US & World Daily Markets Financial Briefing 16-05-2006

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U.S. stocks open higher; inflation data in focus

NEW YORK - U.S. stocks edged higher in opening trade Tuesday, after producer-price data showed a tamer-than-expected reading at the core inflation level, momentarily soothing worries that brisk inflation will force the Federal Reserve to keep tightening rates.
   
The retail sector was in focus after both Wal-Mart Stores Inc and Home Depot reported earnings above forecast.
   
The Dow Jones Industrial Average rose 20 points to 11,448.
   
The Nasdaq Composite Index added 2 points to 2,240 while the S&P 500 Index gained nearly 2 points to 1,296.
   
The stock market Monday had a whirlwind session that saw heavy losses on the Dow industrials and S&P 500 melt into gains in the final hour of trade amid strong demand for blue-chip stocks. The Nasdaq Composite Monday closed well above its worst levels of the day but still at its weakest level of the year.
   
Inflation is uppermost in investors' minds as they attempt to gauge the Federal Reserve's leanings on monetary policy.
   
"We kind of ruined the nice little bulls' consensus about the Fed being able to pause in its rate hikes about a week ago," said Ken Tower, chief market strategist at CyberTrader.
   
"The search is on for a new consensus about growth and inflation and when the Fed can stop raising rates," Tower said.
   
Investors Tuesday also will track speeches by six Federal Reserve officials, including Chairman Ben Bernanke, who will appear at a hedge fund conference in Georgia.
   
Also on the schedule are Fed Governors Susan Bies, Randall Kroszner and Mark Olson, as well as Atlanta Fed President Jack Guynn and New York Fed President Timothy Geithner.
   
Stocks in focus
   
Wal-Mart Stores tacked on 35 cents to $47.78. The retail giant had a stronger-than-expected 6.3% increase in first-quarter profit on sales in line with Wall Street's consensus estimate. The company attributed its strong performance to keeping inventory in check and to its new-fashioned merchandise.
   
Home Depot Inc reported a 19% increase in first-quarter profit, helped by strength in its supply business. Quarterly earnings per share were 70 cents, stronger than the 67 cents a share expected by Thomson First Call analysts. The stock was off 3.3% at $39.16 in early trading.

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Dollar falls on tame inflation, weaker housing starts

NEW YORK - The dollar slumped against major rivals early Tuesday after government reports showed core wholesale inflation remained tame while housing starts declined for the third straight months.
   
The greenback's fall came as the euro was pressured after a poll of German sentiment fell sharply, raising concerns the European economic recovery isn't as strong as some in the market had expected.
   
"The US PPI report indicates inflation remains contained (at least on the core basis), and the sharper than expected weakness in housing signals fresh weakness is ahead for the dollar," said Brian Dolan, head of currency research at Gain Capital.
   
The data suggest "the slowing in the housing market that the Fed has anticipated is materializing and the benign inflation readings fit their outlook, both suggesting that no further Fed tightening is needed," he added.
   
In early New York trading, the euro strengthened to $1.2843 from $1.2784 late Monday. The euro fell to 141.30 yen from 141.69 yen. The dollar declined to 110.13 yen from 110.35 yen. The British pound was at $1.8842, up from $1.8773. The dollar was at 1.2082 Swiss francs, down from 1.2124 francs late Monday.
   
"While the dollar has been supported by position unwinding in financial markets globally at the start of the week, we remain wary of the short-term outlook for the greenback," said Mansoor Mohi-uddin, a currency analyst for UBS.
   
Tame inflation, weaker housing data
   
Led by higher energy costs, U.S. producer prices rose a hefty 0.9% in April, but prices outside of energy were well contained, according to Labor Department data released Tuesday.
   
Energy prices increased 4% in the month, led by a 12.3% rise in gasoline prices. Natural gas prices fell 3%.
   
But inflationary pressures were modest elsewhere at the wholesale level.
   
The core producer price index for finished goods -- which excludes food and energy prices -- rose 0.1% for the second month in a row in April, a sign that higher energy prices have not led to a more generalized inflation.
   
The Federal Reserve will get a better picture of inflationary trends on Wednesday, when the Labor Department reports on the consumer price index for April. Economists expect a 0.5% gain in the headline inflation rate, with a more moderate 0.2% gain in the core CPI.
   
Adding to the dollar's woes, construction of new U.S. houses retreated for the third straight in April, the Commerce Department estimated Tuesday.
   
Starts fell 7.4% in April to a seasonally adjusted 1.85 million annualized units. It was the largest drop in more than a year. Starts are now at their lowest level of starts since November 2004.

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The last time there were three straight monthly declines in construction was the winter of 2003-2004.
   
The decline in housing starts in April was larger than expected. Wall Street economists had forecast housing starts to remain basically flat at 1.97 million units in April according to a MarketWatch survey.
   
The dollar trimmed some losses after the Federal Reserve said output from U.S. factories, mines and utilities rose by 0.8% in April, while capacity utilization rose to 81.9%. Economists were expecting industrial production to rise by 0.4% and capacity utilization to climb to 81.5%.
   
German ZEW weighs
   
The euro had declined to a seven-week low against the yen after a poll of German sentiment fell sharply, raising concerns the European economic recovery isn't as strong as some in the market had expected.
   
The ZEW Institute's indicator of economic sentiment for Germany fell 12.7 points in May to 50.0, below consensus forecasts. The ZEW polls 314 analysts and institutional investors.
   
The decline was linked to the euro's recent appreciation. Germany is the world's largest exporter, so a rise in the euro tends to dent confidence in the country's economy.
   
The ZEW also cited the skyrocketing oil price, and an unwinding of trust put in the German government.
   
"The disillusion that set in within the last months seems to have continued. Debates on tax increases and minimum wages are not appropriate to raise investor confidence," it said.
   
The indicator is a popular one, though the Ifo business climate poll is considered a more reliable predictor of Germany's economy, since the Ifo polls business managers rather than investors.
   
Inflation data also was released in the U.K., which saw a 0.6% monthly rise and 2% annual rise during April, the National Statistics Office said. Those figures were in line with economist expectations.
   
No timetable for rate rise
   
The yen found modest support in the wake of data showing Japan's April consumer confidence index at its highest mark in nearly 16 years, a clear sign that the Japanese economic recovery is taking hold.
   
Also on Tuesday, Bank of Japan Governor Toshihiko Fukui reiterated that he has no firm timetable for raising interest rates.

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Asian shares close lower, Tokyo slides on stronger yen

HONG KONG - Share prices across the Asia-Pacific region ended lower with Tokyo sharply lower for a sixth trading day as investors fretted over the adverse effects of the yen's strength on exporters earnings, dealers said.
   
The 225-issue Nikkei Stock Average finished down 328.49 points or 2.0 pct at 16,158.42, after touching a low of 16,116.73. It was the benchmark index's weakest finish since March 10 when it settled at 16,115.63.
   
The TOPIX index of all first-section issues fell 36.84 points or 2.2 pct to 1,644.97, just off its intraday low of 1,643.40.
   
Prices got an initial lift as the yen gave back some of its recent gains against the dollar. But  buying fizzled out as the dollar reversed course and fell back below 110 yen, reigniting concerns about the potential impact on exporters earnings.
   
"The market opened higher but it soon fell back into negative territory amid lingering worries about the impact of the yen's rise against the dollar," said Fumiyuki Nakanishi, senior strategist at SMBC Friend Securities.
   
"Losses accelerated later in the session after the dollar dipped below 110 yen, seen as a critical mark for many exporters," he said.
   
In late trade here, the dollar stood at 109.99 yen, off a low of 109.93 yen.
   
In Australia, share prices closed lower as investors dumped resource and energy stocks following the slump in commodity prices overnight, but gains in bank and insurance stocks lessened the sell-off, dealers said.
   
They said index-leading resources stocks BHP Billiton and Rio Tinto fell after the correction in base metal prices overnight.
   
Dealers said major banking stocks gained on investor switching and the welcomed correction in commodity prices which lowered inflation concerns arising from the ballooning commodity market.
   
The S&P/ASX 200 lost 16.7 points or 0.32 pct to close at 5,217.4, retreating further from Thursday's record close of 5,364.5.
   
Share prices in Hong Kong were trading lower in the afternoon on follow-through selling after yesterday's sharp fall, with Wall Street's mixed erformance overnight keeping the mood subdued, dealers said.
   
They said commodity stocks fell sharply following a drop in metals prices.
   
At 3:30 pm, the Hang Seng Index was down 126.19 points or 0.77 pct at 6,368.65.
   
In mainland China, A-shares in Shanghai and Shenzhen ended sharply lower on profit-taking and weak global markets with metal companies and heavyweight oil refiners losing ground in particular, dealers said.
   
The fall comes a day after the yuan briefly strengthened past the 8.00 to the dollar level, although today it slipped back to weaker than 8 per dollar.
   
The Shanghai A-share Index slid 53.65 points to 1,693.79 on turnover of 52.95 bln yuan and the Shenzhen A-share Index was down 10.88 points at 409.81 on turnover of 33.30 bln yuan.
   
In Seoul, share prices finished sharply lower in a volatile session, extending heavy losses for a third day on continued sell-offs by foreign investors in many blue chips, dealers said.
   
An early rebound quickly lost momentum, with bargain-hunting interest overwhelmed by massive selling by foreign investors. This pushed the index well below 1,400 points, to their lowest level in a month, they added.
   
The KOSPI index closed down 31.87 points or 2.25 pct at 1,382.11.

Asian Bourse Round-Up

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Gold futures head higher after two-day decline

SAN FRANCISCO - June gold was up $4.50 at $689.50 an ounce after tallying a two-session loss of $36.50.

"Buoyed by short-covering and scattered physical buying, gold made an honest effort to recover from Monday's slump," said Jon Nadler, an analyst at Kitco.com. And "sensing that the fundamentals have obviously not changed over the past few days, and that perhaps just as the rally had been overdone, so had the brief correction, traders took a few cautious steps towards repurchasing positions."

July silver was up 4.5 cents at $13.38 an ounce but July copper fell by 1.65 cents to $3.73 a pound.

Treasurys rallied after the data, as the tame core inflation number was interpreted in the fixed-income market as a hopeful sign that the Fed could ease up in its tightening program.
   
The benchmark 10-year Treasury note last was up 6/32 at 99-30/32 with a yield of 5.14%.
   
Crude futures rebounded slightly in an attempt to halt a sharp two-session pullback that had knocked prices down to a five-week low. The crude contract for June delivery tacked on 36 cents to $69.77 a barrel in electronic trading.

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