The announcement of Spain’s budget plan and speculation that China may introduce fresh measures to introduce more liquidity into its banking system helped benchmarks rebound to clock up gains. While the Dow was back to winning ways after six consecutive days of losses, the S&P 500 rebounded to the green after a five day long losing streak. However, except for a dip in initial claims, domestic economic readings were largely disappointing.
The Dow Jones Industrial Average (:DJI) rose 0.5% and closed at 13,485.97. The Standard & Poor 500 (S&P 500) gained 1% and finished yesterday’s trading session at 1,447.15. The tech-laden Nasdaq Composite Index surged 1.4% to end at 3,136.60. The fear-gauge CBOE Volatility Index (:VIX) declined 11.7% and settled at 14.84. Consolidated volumes on the New York Stock Exchange, the Nasdaq and the Amex were 5.74 billion shares, short of the year-on-year daily average volume of 6.53 billion. The advancers on the New York Stock Exchange outpaced the declining stocks; as for 73% stocks that gained, 24% stocks closed lower.
The announcement of Spain’s 2013 budget plan boosted sentiment and drove benchmarks higher. Budget reforms prioritized spending cuts over tax hikes. European Union Economic and Monetary Affairs Commissioner, Olli Rehn, said: “The reforms are clearly targeted at some of the most pressing policy challenges”. The Spanish government projects savings worth €13 billion next year. The finance minister also said a draft budget for fiscal 2013 reduces overall spending by €40 billion ($51 billion). However, as demands for Catalonia’s independence rises, Spain's ability to control regional government spending would be threatened.
Meanwhile, speculation that the central bank of China may react to boost the economy as early as possible helped the markets’ positive rally. Yesterday, a central bank adviser said China has undervalued the global economic slowdown and therefore reducing interest rates further or lowering of bank reserve requirements will depend on ‘deterioration in the external environment’. China's central bank infused a net 365 billion Yuan into money markets this week, which traders cited as the largest-ever weekly injection.
The U.S. Department of Labor reported a decline of 26,000 in seasonally adjusted initial claims for the week ending September 22, to 359,000, compared with the previous week's revised figure of 385,000. The figure was at its lowest point since late July. Moreover, the sharp decline in initial claims hinted at an improvement in labor market conditions. Consensus estimates had projected the figure to come in at 378, 000.
Yesterday, the Commerce Department came out with the third estimate of Gross Domestic Product (GDP). The Bureau of Economic Analysis in its third estimate said Real GDP increased at an annual rate of 1.3% in the second quarter of 2012, which fell short of the consensus estimates of an increase of 1.7%.
The report also noted: “Real personal consumption expenditures increased 1.5 percent in the second quarter, compared with an increase of 2.4 percent in the first. Durable goods decreased 0.2 percent, in contrast to an increase of 11.5 percent. Nondurable goods increased 0.6 percent, compared with an increase of 1.6 percent. Services increased 2.1 percent, compared with an increase of 1.3 percent”.
Separately, the U.S. Department of Commerce reported a sharp fall in durable goods orders in August. The figure declined by 13.2%, far wider than the consensus estimate of a 4.7% fall. This decrease was the largest fall since January 2009. Excluding defense and transportation, new orders decreased 12.4% and 1.6% respectively.
The National Association of Realtors released Pending Home Sales Index data yesterday, which registered a decline of 2.6% to 99.2 in August. The index had increased by 2.4% to 101.9 in July. Consensus estimates had projected a 1% rise. However, the Pending Home Sales index came in 10.7% higher than the August 2011 figure of 89.6.
Despite discouraging housing data, homebuilding stocks had a positive run yesterday. The SPDR S&P Homebuilders (XHB) gained 1.8% and stocks including KB Home (NYSE:KBH), Hovnanian Enterprises, Inc. (NYSE:HOV), The Ryland Group, Inc. (NYSE:RYL), M.D.C. Holdings, Inc. (NYSE:MDC) and Standard Pacific Corp. (NYSE:SPF) rose 5.1%, 4.1%, 2.7, 2.2% and 2.2%, respectively.
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