MarketView for February 7

Summary

Stocks fell on Thursday, taking a step back from their recent advance, prompted by comments by the ECB president on the euro and Europe's outlook. At the same time, the euro fell against the dollar and yen, spurring a retreat from risky assets such as stocks, after European Central Bank President Mario Draghi said the exchange rate was important to growth and price stability. Investors took that as a sign the bank is concerned about the euro's advance and its effect on the region's economy.

Growth sectors were among the weakest performers on the S&P 500. Housing stocks also declined. However, despite the day's decline and weakness earlier this week, the stock market has been in an almost uninterrupted up trend for most of the year, with the S&P 500 up 5.8 percent so far for 2013.

Retailers reported strong January sales after offering compelling merchandise that drew in shoppers facing a hit to their take-home pay from higher payroll taxes.

Shares of Apple helped to limit losses on the Nasdaq, the shares ending the day up 3 percent at $468.22. Fund manager David Einhorn's  Greenlight Capital said it has sued Apple, stating that the company needs to do more to unlock value for shareholders.

Though the earnings season is winding down, results continue to boost growth estimates for the fourth quarter. According to Thomson Reuters data through Thursday morning, of 317 companies in the S&P 500 that have reported earnings, 69 percent have exceeded analysts' expectations, above a 62 percent average since 1994 and 65 percent over the past four quarters.

Fourth-quarter earnings for S&P 500 companies rose 5 percent, according to the data, above a 1.9 percent forecast at the start of the earnings season.

Akamai Technologies lost 15.2 percent to $35.26 as the worst percentage performer on the S&P 500 after the company forecast current-quarter revenue below analysts' expectations.

Economic data was mixed. Initial jobless claims dipped last week, with the four-week moving average falling to its lowest level since March 2008, signaling the economy continues to recover slowly.

A separate report said fourth-quarter productivity registered its biggest drop in nearly two years, while unit labor costs jumped 4.5 percent, more than economists expected.

Approximately 6.6 billion shares changed hands on the three major equity exchanges, as compared with the 2012 average daily closing volume of about 6.45 billion shares.

Labor Market Continues to Improve

The number of new claims for jobless benefits fell last week and a trend reading hit a near five-year low, signs a grinding recovery in the labor market remains on track. Other reports on Thursday showed many top retailers had strong sales in January even as customers were hit with higher taxes, while productivity at businesses slumped in the fourth quarter.

Initial claims for state unemployment benefits dropped by 5,000 to a seasonally adjusted 366,000, the Labor Department said. That was enough to pull down a four-week moving average of new claims, a gauge of the trend in layoffs, by 2,250 to 350,500, its lowest since March 2008.

While employers have pulled back on layoffs, they have only added jobs at a lackluster pace. Economists say the tepid labor market recovery means the Federal Reserve is likely to keep buying bonds into next year to keep borrowing costs low.

In a sign of the difficulty many people have in finding a job, the number of people still receiving benefits under regular state programs after an initial week of aid increased 8,000 to 3.22 million in the week ended January 26.

The data came as little surprise to markets, which focused on events in Europe. Stock prices and yields on Treasuries fell on worries about the economic outlook in Europe, which were fanned by Draghi's comments that policymakers are monitoring the economic impact of a stronger euro.

The domestic economy has shown signs of underlying strength despite a surprise contraction in the fourth quarter. Consumer spending has looked more robust, and many retailers on Thursday reported strong sales in January.

Overall, same-store sales rose 5 percent in January across 20 retailers, according to Thomson Reuters I/B/E/S, pointing to some resilience in spending despite a hike in payroll taxes that hit most Americans last month.

The Commerce Department's more comprehensive report on January retail sales, due on February 13, is expected to show sales edged higher from December when adjusted for seasonal swings.

Consumers are borrowing rather readily, a sign of confidence in the recovery. Consumer credit increased by $14.59 billion in December, the Federal Reserve said in a report.

The gains were driven by the biggest increase in non-revolving credit, which includes student and auto loans, since November 2001. That was shortly after the September 11, 2001 attacks when automakers were offering zero-percent financing and other incentives to lure consumers back to their showrooms.

Separately, the Labor Department said nonfarm productivity fell in the fourth quarter by the most in nearly two years as output increased only marginally despite steady gains in employment. Productivity declined at a 2 percent annual rate, the sharpest drop since the first quarter of 2011. However, productivity is expected to rebound in the current period because analysts believe weak output during the fourth quarter was partially due to temporary factors like an unusually sharp decline in government spending on the military.

The drop in productivity combined with a big gain in hourly compensation to drive unit labor costs, a gauge of the labor-related cost for any given unit of output, up at a sharp 4.5 percent rate in the fourth quarter. Hourly compensation, which includes wages as well as employer contributions to social insurance and private benefit plans like health care, rose at a 2.4 percent rate.

The compensation-related jump in unit labor costs could be a harbinger of growing price or profit pressures, but analysts said they did not expect it to be maintained. Moreover, the report also showed gains in compensation are not keeping up with rising prices, a bad signal for the ability of households to boost consumption.

Adjusted for inflation, hourly compensation rose only 0.3 percent in the fourth quarter and was down 0.4 percent over the full year, the second straight annual decline.