MarketView for February 05

 

 

 

Summary

 

It was a volatile day on Wall Street to say the least as share prices first plummeted and then recovered with the major equity indexes ending the day slightly higher on Friday, closing out a week that felt increased tension resulting from good and bad news emanating from the labor market data, combined with a growing anxiety over fiscal problems in Europe. Shortly before the closing bell, traders grabbed shares in the technology and materials sectors -- two of the worst performers during the market's latest pullback.

 

Earlier, the major indexes dropped more than 1 percent on the initial interpretation that January's payroll data was another sign of a sluggish job market recovery, combined with concerns over the euro zone's sovereign debt problems. In response, European policy-makers lost little time in trying to reassure the financial markets that the 16-nation currency bloc was stable. At the same time, Portugal backed a law that may push its swollen deficit higher.

 

Government debt prices rose as a result of the latest labor news and the dollar hit an 8-1/2 month high versus the euro, tapping flight-to-quality trades from the troubles in Europe.

The bad news was that employers unexpectedly cut 20,000 jobs in January. On a more positive note, the unemployment rate fell to a five-month low of 9.7 percent, the Labor Department reported.

 

For the week, the Dow Jones industrial average was down 0.6 percent, the S&P 500 fell 0.7 percent and the Nasdaq was down 0.3 percent, marking their fourth consecutive weekly drop.

 

Cisco Systems and Intel ranked among the Dow's top advancers, and helped the Nasdaq erase losses. Cisco rose 2.3 percent to close at $23.70 and Intel gained 2.4 percent to end at $19.47. Materials stocks also rebounded after falling throughout most of the day, with Alcoa Inc up 2.1 percent at $13.18.

 

Friday’s word performers included General Electric, down 1.6 percent at $15.79 and Boeing, down 1.6 percent to close at $58.40.

 

Unemployment at 9.7 Percent – Down from 10 Percent

 

Unemployment rate fell to a five-month low during the month of January and factory payrolls grew for the first time since 2007, setting up the idea that we be seeing a labor market recovery even though the economy lost 20,000 jobs. President Barack Obama cautiously welcomed the figures but said more needed to be done to put people back to work. Obama and his fellow Democrats fear voters could punish them in November congressional elections if headway is not made in tackling unemployment.

 

The decline in payrolls reported by the Labor Department on Friday was far smaller than the 150,000 drop posted in December. November's data from the survey of employers was revised sharply higher to a gain of 64,000, up from 4,000. The jobless rate, based on a separate household survey, fell to 9.7 percent from 10 percent in December. That survey also found employment rising, with the size of the labor force roughly flat. The length of the average workweek hit its highest in a year and overtime paid in manufacturing was the most since September 2008, suggesting growing pressure to add to payrolls.

 

Annual revisions to the payrolls data showed job losses since the recession began were much deeper than originally thought. The economy has lost 8.4 million jobs since the start of the recession in December 2007, compared to 7.2 million before the revisions.

 

In January, the number of 'discouraged job seekers' stood at 1.1 million, up from 734,000 a year ago. Last month, 6.3 million people had been out of work of more than 27 weeks.

 

With anxiety building over the persistent high unemployment rate, Obama has declared that job creation will be his top priority in 2010. Announcing plans on Friday to expand credit for small businesses, Obama said the employment report was cause for hope but not celebration.

 

"Understanding that these numbers will continue to fluctuate for months to come, these are welcome, if modest signs of progress along the road to recovery," Obama said.

 

Financial markets have grown nervous about the prospect of unemployment in the United States remaining high for a long time. The economy resumed growth in the second half of 2009, but a labor market recovery has yet to materialize. Labor market weakness is causing households to remain wary of taking on new debt, with total consumer credit declining by $1.73 billion in December, a Federal Reserve report showed.

 

A survey of banks that do business with the Fed predicted the central bank will begin to start raising interest rates in the fourth quarter of this year as the labor market mends.

 

Meanwhile, payrolls are expected to begin growing in February as the government steps up temporary hiring for the 2010 census. Last month, the services sector added 40,000 jobs after shedding 96,000 positions in December. The figure included a rise in federal government employment, partly a result of early hiring for the census.

 

In another positive trend, temporary help employment rose again last month, while manufacturing payrolls increased 11,000, the first gain since January 2007. Manufacturing employment had dropped 23,000 in December. However, the construction industry continued to struggle, losing 75,000 jobs, likely because of unusually cold weather. Construction payrolls fell 32,000 in December.

 

The average workweek unexpectedly edged up to 33.3 hours, the highest in a year, from 33.2 in December, while manufacturing overtime rose to 3.5 hours, the highest since September 2008.

 

Consumer Credit Falls Again

 

Consumer credit fell by $1.73 billion in December, the eleventh straight monthly decline, a report from the Federal Reserve showed on Friday. December consumer credit outstanding fell at a 0.8 percent annual rate to $2.457 trillion, following a sharp downward revision to November's record drop. November credit fell $21.83 billion, or a 10.6 percent rate, compared to the record $17.5 billion first reported.

 

The current string of 11 monthly declines in consumer credit is the longest since the Fed began keeping records in 1943 and the 10.6 percent drop in November is the sharpest decline in percentage terms since June 1975. Total credit has fallen in 15 of the last 17 months and had not fallen in a decade before the current string of declines began in August 2008.

 

Revolving credit, which includes credit cards, dropped $8.55 billion in December after falling a revised $13.79 billion in November. That's the 15th straight drop in revolving credit, the longest string of declines since those records began in 1968.

 

Non-revolving credit, which takes in loans for new cars and mobile homes, rose $6.82 billion in December after falling by $8.04 billion in November.

 

There are some categories of credit use, such as home-equity loans, that are not measured by the Fed's monthly consumer credit report.

 

It Is Not Looking Good For Financial Reform

 

Bipartisan efforts on Capitol Hill to increase regulation of the financial markets ground to a halt in the Senate on Friday, casting a dark shadow on one of the top domestic policy priorities of the Obama administration. After months of public debate and closed-door talks, Senate Banking Committee Chairman Christopher Dodd, the Democrats' chief negotiator, said he has been unable to agree on a bill with his Republican counterpart, Senator Richard Shelby.

 

"We have reached an impasse," Dodd said, adding he is drafting new legislation to be considered later this month. "While I still hope that we will ultimately have a consensus package, it is time to move the process forward."

 

The Senate impasse comes as finance ministers for the Group of Seven rich nations meet this weekend in Canada, with financial regulation high on their agenda. The main obstacle to Senate agreement is Obama's proposal to create a Consumer Financial Protection Agency (CFPA) to protect Americans from abusive mortgages and credit cards. Banks oppose the agency as a threat to their profitability.

 

Republicans say the CFPA would be a costly new layer of government bureaucracy while Democrats say it is needed because existing agencies failed to enforce consumer protection laws already on the books, contributing to the financial crisis.

 

Democratic Representative Barney Frank said that by declaring an impasse, Dodd will speed movement toward a vote and force the hand of Republicans who have opposed reforms for more than a year, in line with bank lobbyists.

 

"Chris is forcing the pace here. He gave them plenty of time, but at some point, people are going to have to vote on this. It's going to be a test of the Republicans," said Frank, the chairman of the House of Representatives Financial Services Committee, in an interview with Reuters on Friday.

 

In addition to the CFPA, Democrats want a new regulator to police "systemic risk" in the financial system, new procedures for dealing with large financial firms in distress and new protections for investors and financial consumers.

 

Shelby said in a statement he was willing to work with Democrats, but added that some topics were non-negotiable, such as the CFPA, which would strip existing bank supervisory agencies of their consumer protection responsibilities.

 

"I fully support enhancing both consumer protection and safety and soundness regulation," he said. "I will not support a bill that enhances one at the expense of the other, however."

 

Dodd said that some bipartisan agreements are close to being reached and he hopes to include them in a new proposal. Republican Senator Bob Corker said he was "disappointed" with the Dodd-Shelby impasse, but added he and Democratic Senator Mark Warner were close to a bipartisan approach to systemic risk regulation and dealing with big troubled firms.

 

Republican Senator Judd Gregg said he remains committed to working with Dodd, Shelby and Senator Jack Reed with whom he has had "constructive dialogue" on derivatives market reform.

 

Frank said he is still confident there will be a House-Senate conference before summer to agree on a single bill to send to Obama. "What Senator Dodd is doing is perfectly reasonable on all fronts," Frank said.

 

The House in December approved a bill calling for the biggest financial regulatory changes since the Great Depression. Lobbyists for banks and Wall Street firms fought the bill for months and all House Republicans voted against it.

 

The Senate has been debating the matter for more than a year. While Republicans have conceded that regulatory changes are needed, they have not offered a comprehensive strategy of their own and have consistently opposed Democratic measures.

 

As the debate has worn on, public anger over bailouts of financial firms, and big executive bonuses, has grown. As November elections near, Democrats are seeking to portray Republicans as obstacles to reform and allies of Wall Street.