MarketView for April 4

Summary

The major equity indexes moved higher late in the trading day on Thursday after the Bank of Japan announced aggressive stimulus plan to jumpstart its economy. At the same time some weak jobs data held the indexes back somewhat. The BOJ's plan came along with supportive comments from European and Federal Reserve officials, suggesting central bank policies will keep underpinning the world's economy to the benefit of stocks.

The Fed's stimulus efforts along with signs of improvement in the U.S. economy have helped stocks rally since the start of the year. While the S&P 500 broke above its closing record last week, it has yet to surpass its intraday record high of 1,576.09.

Jobless claims rose to 385,000 in the latest week, confounding expectations that claims would drop by 7,000 to 350,000. Meanwhile, Friday's Labor Department report is expected to show 200,000 jobs were created last month. The unexpected rise in weekly jobless claims to a four-month high raised question about the labor market's recovery a day ahead of the government's widely watched monthly jobs report. A report from ADP on Wednesday appeared to indicate that companies hired at the slowest pace in five months in March.

Among the latest comments from Fed officials, Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, suggested the Fed's program to stimulate the economy would continue for at least a few more months. At the same time, Charles Evans, head of the Chicago Fed and an influential dove at the central bank, said rates could stay at rock bottom until the unemployment rate falls to 5.5 percent from the current 7.7 percent. And overseas, European Central Bank President Mario Draghi opened the door to an interest rate cut as soon as next month.

Best Buy was the S&P's top percentage gainer, jumping 16.1 percent to $25.13 after saying it would offer a 30 percent discount on its current stock of Apple iPad 3 tablets in the United States.

Shares of Facebook rose 3.1 percent to $27.07 in heavy volume after it unveiled a new family of phone applications that will let users display mobile versions of their newsfeed and messages on the home screen of a wide range of devices based on Google's Android system.

Earnings forecasts have declined heading into first-quarter reports, which are due to begin next week with Alcoa. S&P 500 earnings are expected to have risen just 1.6 percent from a year ago, according to Thomson Reuters data, down from a January 1 growth forecast of 4.3 percent.

Approximately 6 billion shares changed hands on the three major equity exchanges, as compared to the 2012 average daily closing volume of about 6.45 billion shares.

Unemployment Insurance Claims at 4-Month High

The number of Americans filing new claims for unemployment benefits hit a four-month high last week; the latest suggestion the labor market recovery lost some momentum in March. According to Thursday’s report from the Labor Department, initial claims for state unemployment benefits increased 28,000 to a seasonally adjusted 385,000, the highest level since last November. The four-week moving average for new claims, a better measure of labor market trends, rose by 11,250 claims to 354,250 claims. A Labor Department analyst said claims for California, the most populous U.S. state, had been estimated.

The claims report also showed the number of people still receiving benefits under regular state programs after an initial week of aid dropped 8,000 to 3.06 million in the week ended March 23.

The labor market is a key factor in the Federal Reserve's stated monetary policy. This month the central bank said it would maintain its monthly $85 billion purchases of mortgage and Treasury bonds to keep rates low and foster faster job growth.

On Thursday, Federal Reserve Bank of Chicago President Charles Evans said the Fed could keep interest rates near zero to drive down unemployment as long as inflation remained lower than desired in the future. However, Esther George, his counterpart at the Kansas City Fed, said the current policies were "overly accommodative."

The ultra-easy policy stance should offset some of the drag on the economy from belt-tightening in Washington. Data this week suggested the government budget cuts took some edge off the economy as the first quarter ended.

Factory activity grew at its slowest pace in three months in March. Growth in the vast services sector was the weakest in seven months. And first-quarter GDP growth estimates currently range as high as a 3.8 percent annual rate. The economy grew at a 0.4 percent pace in the last three months of 2012.

Despite signs of weakening in labor market conditions, the pace of layoffs remains contained. Planned layoffs at U.S. firms fell 11 percent in March, consultants Challenger, Gray & Christmas said in a separate report.

Evans Moves to Keeping Interest Rates at Zero

Charles Evans, head of the Chicago Fed and an influential dove at the central bank has suggested that interest rates may have to remain near zero until the unemployment rate falls as low as 5.5 percent, lower than the 6.5 percent threshold the Fed has stated previously.

Evans said on Thursday that rates could stay at rock bottom until joblessness falls to 5.5 percent from the current lofty 7.7 percent, as long as inflation expectations remain lower than the Fed's 2-percent goal. Yes, that does go beyond the Fed's stated plan for rates, which have remained near zero since late 2008 to help the economy recover from the current recession.

Under the current plan, which Evans had a big hand in crafting, the Fed will keep rates ultra-low until unemployment falls to 6.5 percent, as long as inflation expectations do not rise to 2.5 percent.

Evans's comments also appear to closer align him to Narayana Kocherlakota, president of the Minneapolis Fed, who has pitched a plan to lower the joblessness threshold to 5.5 percent. However, Evans stopped short of calling on the Fed to formally adjust its plan.

Getting to "6.5 percent could be a milepost along the way towards a much lower unemployment rate, perhaps as low as 5.5 percent as President Kocherlakota has mentioned," Evans, a voter on monetary policy this year, told reporters on the sidelines of the University of Dayton's RISE student investment forum.

If unemployment were to fall below 6.5 percent and annual inflation were still about 1.5 percent as it is now, Evans said, "I can't imagine why we would feel the need to start tightening policy, because we would be under-running our 2-percent goal."

This week, Kocherlakota again urged the Fed to lower its threshold for unemployment, arguing such a move would give the economy a bigger boost than the Fed's current promise.

Evans said he is "very sympathetic" to Kocherlakota's ideas, and has a "very complimentary" view of when rates should rise.

Still, Evans and Kocherlakota are on the extreme dovish end of the spectrum of the Fed's 19 policymakers. There are hawkish members who have expressed concerns about the interest-rate pledge the Fed made in December, arguing it could stoke inflation and asset bubbles.

Atlanta Fed President Dennis Lockhart, a centrist who appeared at the same forum here, said he does not see interest rates rising until 2015.

The Fed's official forecast is for 1.7 to 2.0 percent inflation by the end of 2015, with unemployment dropping to between 6.0 and 6.5 percent.