MarketView for December 5

Summary

An afternoon rally on Wednesday after President Barack Obama said a deal to avert the looming fiscal cliff was possible within a week, sent both the Dow Jones Industrial Average and the S&P 500 indexes into positive territory for the day, although the Nasdaq closed in the red due primarily to a decline in Apple’s shares. Apple was the largest drag on the Nasdaq, giving up 6.4 percent to $538.79. Among the reasons circulating on the Street was an increasingly competitive environment in the tablet market, which in turn made for the stock's worst day in almost four years and constrained Wall Street's gains.

Investors continued to keenly monitor any progress in talks to avoid the so-called fiscal cliff of year-end tax hikes and spending cuts. Obama said an agreement could be reached in a week if Republicans compromise on taxes. Both Republicans and Democrats dug in on the talks, urging quick action but still offering no compromises.

Economists say the $600 billion in tax hikes and spending reductions that will start to go into effect at the beginning of next year could send the economy back into recession if politicians don't come to an agreement to avoid it.

Meanwhile, the euro fell after hitting a seven-week high against the dollar, stung by a disappointing Spanish bond sale and weak euro zone economic data. The euro was down at $1.31. Investors also held off taking aggressive bets ahead of the European Central Bank's policy meeting on Thursday, which will be watched for any signs on next year's policy path.

Bond markets also reacted poorly to the auction, with Spanish 10-year yields rising to 5.41 percent after demand for the sale was below expectations. It seems that euro zone experts still expect Madrid to request a sovereign bailout that would pave the way for the ECB to buy its debt However; doubts have started to creep in again following a drop in tensions and yields in recent weeks.

A mixed batch of business and retail data showed euro zone shoppers cut back on spending by the biggest margin in six months in October, while purchasing manager figures pointed to another quarter of recession.

ADP reported that private-sector employers added 118,000 jobs in November, fewer than expected as Sandy took a toll on hiring, though activity in the service sector continued to expand.

Wednesday's other main economic event in Europe came in Britain, where finance minister George Osborne warned that growth will be weaker than expected and that he will have to break a key debt promise. Britain's economy was now forecast to grow by only 1.2 percent in 2013, down from the 2 percent rate predicted in March.

ADP Number a Bit Light

ADP reported Wednesday morning that its research indicated that the private sector created 118,000 jobs in November, primarily thanks to service-related jobs, a number that missed expectations ahead of Friday's closely watched government report. The Street had expected a number closer to 125,000 total private jobs created as the effects linger from Sandy and anxiety over the "fiscal cliff" negotiations in Washington.

ADP said the service sector created 114,000 new positions, while goods-producing businesses accounted for the balance of 4,000 jobs. Gains of 23,000 construction jobs offset a loss of 16,000 in manufacturing.

The report is often used as a precursor to the monthly nonfarms payroll report, which the government will release Friday. The economy is expected to have created 80,000 new jobs in November, with the unemployment rate likely to hold steady at 7.9 percent.

While the report can change economists' views, the ADP and government numbers often show wide differences.

As a result, ADP partnered last month with Moody's Analytics in an effort to provide a more accurate number.

For October, ADP reported 157,000 new jobs - revised lower by 1,000 - while the government showed a total of 184,000 new payroll positions.

The bulk of the November job creation also came from large businesses, with 66,000 new positions, while medium-sized firms with 50 to 499 employees created 33,000 and small businesses added 19,000.

This is not a bad report, keeping in mind that the storm took out roughly 86K jobs from the tally. What this means that pace of job creation in the economy has not materially changed from what we have been seeing in recent months. The concern has been that the recent downtrend in corporate capital spending will start showing up in reduced hiring as well. But this report doesn’t show much evidence of that.

The expectation for Friday's BLS report ahead of this morning's ADP report was for headline gains of around 80K. It is unlikely that we will see any material revisions to those estimates.

The key takeaway from this ADP report coupled with what we have been seeing in recent months is that the labor market is modestly improving at a pace somewhere in the 150K monthly range. If we don’t see any material deterioration in this trend despite the ‘Fiscal Cliff’-related uncertainties, then I will be counting that as a positive for the economy.

Service Sector Sees Growth

The rate of growth within the services sector increased slightly in November as a rise in new orders and business activity helped offset a fall in employment and prices, according to an industry report released on Wednesday.

According to a report by the Institute for Supply Management said its services index rose to 54.7 last month from 54.2 the month before. A reading above 50 indicates expansion in the sector.

The survey's business activity index jumped to 61.2 from 55.4 and was at its highest since February. The new orders index also rose, hitting 58.1 after October's 54.8, to its highest since March. However, the employment and prices paid indexes both fell to their lowest since July. Employment fell to 50.3 from 54.9, while prices paid dropped to 57.0 from 65.6.

Productivity Continues to Rise

The Labor Department reported on Wednesday morning that nonfarm productivity increased at a much faster clip than initially thought, chalking up an annual rate of increase of 2.9 percent, the fastest since the third quarter of 2010. The third quarter saw businesses hold the line on hiring even as output surged, with unit labor costs falling at their fastest pace in almost a year.

The Labor Department had previously estimated that productivity, which measures hourly output per worker, rose at a 1.9 percent pace in the third quarter. In the second quarter, productivity had increased at a 1.9 percent rate.

The upward revision to productivity growth reflected an upward adjustment to the estimate for third-quarter economic growth to a 2.7 percent pace from 2.0 percent. However, most of the pick-up in GDP growth was because of a build-up in inventories as consumer spending slackened.

Businesses emerged from the 2007-09 recession lean and are showing little urgency to ramp up hiring, relying on their existing workers to meet production and keeping a tight hand on costs such as wages.

Unit labor costs -- a gauge of the labor-related cost for any given unit of output -- fell at 1.9 percent rate in the third quarter, far more than the 0.1 percent drop previously reported.

They fell for a second straight quarter and were up only 0.1 percent from a year-ago, underscoring the lack of wage-related inflation pressures in the economy and helping to keep the door open to further monetary easing by the Federal Reserve to stimulate the economy.

Worker hours rose at a 1.3 percent rate in the third quarter, while nonfarm output surged at a 4.2 percent pace -- the fastest since the fourth quarter of 2011. Output had previously been reported to have increased at a 3.2 percent pace.