MarketView for April 5

 

 

 

Summary 

 

The latest economic data from Friday, when the markets were closed, combined with the reports released on Monday, resulted in new 18 month highs for the Dow Jones industrial average and the S&P 500 indexes, while the Nasdaq chalked up a new 19 month high.

 

Driving the day’s trading activity were signs of a turnaround in the labor market, which in turn raised hopes that the economy is strengthening and the profit outlook is brightening. And when you stop to think about it, it should not have been much of a surprise that the shares of natural resources companies led the parade on expectations that an improving economy would drive up demand.

 

Domestic crude oil futures hit $86 per barrel and gave a big lift to energy shares, with the shares of Exxon Mobil gaining almost 1 percent, while Chevron posted an increase of 1.3 percent.

 

On the first trading day after government data showed the economy added the largest number of jobs in three years, investors got separate reports showing that services -- the U.S. economy's largest segment -- grew above expectations in March and pending home sales rose more than expected in February. The Dow and the Standard & Poor's 500 Index both finished at fresh 18-month closing highs. The Nasdaq closed at a 19-month closing high.

 

Those companies seeing the largest increases included Apple up 1.1 percent to $238.49, a lifetime closing high, after initial sales of its hotly anticipated iPad portable computer surpassed forecasts when it debuted on Saturday. Apple sold more than 300,000 iPads on the first day, and there were more than 1 million downloads from its online store.

 

However, Monday’s volume made it the second-slowest day this year. Furthermore, higher bond yields and higher crude oil prices could potentially result in some headwinds for some of the key indexes.

 

The yield on the benchmark U.S. 10-year Treasury note rose to touch 4 percent earlier, a level not seen since June 2009, when it hit 4.01 percent. On the New York Mercantile Exchange, May U.S. crude rose $1.75, or 2.06 percent, to settle at $86.62 a barrel, the highest close since the October 8, 2008, settlement price of $88.95. As a result, Exxon Mobil ended the day at $68.19, up 0.9 percent, while Chevron closed up 1.3 percent.

 

February home sales sent the share prices of home builders higher, with Pulte up 2.9 percent at $11.44. Shares of Harley-Davidson closed at $31.37, its highest level in almost 2-1/2 years and a gain for the day of 10.54 percent after an analyst raised his price target on the shares.

 

The Institute for Supply Management said its services index came in at 55.4 in March, the strongest reading for that statistic since May 2006, and well above February's reading of 53.0. The National Association of Realtors monthly index of pending sales of existing homes rose 8.2 percent in February, when a flat reading was expected.

 

Nonfarm payrolls gained 162,000 jobs in March, Friday's report showed. That was below consensus, and many of the jobs were temporary, but more private-sector hiring was seen as further evidence the economy is on the mend.

The Economy Is Finally Beginning to Expand

 

The services sector of the economy chalked up its fastest growth rate in nearly four years during March, while future home sales unexpectedly rose in February bolstering hopes for sustainable economic recovery and job growth. The services sector, which has been lagging other areas of the economy, accounts for some two-thirds of all economic activity.

 

The positive news from both  the service and housing sectors, coupled with last Friday's solid jobs report raised expectations the Federal Reserve will tighten monetary policy sooner rather than later.

 

The Institute for Supply Management reported that its service index grew in March for a third straight month, jumping to 55.4, its strongest reading since May 2006. That was up from February's reading of 53.0. A reading above 50 indicates expansion in the sector.

 

Treasury yields touched 4 percent for the first time in 10 months on Monday amid expectations the Federal Reserve will pursue a less accommodative monetary policy to forestall a pickup in inflation.

 

The ISM non-manufacturing index also showed its employment component rose slightly in March, while new orders jumped as well.

 

The Conference Board, a private research group, reported that the job market strengthened for a seventh straight month in March, with fewer Americans having trouble finding work. Nonetheless, the jobless rate remained at 9.7 percent in March for a third straight month.

 

A separate report on Monday from the National Association of Realtors showed contracts for pending sales of previously owned homes unexpectedly rose in February. The NAR said its pending home sales index, based on contracts signed in February, rose 8.2 percent to 97.6 from a downwardly revised 90.2 in January.

 

Reports last week showed the manufacturing sector growing for an eighth straight month in March, expanding at its fastest pace since July 2004, while employers added jobs last month at the fastest rate in three years.

 

Retail Sales Are Projected to Show a Substantial Increase for March

 

The major retail chains are expected to report a rise in March sales, lifted by an early Easter, an improving job market and warm weather, in what may be the strongest sign yet that consumers are once again opening their wallets. A number of the largest retailers, from Saks and Kohl's to TJX and Target are due to report sales at stores open for at least year, an industry gauge known as same-store sales.

 

Easter's early arrival on April 4 provided a major considerable stimulus for the month, as sales typically tick up two weeks ahead of the holiday and kick off spring shopping. In 2009, Easter fell on April 12. However, even beyond the holiday effect, the results should make it clear whether shoppers are feeling better about spending as corporate layoffs ease and more signs point to economic growth. The  private sector created jobs in March at its fastest rate in three years.

 

The housing and stock markets are also performing well, easing concerns about home values and investment portfolios. Warm weather early in the month added to the positive sentiment following record snowstorms in February.

 

In an early look at March sales, Walgreen posted a 2.3 percent same-store sales rise. However, the one concern is that maybe March sales gains came at the expense of April results.

 

Nonetheless, clothing stores that cater to teens are expected to show the most improved March sales performance, helped by easing unemployment among young job-seekers and a hike in allowances from their parents. Last year, the group saw some of the sharpest declines at the height of a consumer spending slump.

 

American Eagle Outfitters and Aeropostale are expected to lead the teen pack with gains of 10.4 percent and 10.7 percent, respectively. Abercrombie & Fitch, whose same-store sales plummeted 34 percent last year, will likely show an increase in sales of 6 percent.

 

To their credit, retailers are taking a careful look at how they stock shelves in order to have products shoppers want at the right time and thereby allowing for full price sales as opposed to heavy discounting.

 

Other retailers set to report large gains include Kohl's and Nordstrom, both of which gained market share during the recession. Kohl's is expected to report a 12.1 percent increase, compared to 7.6 percent for Macy's and 5.7 percent for JC Penney, while Nordstrom's is expected to post a 10.3 percent sales increase, while Saks is expected to show a gain of 8.3 percent.

 

Lack of Inflation is a Sign of Overall Economic Weakness

 

The lack of inflation since mid-2008 is not just a narrow reflection of housing market weakness but is rather a sign of broad economic slack, economists at the Federal Reserve Bank of San Francisco said on Monday.The finding, published in the latest Economic Letter from the regional bank, comes as Fed policy-makers weigh how much longer to keep short-term interest rates near zero, where they've been since December 2008.

 

Subdued inflation, along with other factors including high unemployment, warrant keeping rates exceptionally low for an "extended period," the monetary policy-setting Federal Open Market Committee said after its most recent meeting in March. However, recently some top Fed officials have begun to question whether the "extended period" language continues to be warranted in light of signs that the economy is regaining its footing.

 

As the debate over the Fed's accommodative policy heats up, the San Francisco Fed researchers' findings could help blunt concern the steep drop in housing prices may be masking inflationary trends that might otherwise trigger a change in monetary policy.

 

"Some analysts have raised the question of whether the unprecedented declines in house values, which have been the hallmark of the recent recession, might be artificially dampening core inflation readings," economists Bart Hobijn, Stefano Eusepi, and Andrea Tambalotti wrote in the Letter.

 

"However, a close examination of recent inflation data shows that the weakness in housing costs is representative of a broad pattern of subdued price increases across most consumption goods and services and is not distorting the broad downward trend in core inflation measures."

 

The economists calculated the personal consumption expenditures core price index -- one of the main measures the Fed uses to track inflation -- excluding the housing component, and compared it to the index with the housing component intact.

 

They found that while housing prices did drag on inflation, the effect was small, and overall they were just one component of a broad-based decrease in inflationary pressures since the peak of the financial crisis. The same was true when the economists made a similar calculation for the better-known consumer price index, or CPI.

 

"No matter whether housing is included or not, core inflation exhibits a noticeable disinflationary tendency since August 2008," they wrote in the letter. Such pressures are likely due to a large amount of slack in the economy, they said.

 

The findings bolster the case for continuing to use current measures of inflation, they wrote.

 

The FOMC next meets April 27 and 28.

 

San Francisco Fed President Janet Yellen, the leading candidate to replace soon-to-retire Fed vice chairman Donald Kohn, is typically seen as belonging to the Fed's more dovish wing -- that is, less likely to be the first to push for a rate hike.