MarketView for December 3

 

 

Summary 

 

The major equity indexes chalked up their best week in a month on Friday, shrugging off tepid jobs growth in a sign that the rally may have further to run. Late in the day, stocks gained after reports that Federal Reserve Chairman Ben Bernanke said in a CBS television interview recorded on November 30 that he does not rule out more than the announced $600 billion in Fed asset purchases. The interview with "60 Minutes" has yet to be televised.

 

The S&P 500 rose 3 percent this week, on signs that the economy is stabilizing as investors take a more optimistic view of Europe's debt crisis. This has helped push the S&P 500 close to a new two-year high. The Nasdaq rose to almost a three-year high, ending the day at its highest level since early January 2008.

 

Despite a modest day for major averages, the Dow Jones Transportation Average touched 52-week highs, a positive sign since it is a market bellwether within the Dow theory.

 

Commodity-related shares benefited from a weaker dollar, which declined after the jobs report. As a result, Alcoa gained 1 percent to close at $14.22. Financials, which had their biggest day in three months on Thursday, extended gains late in Friday's session.

 

According to a report released by the Labor Department prior to the opening bell, employment barely grew in November. Nonfarm payrolls rose by only 39,000new jobs. The unemployment rate unexpectedly rose to a seven-month high of 9.8 percent.

 

The lack of concern over the jobs report was reflected in the CBOE Volatility Index, or VIX, known as Wall Street's "fear gauge," which shed 7.1 percent to 18.01

 

The S&P 500 faced strong technical resistance at about 1,228, near a recent high of more than two years and also the 61.8 percent Fibonacci retracement of the index's slide from October 2007 to March 2009, a key technical indicator. Support for the benchmark kicks in at 1,200, which was recently a stubborn resistance point, and the top end of its recent trading range, and near 1,195, its 10-day moving average.

 

Also helping to curb stocks' decline was the euro's gain on Friday of more than 1 percent against the U.S. dollar to $1.3422. In recent weeks, the euro's moves have been tightly coupled with domestic and global equities.

 

Job Numbers Disappoint

 

Employment barely grew in November and the jobless rate unexpectedly hit a seven-month high, meaning that the Federal Reserve will likely complete its $600 billion plan to shore up the anemic recovery in its entirety.

 

Nonfarm payrolls rose 39,000, with private hiring gaining only 50,000, just a third of what economists had expected, a Labor Department report showed on Friday. The unemployment rate jumped to 9.8 percent from 9.6 percent in October.

 

Payrolls for September and October were revised to show 38,000 more jobs were gained in those months than previously estimated, taking some sting out of the report. One of the big surprises in November was the loss of 28,100 retail jobs despite signs of a busy holiday shopping season. Adding to the mystery, it appears that retailers hired more than 56,000 workers on a seasonally adjusted basis in November, up about 77.5 percent from October.

 

One answer might be that some last-minute hiring by retailers was not been captured in the Labor Department's survey of employers. It was also likely that many of the workers were being hired through staffing agencies, which adds to temporary help employment. Temporary help services employment increased 39,500 last month, building on October's 34,700 gain.

 

The jobless rate jumped partly because the survey of households on which it is based showed discouraged workers rejoined the labor pool to look for jobs. However, that survey also showed a drop in employment.

 

The weak jobs report could unfortunately give fresh impetus to efforts to secure a deal on Bush-era tax cuts that expire at year end. Expiry without offsetting stimulus elsewhere could deal a hard blow to the economy.

 

The report showed employment in November was weak across the board; with government payrolls contracting as local authorities continue to struggle with budget problems. Payrolls in the goods-producing sector fell 15,000 as manufacturing jobs declined for a fourth straight month and construction reversed October's surprise gains.

 

Employment in the private service-providing sector rose 65,000 in November, with the weakness in the retail sector offset by strong hiring by professional and business services, and the gain in temporary employment.

 

Jobs Data Injures Bond Market

 

A worse than expected jobs report sent shorter-dated Treasury prices lower and rates higher on Friday, paring back traders' expectations of faster economic growth in reaction to a recent string of upbeat data. The resilient stock market, uncertainty over the fiscal crisis in Europe and uneasiness over next week's $66 billion of coupon-bearing supply produced another volatile session for bonds in moderately heavy volume.

 

November's surprisingly weak U.S. job growth and a rise in the jobless rate rekindled the view that the Federal Reserve will keep short-term interest rates near zero into 2012 and will complete its $600 billion bond purchase program, dubbed QE2. This view, however, hurt long-dated Treasuries, and again brought to the forefront concerns that the continually easing monetary policy could spark inflation once the economy does begin to accelerate.

 

The benchmark 10-year note fell 6/32 in price, yielding 3.02 percent, up from 2.99 percent late Thursday. The 10-year yield ended near 3.00 percent for a third straight day, a technical signal that it may rise further. Look for possible support in the 3.10 percent short-term.

 

The 30-year bond finished 1 point lower for a 4.32 percent yield, up from 4.26 percent late Thursday. It was the largest three-day price increase in three months, amounting to 21 basis points. There are 100 basis points in a percentage point.

 

Five-year Treasuries were the day's best-performing maturity, rebounding from a beating the previous two sessions. They last traded up 8/32 in price for a yield of 1.62 percent, down 5 basis points from late Thursday.

 

The long-dated sell-off steepened the two-to-30-year part of the yield curve. The yield gap between two-year and 30-year Treasuries grew to 3.83 percentage points from 3.71 points late Thursday and several basis points from its record wide near 3.88 points set on November 15.

 

Prospects of weak demand for next week's 30-year supply, which is seen as the riskiest during this period of super-easy Fed policy, also hammered the long end of the curve. The Treasury will sell $32 billion in new three-year notes on Tuesday; $21 billion of a prior 10-year issue on Wednesday and $13 billion of an older 30-year bond on Thursday.

 

Swap Dealers Facing a New Day

 

The Securities and Exchange Commission unveiled plans on Friday that will determine which companies and funds will be forced to hold more cash to trade in the lucrative over-the-counter derivatives market. The proposals, which will subject Wall Street firms to even more regulatory scrutiny, are designed to mitigate risk to markets and avoid a repeat of what happened when AIG's unsecured derivatives threatened the global financial system.

 

On Friday, the SEC followed the Commodity Futures Trading Commission and began efforts to define who would be classified as a swap dealer and major swaps market participant. Under the regulators' proposal, an entity would be deemed a major swap participant if it held a "substantial position" in any of the major swap categories such as credit derivatives, foreign exchange swaps or interest rate swaps.

 

The SEC also targeted those whose outstanding swaps positions created "substantial counterparty exposure that could have serious adverse effects" on the financial system.

 

A financial entity holding a substantial swaps position that is highly leveraged and not already subject to a federal banking regulator's capital requirements would also fall under that category. SEC Commissioner Troy Paredes said he was concerned that the thresholds to determine a major swap participant were too high.

 

SEC staff estimated that only about 10 entities would have to start going through tests to determine whether they were major security-based swap participants. Those entities would most likely include AIG and hedge funds holding large speculative swap positions.

 

Wall Street firms dominate the derivatives market. JPMorgan Chase, Bank of America, Goldman Sachs, Citigroup and Morgan Stanley together held about $171 trillion in over-the-counter swaps at midyear.

 

Under the Dodd-Frank financial reform legislation, the CFTC and the SEC won power to police the roughly $600 trillion off-exchange derivatives market. But long-standing oversight turf battles between the agriculture and financial committees in Congress prevented the merger of the two market regulators.

 

As a result, the SEC only has authority over the security-based swaps market, which represents 5-10 percent, or $25 trillion-$60 trillion, of the overall swaps market. The CFTC has authority over all other swaps including commodities, foreign exchange and interest rate swaps.

 

The SEC estimated that about 50 entities would be labeled security-based swap dealers and be required to register with the agency. The proposals, other derivatives rules and sweeping requirements under the Dodd-Frank legislation are designed to plug regulatory gaps exposed by the 2007-09 financial crisis.

 

At the same time, the SEC and CFTC are trying ensure that companies, municipalities and others that use swaps to hedge fluctuating commodity prices and other risks will not be labeled as swap dealers or major swap participants. The proposals would exclude those holding a swap position for hedging or mitigating commercial risk.

 

Each Country Has Their Own Set of Problems

 

Disparities in the global economy were evident on Friday with weak jobs data underscoring the economic data within the United States while China and Brazil are trying to slow their rapid economic growth.

 

Within the United States, unemployment rate hit 9.8 percent in November, meaning that the Great Recession battle is far from over. The weak jobs numbers bolstered the case that the Federal Reserve will complete the entire $600 billion in bond purchases it announced last month to spur the recovery.

 

A number of emerging market policymakers have complained that the Fed's easy money policy makes life more difficult for them, as investors search out higher-yielding markets, pushing up asset prices and currencies in the process.

 

Brazil raised bank reserve requirements on Friday, looking to restrict somewhat a credit boom that is fueling inflation as the country's economy expands at its fastest pace in almost three decades. Chinese policymakers announced a change in posture to help keep in check their fast-growing economy.

 

China decided to announce a switch to a "prudent monetary policy" from a moderately loose stance, a change that could pave the way for more interest rate increases and lending controls.

 

However, there is some good news regarding the U.S. economy. A report from the Institute for Supply Management ISM) on Friday indicated that the services sector grew for an 11th straight month in November and a reading of employment among service companies rose to its highest level in more than three years.

 

However, in the euro zone the purchasing managers indexes -- taking in more than 2,000 businesses ranging from banks to hotels -- rose to 55.4 from 53.3 in October, easily above the 50 mark separating growth from contraction.

 

But that strengthening recovery was dominated by France and Germany as debt-laden members showed scant sign of progress. In fact, the data looked grim for two of the countries caught in the middle of the euro zone debt crisis.

 

In Ireland, service sector growth was sluggish. Spain, tipped by a small minority of economists as next in line to follow Ireland for an EU/IMF bailout, saw its service sector contract for the fourth month in a row in November.

 

Better-than-expected euro zone sales figures on Friday, which showed 0.5 percent growth month-on-month in October, were similarly powered by Germany, while the UK services PMI showed a slight slowdown in what has so far been a strong recovery.