Experts Talk FOMC Minutes, Data, Earnings

The Oct. 14 market rally was helped by generally positive September Fed minutes. Also: not-so-bad retail numbers and insight on the weakening dollar

By BusinessWeek staff

The stock market, already in rally mode Oct. 14 after earnings from Intel (INTC) and JPMorgan Chase (JPM) beat estimates, got a further boost from some better-than-expected economic data and indications from the minutes of the September Federal Reserve policy meeting that the U.S. economic recovery was under way. BusinessWeek compiled comments from Wall Street economists and strategists on the FOMC, the economy, and corporate earnings on Oct. 14:

Michael Wallace, Action EconomicsThe September FOMC minutes indicated policymakers believed an economic recovery was under way, with developments in the financial [sector] seen as "broadly positive." They were encouraged by the improvement in the housing market and the stabilization of prices. Although risks to the outlook had become more balanced, the economy was nevertheless seen remaining "quite weak," with resource utilization low while unemployment was likely to remain high. Bank credit remained difficult and or costly to obtain. Hence, the Committee voted to maintain the 0% to 0.25% target funds rate and reiterate that would be the case for an extended period. Also in that context, some members thought an increase in the mortgage-backed securities [purchase] program could help reduce the economic slack more quickly. However, one member noted the economic recovery could warrant a reduction in the purchase program. Members also discussed maintaining flexibility to expand the program if necessary.

On inflation, all members agreed that continued communication that the FOMC had the tools and willingness to begin withdrawing stimulus was important to containing inflation expectations. So, as suspected, the minutes didn't reflect the rift on the FOMC as suggested by […] recent Fedspeak.

Beth Ann Bovino, Standard & Poor'sBusiness inventories fell 1.5% in August, while sales rose 1.0%. The inventory/sales ratio plunged to 1.33 months from 1.36 in July, barely above its year-ago level of 1.30. The market had expected a 0.9% inventory drop. The big decline was concentrated in autos, where the Cash for Clunkers program got cars off the lot. Auto dealer inventories fell 9.5%, and are down 30.9% from a year ago. Inventories are down 13.2% from a year ago, while sales are down 14.9%. The lower inventories are slightly negative for third-quarter gross domestic product, but positive for the future.

Import prices edged up 0.1% in September, after surging 1.6% the month before. The September reading was much tamer than the 0.3% rate that markets had expected but in line with our forecast. Petroleum prices fell 1.1% from the previous month, after surging 7.1% month-over-month in August. Petroleum prices are down 34.4% from a year ago. Excluding petroleum, import prices were up 0.4% month-over-month on strength in nonfuel industrial supplies and materials and food. September export prices fell 0.3% month-over-month, a stronger drop than the 0.1% rate markets had expected and after rising 0.7% in August. Excluding agricultural goods, export prices were flat.

Retail sales fell 1.5% in September, because of a 10.4% drop at auto dealers after the end of the clunkers program. Excluding autos, sales rose 0.5%. The consensus estimate was for a 2.0% drop overall, and a 0.2% rise excluding autos. The August increase was revised downward to a 2.2% increase form the 2.7% estimated last month, mostly because of a revision to the auto data. A stronger report than expected, suggesting consumers really are returning to the mall.

Hans Mikkelsen, Yuriy Shchuchinov, Bank of America Merrill LynchRecent weakening in the U.S. dollar from its March highs will impact third-quarter earnings positively for U.S. companies with significant foreign profits. While earnings improvement is positive across the capital structure, for many high-grade issuers the benefits accrue mainly to shareholders as relatively high credit quality implies limited scope for further improvement. Within high grade, in theory earnings improvement impacts credit the most for the weakest issuers—that is, those with the widest spreads. However, we find that the widest sectors such as REITs and Homebuilders have relatively little foreign sales.

On the other hand, sectors for which foreign sales are most important, such as Technology and Industrials Products, tend to have tight spreads and thus low marginal impact on credit spreads from improvement in earnings. Thus currency translation following dollar depreciation—while helpful—plays a relatively minor role for U.S. companies in high-grade credit.

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