MarketView for Febuary 11

 

 

Summary

 

The major equity indexes chalked up gains for a fourth straight session on Tuesday as Congress agreed to advance legislation extending borrowing authority and the Federal Reserve's new chief held off from making any changes to its schedule for trimming stimulus. The gains were broad, with the S&P 500 ended just 1.6 percent away from its record closing high.

 

Republican leaders in the U.S. House of Representatives caved in to demands by President Barack Obama and agreed to advance legislation increasing Washington's borrowing authority, removing a potential market headwind.

 

Fed Chair Janet Yellen emphasized continuity in the U.S. central bank's policy strategy of cutting asset purchases by $10 billion a month, saying she strongly supports the approach of her predecessor, Ben Bernanke. In her first public comments as Fed chief, Yellen also said that while the U.S. unemployment rate has fallen recently, labor market conditions needed to improve further.

 

The Fed's policies have been credited with driving the market's steep gains in 2013, and those accommodative measures are expected to keep a floor under stock prices for as long as they continue. However, had the pace of ending the program been slowed, it may have raised concerns that the economy was still not strong enough to grow on its own.

 

The S&P 500 not only gained about 4 percent over the last several days but the index has also moved above its 50-day moving average for the first time since January 24, a positive sign of near-term momentum. The index has recovered much of its recent weakness, which took the index down as much as 6 percent from its record close on January 15.

 

Sprint closed up 2.7 percent to end the day at $7.90 after the company reported quarterly revenue ahead of analysts' expectations and said it added wireless subscribers in the fourth quarter.

 

CVS Caremark rose 2.7 percent to finish at $68.77 after the company posted higher quarterly profit as it processed more prescriptions.

 

Of the 357 companies in the S&P 500 that have reported earnings through Tuesday morning, 67.8 percent have beaten profit expectations, above the long-term average of 63 percent, according to Thomson Reuters data. Almost 66 percent have topped revenue forecasts, above the historical average of 61 percent.

 

On the downside, the shares of both Dean Foods and ConAgra fell after the companies gave weak outlooks. Dean Foods warned of a first-quarter loss while ConAgra cut its full-year outlook. Dean's stock ended the day down 7.4 percent to $14.08, while ConAgra fell 6.3 percent to close at $29.08.

 

After the close, shares of Fossil Group gained 5 percent to $122.80 as a result of fourth-quarter numbers, while TripAdvisor rose 1 percent to $85 after results.

 

Infloblox fell 48.1 percent to $17.19 after the network equipment maker estimated second-quarter revenue below analysts' average forecast.

 

Cadence Pharmaceuticals gained 26.5 percent to $14 after the company agreed to be acquired by specialty pharmaceuticals company Mallinckrodt Plc for about $1.3 billion. Mallinckrodt's ended the day up 11.6 percent to close at $66.19.

 

About 5.94 billion shares changed hands on the major equity exchanges according to BATS exchange data.

 

Janet Yellen Holds Her Own

 

Janet Yellen made it clear on Tuesday she would not make any abrupt changes to monetary policy, stating that the central bank was on track to keep reducing its stimulus even though the labor market recovery was far from complete.

 

In her first public comments since becoming Fed chief earlier this month, Yellen had testy exchanges with some Republican lawmakers over Wall Street regulation and central bank independence. But she managed to keep financial markets calm by emphasizing continuity with the policy approach taken by her predecessor, Ben Bernanke.

 

Yellen said the central bank must keep its eye on the "unusually high" incidence of long-term unemployment and the "exceptionally high" proportion of Americans who can find only part-time work as it plots a tricky reversal of its very accommodative policy stance.

 

"By a number of measures our economy is not back, the labor market is not back, to normal," Yellen told the U.S. House of Representatives' Financial Services Committee. "There's a great deal of slack in the labor market still."

 

Under Bernanke, the Fed bought trillions of dollars in bonds to drive borrowing costs lower and spur investment and hiring, swelling its balance sheet to more than $4 trillion. In December, it decided to begin scaling back its support given a drop in unemployment and stronger economic growth.

 

Since then, however, signs have emerged of a sharp slowdown in jobs growth, leading some investors to wonder whether the Fed might put the wind-down of its bond-buying program on hold.

 

However, Yellen showed little inclination to change tack. She said the Fed would likely take "further measured steps" to curb its stimulus if data broadly supports policymakers' expectation of improved labor markets and a rise in inflation, and she cautioned against reading too much into recent jobs figures.

 

In only her second week on the job after serving for more than three years as the Fed's vice chair, Yellen received accolades from both Republicans and Democrats on being the first woman to lead the central bank in its 100-year history.

 

Nonetheless, during the unusually long hearing on the Fed's semi-annual monetary policy report, she referred to notes and appeared uncomfortable at times in addressing sharp questions on regulation. At one point during the more than four hours of questioning, Yellen said she would have to study the details on a ban on bank proprietary trading before advising on how lawmakers might want to adjust the so-called Volcker Rule.

 

Yellen, who was appointed to chair the Fed by President Barack Obama, was cut off at times by committee Chairman Jeb Hensarling and other Republicans as she tried to patiently explain the central bank's two-pronged approach to supporting the economic recovery: buying bonds and promising low interest rates for a while to come.

 

Yellen said the purchases were not on a pre-set course, but added that it would take "a notable change in the outlook" for Fed policymakers, who next meet on March 18-19, to set aside their plan to wind down the program.

 

As for the possibility of actually increasing their bond buying, she said it would take a "significant deterioration" in the outlook for the job market, or very serious concerns that inflation was not moving higher over time. Inflation is running at just 1.1 percent, well shy of the Fed's 2 percent target.

 

Yellen noted the recent volatility in global financial markets, where some emerging market currencies and stocks have sold off in recent weeks, but she said at this stage it did "not pose a substantial risk to the U.S. economic outlook."

 

Having lowered rates to near zero in the depths of the crisis in late 2008, the Fed has said it does not expect to raise them until well after the time the jobless rate drops below 6.5 percent, especially if inflation remains weak.

 

But unemployment has already reached 6.6 percent; down from 8.1 percent when the Fed launched the latest bond-buying program in 2012, and policymakers are scrambling to decide how best to adjust their guidance.

 

A shaky run of recent data, including two straight months of weak jobs growth, has raised questions over whether the economy can sustain the strength it showed in the second half of last year. Gross domestic product grew at a 4.1 percent annual rate in the third quarter and at a 3.2 percent pace in the fourth quarter.

 

"We have to be very careful not to jump to conclusions in interpreting what those reports mean," Yellen said, referring to the jobs data, which she said may have been impacted by unusually cold winter weather.

 

While Yellen said the unemployment rate remained "well above" the central bank's target level, she also said a "significant" part of the fall in labor force participation was "structural" and, therefore, permanent. That would mean the jobless rate commensurate with full employment has risen.

 

Hensarling said the Fed's promise to keep rates low well into the future was a noticeable departure from a decades-old monetary policy rule of thumb that Yellen once called the mark of a "sensible" central bank.

 

"So that begs the questions today, using your words, are you a sensible central banker, and if not, when will you become one?" he asked.

 

"Congressman, I believe that I am a sensible central banker," Yellen replied.