MarketView for April 8

 

 

Summary

 

The major equity rose on Tuesday, snapping a three-day losing streak as investors bought beaten-down social media and Internet shares.

 

The day's biggest gainers included Amazon.com, up 2.9 percent at $327.07; Yahoo, up 2.3 percent at $33.83; and LinkedIn, up 5.9 percent at $169.10. The Global X social media index rose 2.4 percent to close at 18.50.

 

However, the gains in the blue-chip Dow Jones industrial average were capped by a decline in bank stocks. Goldman Sachs fell 1.3 percent to end the day at $156.56. JPMorgan Chase fell 0.3 percent to close at $58.85.

 

Alcoa kicked off the earnings season after the bell on Tuesday, reporting a first-quarter loss due to a restructuring charge. Yet, the shares were up more than 2 percent in extended-hours trading.

 

Bed, Bath & Beyond is scheduled to report earnings on Wednesday, while JPMorgan Chase and Wells Fargo report on Friday.

 

S&P 500 companies' first-quarter earnings are projected to have increased just 1 percent from a year ago, according to the data from Thomson Reuters. The forecast is down sharply from the start of the year, when profit growth was estimated at 6.5 percent.

 

Companies across America are blaming the brutal winter for weak first-quarter results, but investors are expecting a quick rebound in the second quarter.

 

Financial stocks were in the spotlight as regulators finalized the rule to limit banks' reliance on debt. Under the rule, the eight biggest U.S. banks must raise a total of about $68 billion in capital by 2018 to comply with a new rule designed to prevent another financial crisis.

 

The rules would apply to JPMorgan Chase, Citigroup, Bank of America, Wells Fargo, Goldman Sachs, Morgan Stanley, Bank of New York Mellon and State Street.

 

Biotech stocks, which had been punished in the recent selloff, seesawed between gains and losses on Tuesday. The Nasdaq biotechnology index .NBI fell 0.4 percent. Gilead Sciences was among the S&P 500's largest decliners, down 3.1 percent at $70.01.

 

Tuesday's advance followed the S&P 500's largest three-day retreat since late January and the Nasdaq's steepest three-day drop since November 2011. The benchmark S&P 500 index rose above its 50-day moving average around 1,840, a key support level. The index has managed to stay above 1,840 several times over the past month.

 

In contrast to the day's positive trend, shares of Gigamon fell 33.9 percent to close at $17.31. The maker of network traffic management software estimated lower-than-expected first-quarter revenue.

 

Approximately 6.7 billion shares changed hands on the major equity exchanges, slightly below the 6.8 billion share average so far this month, according to data from BATS Global Markets.

 

Fed Should Do More

 

The Federal Reserve should do more to increase both inflation and jobs, a top Fed official said on Tuesday, including possibly pushing its main interest rate even lower or cutting the rate it pays banks on excess reserves kept at the U.S. central bank.

 

"The key is for us to be able to demonstrate in an effective fashion that we are committed to the recovery," Narayana Kocherlakota, president of the Minneapolis Federal Reserve Bank, told reporters after a speech.

 

The Fed has been winding down its massive bond-buying stimulus since early this year, and Kocherlakota said he has no plans to "relitigate" that decision, which puts the Fed on track to ending bond-buying altogether before the end of the year.

 

Instead, he said on Tuesday, the Fed must do better on returning the economy more rapidly to full employment and a healthy 2-percent pace of inflation.

 

The Fed has kept its short-term policy rate between zero and a quarter of a percentage point since December 2008, and Kocherlakota told the Greater Rochester Chamber of Commerce that "we should be thinking about" pushing it even lower.

 

"It's really about demonstrating a commitment to stay with the recovery for as long as it takes to get the economy fully recovered," he said.

 

The idea of lowering the Fed's main policy rate, already near zero, or cutting the rate the Fed pays to banks on reserves they keep locked up at the central bank, is outside the mainstream of current Fed policymaking, which currently is focused on providing guidance about what economic conditions could lead to the Fed raising rates.

 

Kocherlakota, whose lone dissent against the Fed's policy decision last month marks him as the central bank's most dovish member, said that guidance falls short.

 

"We would be better off having more of a collective vision as a committee to what the change in conditions would have to be that would lead us from ending the asset purchase program to raising rates," he said.

 

"Unless we communicate as a group about what those conditions are, then we face this instability that two words in a press conference or two words in a speech or an answer to a Senator can end up moving financial markets participants' vision of what we are trying to do with policy."

 

The Fed last month said it would reduce its monthly bond purchases to $55 billion and would continue to trim the program in measured steps as long as the economy improves as it expects.

 

After the policy-setting meeting, Fed Chair Janet Yellen briefly roiled markets when she suggested the Fed may start raising rates around "six months" after the bond-buying program ends. She also said that the timing of any rate hike depends on economic conditions, but that message was lost in the immediate aftermath of her answer.

 

"Unless we communicate more effectively on a collective basis about how conditions are shaping our policy choices, I think we going to continue to face that kind of instability," Kocherlakota said.

 

In recent weeks several Fed policymakers have given their views as to when rates ought to start rising, although forecasts from all 16 current policymakers show nearly all expect it sometime next year.

 

Kocherlakota on Tuesday refused to be drawn about his personal expectations for when rates should rise.

 

He reiterated his expectation that the U.S. economy will likely grow around 3 percent this year and that unemployment will fall to the "low sixes" by the end of this year, from 6.7 percent now.

 

"It's a question of the speed of the recovery, not about whether we are seeing a recovery," he said.

 

Inflation, which is running near 1 percent, is "too low" and does not look likely to rise back to the Fed's 2 percent goal for another four years, Kocherlakota said.

 

"Low inflation in the United States tells us that resources are being wasted," he said, including the productive potential of Americans who cannot get jobs because demand for goods and services are so low.

 

And while unemployment has fallen from the recession-era high of 10 percent, "the U.S. labor market is far from healthy," he said. Longer term, he said, unemployment should fall to just over 5 percent.

 

Kocherlakota's view that the Fed should do more is no secret: The Fed, in his view, should have promised to keep rates near zero until U.S. unemployment falls below 5.5 percent, as long as inflation and financial stability risks are contained.

 

Instead, the Fed last month dropped the idea of tying low rates to any specific unemployment figure and said it would factor in a wide range of economic measures as it judged the correct timing for raising rates.

 

Kocherlakota said that the Fed could reword its policy statement show "a stronger commitment to the recovery in terms of being willing to stay accommodative for as long as it takes to see the recovery to completion."