark rate again. The central bank has raised its main rate in two steps since April, from 1 percent to the current 1.5 percent, in an attempt to head off rising inflation.

Analysts expect the E.C.B. to raise rates for the 17-nation euro area again at the end of this year or early next year, after Mr. Trichet retires at the end of October and hands the presidency to Mario Draghi, governor of the bank of Italy.

Similarly, the Bank of England left its benchmark rate unchanged because the country’s economy remains weak. The Bank of England also kept its bond purchasing program — which injects money into the economy to spur growth — at £200 billion, or $326 billion.

The British economy grew 0.2 percent in the second quarter from the first quarter, when its G.D.P. rose 0.5 percent. The manufacturing sector shrank in July, an unexpected development that also pointed to a weak economy.

One factor weighing on the British economy has been the sovereign debt crisis, since the euro zone is the country’s biggest export market.

“It’s not a spectacular recovery,” said Michael Taylor, an economist at Lombard Street Research in London. “It’s choppy and it’s disappointing and that does argue for an unchanged policy well into next year.”

A far-reaching government austerity program that froze public sector pay and pensions and increased some taxes is another factor holding back growth. At the same time, consumer price inflation remains well above the Bank of England’s 2 percent target — conditions that would normally lead the bank to raise interest rates.

Prime Minister David Cameron warned last month that the economic recovery would be difficult. So far his government is sticking to the deepest budget-cutting program since World War II despite mounting criticism from members of the opposition, who argue it is too punishing.

There is also growing pressure on the British government and the central bank to consider other measures to fuel economic growth. The National Institute for Economic and Social Research, which supplies information to the Bank of England and other clients, said on Wednesday that cutting taxes would be one way to help the economic recovery.

British businesses continue to feel the impact of the weak economy. Holidays 4U, a travel service, ran out of money on Wednesday, leaving hundreds of passengers stranded. The fashion retailer Jane Norman and the wine retailer Oddbins went into administration earlier this year. Many stores have started to discount merchandise early to lure wary consumers, whose disposable incomes have been reduced by inflation.

Julia Werdigier reported from London.

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Next on the Agenda for Washington: Fight Over Debt

Congressional Republicans are vowing that before they will agree to raise the current $14.25 trillion federal debt ceiling — a step that will become necessary in as little as five weeks — President Obama and Senate Democrats will have to agree to far deeper spending cuts for next year and beyond than those contained in the six-month budget deal agreed to late Friday night that cut $38 billion and averted a government shutdown.

Republicans have also signaled that they will again demand fundamental changes in policy on health care, the environment, abortion rights and more, as the price of their support for raising the debt ceiling.

In a letter last week, Treasury Secretary Timothy F. Geithner told Congressional leaders the government would hit the limit no later than May 16. He outlined “extraordinary measures” — essentially moving money among federal accounts — that could buy time until July 8.

Once the limit is reached, the Treasury Department would not be able to borrow as it does routinely to finance federal operations and roll over existing debt; ultimately it would be unable to pay off maturing debt, putting the United States government — the global standard-setter for creditworthiness — into default.

The repercussions in that event would be as much economic as political, rippling from the bond market into the lives of ordinary citizens through higher interest rates and financial uncertainty of the sort that the economy is only now overcoming, more than three years after the onset of the last recession.

Given the short time frame for action and the prospect of an intractable political clash, leaders in both government and business are already moving to avert a crisis that most likely would be “a recovery-ending event,” as Ben S. Bernanke, the Federal Reserve chairman, testified recently in the Senate. He described a sequence of events that “would cascade through the financial markets,” provoking another credit crisis like that in 2008 and causing interest rates to jump.

Mr. Geithner has been meeting privately with senior lawmakers of both parties to underscore the economic stakes. At the White House, Mr. Obama’s chief economic adviser, Gene Sperling, peeled away from the spending fight in recent weeks to turn nearly full time to developing the administration’s strategy for the debt-limit debate. Central to that, administration officials say, is whether Mr. Obama initiates bipartisan talks on a long-term debt-reduction plan that tackles taxes, military spending and fast-growing entitlement programs like Medicare and Medicaid.

Executives of the nation’s largest financial institutions in recent days met with Mr. Geithner, House Speaker John A. Boehner, Republican of Ohio, and other lawmakers, arguing for the importance of raising the debt ceiling. Jamie Dimon, the chief executive of JPMorgan Chase, told them that his bank had devised contingency plans to protect its global business in the event of a default.

“If anyone wants to push that button, which I think would be catastrophic and unpredictable, I think they’re crazy,” Mr. Dimon said recently at the United States Chamber of Commerce.

The United States is one of the few nations that limits its debt by law, and votes in Congress to raise the ceiling, something that happens every few years, are perhaps the least popular that lawmakers face.

Financial and government leaders alike have grown accustomed to some political brinkmanship over raising the cap, confident that Congress ultimately would do so, usually with the party holding the White House supplying most votes. (So it was that Mr. Obama, as a Democratic senator in 2006, voted against a Bush administration request to raise the debt limit; it passed with mostly Republican votes.)

What makes this year different, people in both parties say, is the large number of Congressional Republicans, including the many newcomers who gave the party a House majority, who are strenuously opposed to government spending, and egged on by the activist Tea Party movement to use the leverage of the debt-limit vote to make their stand.

“We want to see real structural, cultural-type changes tied to this debt ceiling. We’re not interested in a one-off kind of savings, or anything small,” said Representative Mick Mulvaney, a first-term Republican from South Carolina. “There has got to be game-changing kinds of changes to get us to vote for it.”

He dismissed warnings about default as “just posturing,” and said Democrats should bear the responsibility for passing any measure to increase the borrowing limit.

“It’s their debt,” he said. “Make them do it. That’s my attitude.”

In fact, the debt was created by both parties and past presidents as well as Mr. Obama.

Of the nearly $14.2 trillion in debt, roughly $5 trillion is money the government has borrowed from other accounts, mostly from Social Security revenues, according to federal figures. Several major policies from the past decade when Republicans controlled the White House and Congress — tax cuts, a Medicare prescription-drug benefit and wars in Iraq and Afghanistan — account for more than $3.2 trillion.

The recession cost more than $800 billion in lost revenues from businesses and individuals and in automatic spending for safety-net programs like unemployment compensation. Mr. Obama’s stimulus spending and tax cuts added about $600 billion through the fiscal year that ended Sept. 30.

Though the recent standoff that consumed Washington over spending for the 2011 fiscal year ended without a government shutdown, the messy process and 11th-hour settlement have stoked trepidation about the debt-limit fight to come. If Republicans and Democrats found it so hard to compromise over a few billion dollars, the thinking goes, how can they ever come together on a multi-year, multitrillion-dollar plan to cut the debt within weeks or months?

“If I were still Treasury secretary, it would worry the hell out of me,” said James A. Baker III, who served in that office for President Ronald Reagan, during a time when the total federal debt nearly tripled over his two terms. “But it doesn’t worry me as a good Republican, and one who wants to finally see some fiscal responsibility in this country.”

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