MarketView for Febuary 5

 

 

Summary

 

It was a valiant effort but the major equity indexes were still unable to make it into positive territory by the closing bell on Wednesday as technical support offset the latest batch of mixed data, which in turn failed to lift sentiment after a string of soft economic indicators earlier in the week.

 

In a volatile trading session, the benchmark Standard & Poor's 500 Index hit a session low of 1,737, marking its lowest level since October 18, before rebounding to briefly climb into positive territory with a session high of 1,755.

 

Economic data is being scrutinized after a weak reading in the factory sector on Monday that sent the financial markets into a tailspin and triggered a global equity selloff. Wednesday's data left investors with little clarity about the economic impact from the harsh weather this winter.

 

Growth picked up in the services sector during January, with steady strength in private-sector hiring suggesting the winter weather that socked the country over the last several weeks had a limited effect on the economy.

 

As a result, there is some concern building over the nonfarm payrolls report that comes out on Friday. Last month's surprisingly low jobs number was discounted by many as an outlier negatively affected by the severe weather. However, other data has been just as uninspiring and there is concern that another weak report could be an indication of a greater macroeconomic problem.

 

After the closing bell, Disney reported higher earnings for the quarter sending its shares up to $72.99 in extended-hours trading, a 1.7 percent increase over its close at $71.76.

 

Twitter fell 11.1 percent to $58.64 in extended-hours trading after the social media company reported its slowest pace of user growth during the fourth quarter, dashing hopes that it can sustain its torrid pace of expansion.

 

In another substantial move after the close, Green Mountain Coffee Roasters was up nearly 40 percent to $112.25 after Coca-Cola acquired a 10 percent stake in the manufacturer of the Keurig single-cup brewer for $1.25 billion as part of a 10-year partnership agreement. In contrast, shares of SodaStream fell 8.9 percent to $32.60 after the bell.

 

Meanwhile, concerns over the lack of growth in China and the outlook for some emerging market economies continue unabated. A recent rout in emerging markets' currencies spurred some central banks to act, pressuring bond and stock holdings and luring investors into assets perceived as relatively safe, like the yen, Treasuries and German government debt.

 

Charles Plosser, the president of the Federal Reserve Bank of Philadelphia and a hawkish policymaker, said the central bank should wind down its bond purchases faster than planned and end the stimulus program before mid-year.

 

Of the 298 companies in the S&P 500 that have reported earnings through Wednesday morning, 69.5 percent have exceeded the Street's expectations, a number that was above the 63 percent rate since 1994 and the 67 percent rate for the past four quarters.

 

Gilead Sciences fell 4.7 percent to close at $78.15, a day after the company reported quarterly results. Shares of Cognizant Technology Solutions fell 4.3 percent to $92.85. The company forecast slower-than-expected revenue growth.

 

Tableau Software rose 12.8 percent to end the day at $89.61 after the data analysis software maker forecast better-than-expected revenue for this quarter and results handily beat Street consensus.

 

CVS Caremark indicated that it would stop selling tobacco products at its 7,600 stores by October, becoming the first drugstore chain to take cigarettes off the shelf. Its shares declined 1 percent to close at $65.44.

 

Volume was modest, with about 6.61 billion shares changing hands on the three major equity exchanges, a number that was slightly below the 6.94 billion share average in January, according to data from BATS Global Markets.

 

A Difference and Yet the Same Philosophy at the Fed

 

Philadelphia Fed President Charles Plosser's criticism of QE3 program is unlikely to sway new Chair Janet Yellen and the majority of Fed policymakers, whose position was reinforced on Wednesday by Dennis Lockhart of the Atlanta Fed. While Lockhart, a centrist, said in Birmingham he was comfortable with the current pace of trimming accommodation, Plosser's speech suggests he could dissent if the Fed continues trimming the purchases by only $10-billion monthly increments at future meetings, as most economists expect.

 

The Fed is now buying $65 billion per-month in Treasuries and mortgage bonds to depress borrowing costs in the U.S. economy, which was slow to recover from the 2007-2009 recession but strengthened toward the end of last year. It trimmed the so-called quantitative easing program by $10 billion in each of the last two months and is expected to continue doing so until it stops the stimulus altogether around the autumn.

 

However, Plosser, who backed last week's cut to the program, warned of looming communications problems if the central bank keeps buying assets while, as he expects, the rate of unemployment falls below 6.5 percent sometime in the first half of 2014, from the current 6.7 percent.

 

A voter on monetary policy this year, he argued that labor market conditions are "improving rapidly" and inflation, while low at just over 1 percent, "has stabilized" and is expected to strengthen.

 

"The longer we continue purchases in such an environment, the more likely we will fall behind the curve in reducing the extraordinary degree of monetary policy accommodation," Plosser said. "With the economy awash in reserves, the costs of such a misfire could be considerably higher than usual, fomenting higher inflation and perhaps financial instability," he said.

 

Beyond the asset purchases, the Fed has promised to keep interest rates near zero until well past the time unemployment falls below a 6.5-percent threshold, especially if inflation remains low.

 

Though the Fed has stressed that the two easy-money policies - bond-buying and low rates - are separate, Plosser said "communications problems" loom if the economy continues to gather strength, as he expects. "My preference is to scale back our purchase program at a faster pace to reflect the strengthening economy," he said. "I would like to see purchases concluded before the unemployment rate reaches the threshold, which is likely during the first half of the year."

 

While fellow hawk Richard Fisher, head of the Dallas Fed, has backed $20-billion cuts to the purchases, polls of economists show near unanimous expectation that the central bank will stick to $10-billion reductions at each meeting until the purchases end by the autumn. Lockhart doubled down on that message on Wednesday.

 

"Absent a marked adverse change in the outlook for the economy, I think it is reasonable to expect a progression of similar moves, with the asset purchase program completely wound down by the fourth quarter of the year," Fisher said.

 

Lockhart called the $10-billion step-downs in asset purchases the "default mode," although policymakers could adjust the pace if necessary.

 

The Fed wants to be sure the labor market, still plagued by low participation, will not stumble again on the path to recovery from the Great Recession. The jobless rate for January is due from the government on Friday.

 

The Fed's next policy-setting meeting is March 18-19, the second of eight scheduled for this year. But Yellen, who was sworn in as chair on Monday, could clarify her position at congressional testimony on February 11 and 13 next week.

 

And on the other side, Dennis Lockhart, president of the Federal Reserve Bank of Atlanta said on Wednesday that the Fed would likely keep steadily dialing back its asset purchases and wind them down completely by late 2014 but should be patient on raising interest rates.

 

According to Lockhart, the year had begun with some momentum, despite the recent decline on Wall Street, and further reductions in the pace of central bank asset purchases would be appropriate as long as the economy remained on track.

 

"Absent a marked adverse change in the outlook for the economy, I think it is reasonable to expect a progression of similar moves, with the asset purchase program completely wound down by the fourth quarter of the year," he said.

 

However, Lockhart, a centrist at the central bank who does not have a vote on monetary policy this year, urged patience when it came to lifting benchmark interest rates from their current near-zero level.

 

The Fed has said it will keep rates at rock bottom well past the time unemployment falls below 6.5 percent, especially if inflation remains below its 2 percent target. The jobless rate has fallen to 6.7 percent, with a new reading due out on Friday.

 

"We could cross that threshold before long," Lockhart said, adding that this made how long to keep the Fed funds rate at 0-0.25 percent the key policy question. Lockhart said that he personally did not see any change in rates until well into 2015 and thought the Fed should wait for more clarity on the outlook for growth, jobs and inflation.

 

"We policymakers should be patient - not too quick to respond to zigs and zags in the data," he said.

 

"In my view, the Fed should stay the course and let more clarity emerge on the sustainability of the recent pickup in growth, the path of inflation relative to the 2 percent target, and the nature of the employment situation."

 

Lockhart said numbers for the first three months of the year could be "not-so-great," noting that bad weather and an unwinding of the build-up in inventories, which boosted growth in late 2013, could hurt economic output and even jobs. But he said overall, there were signs of rising confidence in the outlook for the economy.

 

"I think the fundamentals have improved, and the economy is likely to continue to perform in a higher gear over the full-year 2014," he said.

 

Lockhart, like other policymakers, said inflation expectations were well-anchored and he expected inflation to gradually accelerate towards the Fed's 2 percent target, hitting that level towards the end of 2015. Yet, with a fair amount of slack still in the economy, he was "monitoring wage and price developments carefully for evidence that inflation will move back toward 2 percent."