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MarketView
Events defining the day's trading activity on Wall Street
Lauren Rudd
Friday, April 1, 2011
Summary
The financial markets began a traditionally healthy
month on strong note on Friday after some solid jobs figures and a drop
in unemployment were announced, but the S&P 500 may have difficulty
trying to break through that psychologically important 1,344 number to
move to new multi-year highs. On Friday, the S&P remained in a range near 1,333, a
significant level as it represents double the 12-year low hit in March
2009. It is close to the 1,344 representing the S&P's 2011 high, its
highest point since June 2008. Meanwhile, the Dow Jones industrial
average hit 12,419, its highest intraday level going as far back as June
2008. For the week, the Dow gained 1.3 percent; the S&P
added 1.4 percent and the Nasdaq rose 1.7 percent. April is the best
month for the Dow industrials going back to 1950, with an average gain
of 2 percent, according to the Stock Trader's Almanac. About 7.4 billion
shares traded on the three major exchanges, well below the estimated
daily average of 8.47 billion during 2010. Strong job growth and supportive comments on Fed
policy from influential New York Fed Bank President William Dudley were
supportive, but the market is looking to forthcoming earnings to kick
the rally into a higher gear. Employment grew solidly for a second month
in March and the jobless rate hit a two-year low of 8.8 percent. Dudley
said quantitative easing that totaled $600 billion in bond purchases was
expected to run until June, countering several days of hawkish rhetoric
from other Federal Reserve officials. The Nasdaq and the Intercontinental Exchange
announced a bid to buy the New York Stock Exchange, topping an earlier
offer from Deutsche Boerse. In another snapshot of the economy, the
manufacturing sector grew at a marginally slower pace in March,
according to the Institute for Supply Management. The Commerce
Department said construction spending fell more than expected in
February, dropping to its lowest level since October 1999.
Unemployment Drops The unemployment number fell for a second straight
month in March, reaching a two-year low of 8.8 percent, while at the
same time underscoring a decisive shift in the labor market that should
help to underpin the recovery. At the same time, nonfarm payrolls rose
216,000 last month, the largest increase since last May, the Labor
Department said on Friday. The gain built on the 194,000 new positions
added in February. The quickening pace of job growth has pulled the
unemployment rate down a full percentage point since November, the
largest four-month decline since February 1984. Still, the report was
likely not robust enough to push the Federal Reserve off its ultra-easy
monetary policy course. The economy has recovered only a fraction of the
more than 8 million jobs lost in the recession. Economists say job
growth between 250,000 and 300,000 a month is needed to have a sizable
impact on the pool of 13.5 million jobless Americans. The improvement in the labor market provides fuel
for an already lively debate at the Fed over how soon the U.S. central
bank should withdraw its extensive support for the economy. High
unemployment and a lack of wage gains -- earnings were flat in March and
have barely grown so far this year -- argue for keeping supports in
place, in the view of some officials. Others worry keeping interest
rates close to zero for too long will provide a spark for inflation. In a sign the central bank is unlikely to rush to
the exits, the head of the powerful New York Federal Reserve Bank on
Friday pushed back against the hawkish rhetoric from some counterparts,
saying the pick-up in job growth was welcome but not a reason to reverse
course. "We are still very far away from achieving our dual
mandate of maximum sustainable employment and price stability," New York
Fed chief William Dudley said. Investors reacted to the jobs report by raising
their bets on the Fed tightening credit by year-end but rowed back a bit
after Dudley's cautious comments. The 0.1 percentage point drop in the unemployment
rate, which took it to its lowest level since March 2009, came even as
more people entered the labor force, a signal of rising optimism on job
prospects. But of those unemployed, 45.5 percent had been out of work
for 27 weeks or more. The improving employment picture could increasingly
coax those who had given up the search for work to re-enter the labor
market, which could push the jobless rate higher. Government employment fell for a fifth straight
month, but the private sector added 230,000 new positions, with all but
31,000 of those jobs coming in the service sector. It was the 12th
straight month of private sector job gains. Manufacturing employment growth slowed, while the
construction sector shed 1,000 employees. A report issued by the
Commerce Department on Friday showed construction spending fell in
February to its lowest level since October 1999. Despite slower jobs growth in the sector, the
manufacturing report showed factories continued to help power the
recovery in March, with activity rising for a 20th straight month. Strong March sales results from automakers, which
showed high gasoline prices lifting sales of smaller, fuel-efficient
cars, suggested more production gains ahead. They also signaled that
consumer spending retains some vigor after a weak start to the year.
Fed Hawk Issues Warning William Dudley, president of the New York Federal
Reserve Bank, pushed back against an increasingly hawkish tone from
other Fed officials worried about inflation, stating that he saw no need
for the Fed to reverse course. Dudley said on Friday the Fed was "still very far
away" from achieving its mandate of maximum sustainable employment and
price stability, even though the economy is on a firmer footing. His
caution contrasted with comments from three other Fed officials on
Friday who focused on the risks that the Fed's policies could fuel
inflation. However, Dudley's comments prompted prices for safe-haven
U.S. Treasury bonds to erase modest losses and drove the dollar down
against the euro. The March employment figures had initially driven
expectations that the Fed might end its easy monetary policy sooner than
expected. "A stronger recovery with more rapid progress toward
our dual mandate objectives is what we have been seeking," Dudley said.
"This is welcome and not a reason to reverse course." The Fed's upcoming policy meeting on April 26-67 is
its last scheduled meeting before the bond-purchase program is scheduled
to end. Dudley said he would be surprised if the program was not
completed but said the benefits of further round of so-called
quantitative easing had "diminished a bit". The president of the Philadelphia Fed, Charles
Plosser, and Richmond Fed President Jeffrey Lacker, both considered
inflation hawks, said the Fed could raise interest rates in 2011,
depending on how the economic recovery evolves. "It wouldn't surprise me if we needed to act before
the end of the year," Lacker told CNBC television, adding that inflation
is a bigger risk to the economy this year than it was in 2010. Lacker
said he had not yet made up his mind on whether he thinks the Fed should
stop short of the full $600 billion of its bond-buying program. Richard Fisher, the president of the Dallas Federal
Reserve, also took a hawkish tone in comments on Friday, warning that
rising inflation around the world might start to push up wages in Europe
and the United States. However, Minneapolis Fed President Narayana
Kocherlakota said that a sufficiently tough central bank can control
inflation even if fiscal policy is so loose that it risks a sovereign
default. The diverging comments highlight increasing
differences between Fed officials on the outlook for the economy and
inflation. Dudley sought to downplay the differences, saying all Fed
officials agreed on policy goals. Dudley, whose recent comments put him on the dovish
end of the Fed's policy spectrum, is influential vice chair of the Fed's
policy-setting committee, as well as holding a permanent voting seat on
the Fed's policy-setting panel. Plosser, Lacker and Kocherlakota have a
vote on policy this year, while Fisher does not. Acknowledging some hopeful signs in the economy,
Dudley said it was important not to be "overly optimistic" about growth.
He cautioned that progress could be slowed by the effects of Japan's
devastating earthquake and tsunami and from high oil prices, which have
been pushed up recently by unrest in the Middle East and North Africa. Figures showing a second straight month of solid
jobs gains in March were "good news," he said. But the Fed would need to see sustained strong
employment growth to be sure that a "virtuous circle" -- in which rising
demand generates more rapid income and employment growth and leads to
more consumer spending -- was firmly established. Dudley said he was "hopeful that jobs growth will
increase more rapidly in the coming months" but even if the economy adds
300,000 jobs per month, there would still likely be considerable slack
in the labor market at the end of 2012.
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MarketView for April 1
MarketView for Friday, April 1