MarketView for April 1

MarketView for Friday, April 1 
 

 

 

MarketView

 

Events defining the day's trading activity on Wall Street

 

Lauren Rudd

 

Friday, April 1, 2011

 

 

 

Dow Jones Industrial Average

12,376.72

p

+56.99

+0.46%

Dow Jones Transportation Average

5,370.47

p

+70.58

+1.33%

Dow Jones Utilities Average

415.80

p

+2.74

+0.66%

NASDAQ Composite

2,789.60

p

+8.53

+0.31%

S&P 500

1,332.41

p

+6.58

+0.50%

 

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.