MarketView for February 1

Summary

The major equity indexes extended January's rally on Wednesday after upbeat global manufacturing data boosted sentiment, while Greece neared a long-delayed deal with private creditors. The recent run of better-than-expected economic data around the world, though still not suggesting a booming expansion, has helped lift equity markets as investors move away from a worst-case scenario for the global economy.

An index of our domestic manufacturing sector rose in January to its highest level since June according to the Institute for Supply Management, while China's factory sector expanded slightly and confounded expectations for a contraction. Germany recorded its first rise in manufacturing output in four months.

Optimism spurred gains in industrials, financials and basic materials, which rose between 1.1 percent and 1.7 percent. Caterpillar closed up1.3 percent to $110.52 and was the largest gainer among the industrials making up the Dow Jones Industrial Average.

Trading volume was higher than it has been in recent days, with about 7.80 billion changing hands on the three major equity exchanges as compared to the 20-day moving average of 6.97 billion shares. The wider participation comes after four down days when market movements were minimal and volume generally light.

Stocks also gained some momentum after Greek Finance Minister Evangelos Venizelos said talks between Athens and its private creditors were "one formal step away" from a deal needed to avoid a messy default. Such a deal would be a significant step in removing one of the greatest concerns on Wall Street. Both domestic and European banks rallied on the news. Bank of America ended the day up 3.2 percent to close at $7.36 and Citigroup was up 2.9 percent at $31.60.

After the S&P 500 rose 4.4 percent last month, some on the Street expect the benchmark to hit a short-term top. However, at the moment I do not see this happening.

Homebuilder shares advanced after data indicated that construction spending rose sharply in December to its highest level in more than 1-1/2 years. Shares in Pulte Group, the nation’s second largest homebuilder, gained 5.1 percent to close at $7.83.

Amazon.com fell 7.7 percent to close at $179.46 a day after the online retailer warned of a possible first-quarter loss and posted a steep drop in fourth-quarter earnings.

According to Thomson Reuters data, with 228 companies having reported results, 61 percent have exceeded expectations, a number that was below the 70 percent beat rate of recent quarters. However, Whirlpool rose 13.5 percent to close at $61.64 after giving an optimistic full-year outlook.

Treasuries prices fell on Wednesday as European risk assets improved, dampening demand for the safe-haven bonds, and as buying ebbed following a day of large month-end purchases. Depressed Treasury yields, which point to caution on the part of investors, have been a reason for some to distrust a gain in stocks predicated on signs of an improving economy.

Rumors on the Street indicate that Facebook will submit paperwork to regulators for a $5 billion initial public offering and selected Morgan Stanley and four other book runners to handle the IPO. Morgan Stanley shares gained 4 percent to $19.39 as a result.

Manufacturing Gains Ground

Manufacturing growth accelerated in January to its highest level in seven months, though a measure of employment faded and private-sector employers added fewer jobs than expected, according to data released on Wednesday. The Institute for Supply Management (ISM) said its index of national factory activity rose to 54.1, from a revised 53.1 the month before, and was at the highest level since June 2011. A gauge of new orders also gained to 57.6 from 54.8, while the employment index slipped to 54.3 from 54.8. An ISM reading above 50 indicates expansion in the sector.

However, job growth among private employers slowed as companies added 170,000 jobs last month, the ADP National Employment Report showed. It was shy of expectations for a gain of 185,000 jobs. It was also the smallest gain in three months. The more comprehensive government labor market report will be released on Friday.

Prospects for a third round of quantitative easing, known as QE3, from the Fed remain good as long as unemployment stays above 8 percent. The unemployment rate is expected to hold steady at 8.5 percent.

Uncertainty over the outlook for the economic recovery prompted the Fed to signal it will keep interest rates at ultra-low levels for nearly three years. At the same time, Charles Plosser, president of the Philadelphia Federal Reserve Bank, criticized the Fed for that move, saying it undermined confidence and caused confusion.

"Such statements are, in my mind, particularly problematic from a communications perspective," Plosser said. "Monetary policy should be contingent on the economic environment and not on the calendar."

Uncomfortably high unemployment remains one of the challenges for the economy that is still recovering from the financial crisis and collapse of the housing market. As part of a wider set of proposals to energize the anemic housing sector, President Barack Obama on Wednesday called on Congress to approve a $5 billion to $10 billion effort to help homeowners refinance their mortgages.

Housing continues to be held back by an excess amount of available homes, weak prices and tight lending standards. In the latest example of poor housing demand, applications for mortgages slipped last week.

Separate data from the Commerce Department showed construction spending rose in December to its highest level in more than 1-1/2 years, well exceeding expectations. Construction activity likely added to fourth-quarter growth.

Around the world, factory activity also rose in China and Germany during January. Euro zone activity contracted for the sixth month, though the rate improved from December.

ADP revised down December's private payrolls to an increase of 292,000 from the previously reported 325,000. The report is jointly developed with Macroeconomic Advisers LLC.

Although many on the Street often refer to the ADP report to fine-tune their expectations for the payrolls numbers, it is not always accurate in predicting the outcome. The ADP figures have tended recently to overshoot the government report.

The ADP report has come in stronger than the private payrolls component of the nonfarm jobs report for three straight months, averaging a 62,000 overshoot in the fourth quarter of last year. Friday's report is expected to show the economy created 150,000 jobs, and a gain in private payrolls of 170,000, according to Reuters data.

Small and medium-sized companies added the most jobs in January, ADP said, with an increase of 95,000 and 72,000 jobs, respectively.

Separate data showed borrowing by small businesses rose in December to the highest level in more than four years, suggesting underlying strength for an important part of the economy.

In a positive sign for consumer demand, Chrysler Group's January auto sales surged, although sales at General Motors, the largest domestic automaker, lost some ground.