MarketView for December 4

Summary

The Dow Jones Industrial Average and the S&P 500 indexes finished lower for the fourth consecutive session on Wednesday after investors found few reasons to make big moves, with uncertainty remaining over when the Federal Reserve will start to slow its stimulus. Yet, the major equity indexes did edge closer to break-even levels in the last hour of trading. Still, the losses were broad, with eight of the 10 S&P 500 sector indexes ending lower for the day on concerns that the market's recent rally to record levels was not justified.

Many market participants expect the Fed to announce a cut in its $85 billion in monthly bond purchases in March, but recent economic data increased expectations that the move may come sooner. The Fed has said it would slow its stimulus program when certain economic measures meet its targets, including a decline in the U.S. unemployment rate.

The ADP National Employment Report showed private-sector employers added 215,000 jobs in November, more than expected. This was the latest in a string of reports suggesting that the economy's outlook was brightening.

In the Fed's Beige Book, a collection of narratives from the central bank's business contacts across the nation, the Fed said employers had stepped up hiring in some parts of the country in October and early November, and the economy had expanded at a "modest to moderate pace."

Other signs of strength in the economy were figures showing that the U.S. trade deficit narrowed in October and new home sales recorded their biggest increase in nearly 33-1/2 years in October. The home sales report suggested that the housing market's recovery remains intact despite higher mortgage rates. Shares of KB Home rose 1.1 percent to $17.26.

But the economic picture was muddied after the Institute for Supply Management said its services index fell to 53.9 last month from 55.4 in October. A forecast called for a November reading of 55.0. A figure above 50 signifies expansion.

Domestic crude oil futures prices advanced 1.2 percent, up for a fourth straight day as government data showed an unexpected drop in U.S. stockpiles. Crude is up 5.3 percent over the past four sessions. Shares of Marathon Oil rose 1.4 percent to $36.74, while Hess added 1.3 percent to end the day at $82.21.

Among decliners, shares of Express fell 23 percent to $19 after the company forecast quarterly earnings below Street estimates due to weaker-than-expected Thanksgiving sales. OmniVision Technologies ended the day down 2.9 percent to $15.52 after the chipmaker forecast current-quarter revenue well below analysts' estimates.

After the market closed, Aeropostale fell 3.6 percent to $9.01 following the release of its third-quarter results. The stock ended regular trading at $9.36, down 3.9 percent.

Oculus Innovative Sciences closed up 103.4 percent to $4.74 after the company got the go-ahead from the FDA for its anti-scar gel.

About 6.54 billion shares changed hands on the major equity exchanges, according to BATS exchange data.

Economic Data Continues To Make Gains

Private-sector hiring rose in November at the fastest clip in a year, opening the door wider for the Federal Reserve to start trimming its bond purchases within the next few months. Other data on Wednesday also pointed to a brightening outlook, with the services industry expanding at a decent pace last month and exports hitting a record high in October.

For example, there was also good news on the housing market as new home sales posted their largest increase in nearly 33-1/2 years. Private employers added 215,000 new jobs to their payrolls last month, according to payroll processor ADP. If correct, it would be the largest rise in a year and would exceed Street expectations for a gain of 173,000 jobs. At the same time, the figure for October was revised up to 184,000 from 130,000. The jobs data comes ahead of the government's much more comprehensive employment count for November on Friday.

Note that the ADP data suggested the government report could show a larger gain than the consensus forecast. Their optimism was tempered a bit by a gauge of services industry jobs showing growth dropping to a six-month low for November.

The upbeat tone was also captured by a separate report from the Fed on Wednesday that described the economy as expanding at a "modest to moderate pace" in October and early November.

The signs of economic momentum weighed on U.S. Treasury debt prices as traders speculated the Fed could begin to trim its bond-buying stimulus as soon as its next meeting on December 17-18. U.S. stocks were trading lower, while the dollar reversed gains versus the euro and the yen.

However, my feeling is that the Fed is more likely to wait until after January, or maybe even March, to reduce its current $85 billion a month bond-buying pace.

Separately, the Institute for Supply Management said its services index fell to 53.9 last month from 55.4 in October. A reading above 50 indicates expansion in the sector. November marked the 47th straight month of growth in the services sector. A sub-index of services industry employment fell to its lowest level since May, but also stayed in expansion territory.

A separate report from the Commerce Department showed the nation's trade deficit shrank 5.4 percent to $40.6 billion in October, suggesting trade will likely contribute to growth this quarter. Exports, which had declined for three straight months, hit an all-time high, pointing to a pick-up in global demand. Imports also rose, reaching a 1-1/2 year high, as demand for consumer goods and industrial supplies and materials increased.

In October, petroleum exports were the highest on record. Exports to China, Canada and Mexico reached all-time highs in October, while exports to the 27-nation European Union also gained.

In another report, the Commerce Department said new home sales rose 25.4 percent to a seasonally adjusted annual rate of 444,000 units in October, more than unwinding September's 6.6 percent drop. That suggested the housing market recovery remains intact despite higher mortgage rates.

Treasury Prices Slump

Treasuries prices slumped on Wednesday as robust data on private-sector jobs and new home sales supported expectations that the Federal Reserve would be encouraged to begin tapering sooner than expected. As a result, the price decline pushed benchmark yields to their highest level since mid-September. Short- and medium-dated yields climbed to their highest levels in about three weeks.

The market stabilized after the Institute for Supply Management's gauge of U.S. services industries fell more than expected in November, suggesting slower growth in that sector and reviving some bids for government bonds. At the same time, most analysts believe the Fed will begin reducing its bond purchases at its March meeting. However there is also a contingency that believes it could happen as early as December or January, if employment data comes in strong.

In that regard, ADP said on Wednesday that companies added 215,000 jobs in November, the largest monthly increase in a year. This compared with an upwardly revised 184,000 increase in October.

Some analysts use the ADP data to adjust their forecasts on the government's payroll reading. The Labor Department will release its November payroll report at 8:30 a.m. EST on Friday.

Employers stepped up hiring in some parts of the country in October and early November as the economy expanded at a "modest to moderate pace," the Federal Reserve said on Wednesday. The Fed's Beige Book report, a collection of anecdotes from the central bank's business contacts across the nation, could bolster the view that the robust growth in payrolls in October carried over into November.

Other data supporting a Fed withdrawal of stimulus by early 2014 included a contraction in the trade gap in October, stemming from record exports, and a 25.4 percent increase in new home sales in October, making it the largest monthly gain since May 1980.

On the open market, benchmark 10-year notes last traded 15/32 lower in price to yield 2.842 percent, up from 2.775 percent late on Tuesday. The 10-year yield touched 2.852 percent, the highest since mid-September.

Thirty-year bonds shed more than 1 point in price to yield 3.904 percent, up from 3.836 percent on Tuesday. The yield curve, as measured by the yield difference between two-year and 10-year Treasuries, grew to 2.55 percent.

Another month of solid job gains would support ideas that the Fed will soon trim its third round of quantitative easing, known as QE3, which began a year ago and involved $85 billion of monthly purchases of Treasuries and mortgage-backed securities.

Prices on agency mortgage-backed securities fell, too, on worries about the Fed tapering its bond purchases. The 30-year 3.5-percent coupon MBS backed by Fannie Mae fell 12/32 in price to yield 3.512 percent, up 5 basis points from Tuesday.

On Wednesday, the U.S. central bank bought $3.18 billion in notes due 2022 to 2023, part of its QE3 plan to buy $45 billion of Treasuries in December.