MarketView for April 7

Summary 

It was another down day for the Street’s major equity indexes, as Wall Street fell on on Thursday after a major aftershock in Japan reignited fears about its nuclear power crisis, but solid economic reports from the Labor Department resulted in minimal losses on the Street. A rise in retail stocks after better-than-expected March chain-store sales also helped to control broader market declines as the data added to evidence of a sustained economic recovery. Approximately 7.06 billion shares changed hands on the three major exchanges, as compared to last year's estimated daily average of 8.47 billion shares.

The CBOE Volatility Index VIX, Wall Street's so-called fear gauge, closed up 1.2 percent at 17.11 after rising more than 2 percent earlier. Share prices were mostly flat in early trading. The S&P 500 index encountered strong technical resistance that stymied gains after the larger-than-expected drop in weekly initial jobless claims and data on the surprisingly strong March retail sales.

Among retailers, Costco Wholesale exceeded expectations, and its shares ended the day up 3.8 percent to close at $77.82. Macy's ended the day up 0.8 percent to $25.40, while Target Corp fell 2.6 percent to $49.62.

Bed Bath and Beyond closed up 10.5 percent at $54.55, a day after it forecast full-year earnings growth that exceeded Street expectations. U.S.-listed shares of rare-earth stocks gained sharply, including Canada's Rare Element Resources, up 16.4 percent at close at $15.30. Shares of Avalon Rare Metals also closed up, ending the day with a 9.6 percent gain to close at $9.52.

Disagreement Continues at Fed

Two top Federal Reserve officials offered conflicting views on interest rates on Thursday; one arguing they should stay low for a long time and another saying a rate hike could be in the cards this year.

Richmond Federal Reserve Bank President Jeffrey Lacker, an inflation hawk, said inflation risks have risen in the last six months, potentially warranting some form of monetary tightening before the end of the year.

"Rate hikes by year end are certainly a possible outcome given what we see with momentum in economic growth and given how inflation risks seem to have evolved," Lacker, said.

In contrast, Cleveland Fed Bank President Sandra Pianalto said the Fed should keep its federal funds target rate very low for a long while to come, and complete its $600 billion bond purchase program as scheduled. Pianalto said she saw no evidence that sharp rises in food and energy prices would lead to lasting inflation, though the Fed is watching for any signs of an unanticipated spillover.

"My outlook for economic growth and inflation assumes that we complete our asset purchase program as originally scheduled, and keep our federal funds rate target at exceptionally low levels for an extended period," Pianalto said.

The Fed's bond purchases are scheduled to end in June.

"I don't expect recent rises in food and energy prices to cause a broad spillover into a wide array of consumer prices, or in other words a lasting increase in inflation," said Pianalto. She said underlying inflation would rise only gradually toward 2 percent by 2013.

Lacker was not as sanguine. He said the Fed should consider selling some of its mortgage bond holdings potentially early in its exit strategy. "The housing finance market can easily withstand a substantial liquidation of our MBS holdings," Lacker said. "I don't think we should fear tanking the housing market

In response to the crisis and the ensuing recession, the Fed has bought well over $2 trillion in mortgage and government bonds. Lacker favors a return to holding only Treasuries, since he worries that the housing bond buys blurred the line between monetary and fiscal policy.

Economic Data Continues to Improve

New claims for jobless benefits fell last week and retailers chalked up better than expected sales in March, signs that high fuel prices have not had a tremendously adverse effect. Initial claims for state unemployment insurance fell by 10,000 claims to 382,000 claims for the period, the Labor Department said on Thursday, remaining well below the 400,000 level associated with steady jobs growth. Other data indicated that consumers shrugged off higher gasoline prices last month to increase sales at many retailers as improving labor market conditions encouraged discretionary spending.

With the latest decline, initial claims for jobless benefits are now below the 400,000 level, which is generally associated with steady job growth, for four weeks in a row. The four-week average has held below that mark for the sixth straight week. Economists say both measures need to drop to about 300,000 to signal a strong labor market recovery.

Signs of improvement in the jobs market were also evident in the number of people still receiving benefits under regular state programs after an initial week of aid, which fell in the week ended March 26 to the lowest level since October 2008. However, long-term unemployment remains a major problem. A total of 8.52 million people were claiming unemployment benefits under all programs in the week ended March 19, the latest week for which data is available.

The claims data underscored the strengthening labor market tenor and came on the heels of a report last week showing employers added 216,000 jobs in March, with the unemployment rate falling to a two-year low of 8.8 percent.

Last week, the four-week average of unemployment claims, a better measure of underlying trends, fell 5,750 to 389,500. With the labor market conditions firming, consumers are feeling a little more confident to loosen their purse strings. Sales at stores open at least a year rose 1.7 percent in a tally of 25 retailers, topping expectations of a 0.7 percent decline, according to Thomson Reuters.

The stronger-than-expected same-store sales bode well for the government's overall retail sales report for March, which is scheduled for release next week and is expected to be heavily influenced by the high gasoline prices. They offered some relief after other data on consumer spending suggested a moderation in the pace of economic growth early in the year after a fairly brisk pace in the fourth quarter.