MarketView for January 6

 

 

 

Summary 

 

If the day’s activity on Wall Street on Wednesday was any indication, someone forgot to tell the Street that the December-January holiday period is over. Trading volume was light as the three key equity indexes were virtually unchanged at the closing bell. Part of the reason for the day’s malaise was ongoing concerns over weakness in the labor market as a report on the services sector showed only slight improvement.

 

The Institute for Supply Management’s non-manufacturing index rose to 50.1 in December, showing slight expansion, but was still below the 50.5 forecast by economists.

Nonetheless, the S&P 500 still managed to eke out a new 15-month high.

 

Weighing on the Dow Jones industrial average was Travelers, down 1.4 percent at $47.94 after the stock received a brokerage firm  downgrade to "market perform" from "outperform." At the same time the Nasdaq was pushed lower by losses in big-cap technology issues, including Apple, down 1.6 percent at $210.97, and Microsoft, down 0.6 percent at $30.77.

 

Cautious minutes from the Fed's last meeting, as well as the services report, which showed the sector hovering on the cusp of expansion, came after a number of data points helped lift stocks earlier this week to their highest closing levels in more than a year.

 

An ADP Employer Services report indicated that private employers shed 84,000 jobs in December, less than a revised 145,000 in November, but exceeding economists' forecast for a loss of 73,000 jobs

 

One bright spot was Family Dollar Stores, up 12.5 percent at $30.92, after the retailer reported first-quarter earnings that exceeded expectations.

 

Another obstacle for stocks was the surge in the price of oil to above $83 per barrel, which pushed the Dow Jones Transportation Average down 0.6 percent. Companies such as FedEx, down 0.8 percent at $83.84, and UPS, down 0.7 percent at $57.85, make up the DJTA.

 

February crude oil futures settled up $1.41 per barrel, or 1.7 percent, at $83.18, the highest close since October 9, 2008, on expectations that cold weather in the United States will increase demand for heating oil.

 

3M rose 1.5 percent to $83.72 after Goldman Sachs added the stock to its Americas "conviction buy" list and said stronger-than-expected results in October and November likely continued in December.

 

In contrast, Walgreen fell 0.8 percent to $36.72 after the chain reported that same-store sales fell in December instead of rising, as the Street had been expecting. Meanwhile, Dow Chemical rose 1.8 percent to $31.02 after Barclays Capital upgraded the stock to "overweight" from "equal-weight."

 

Job Losses Decrease

 

The rate of job losses at U.S. private employers slowed in December, while planned layoffs at companies fell to the lowest in two years during the month, according to two reports released on Wednesday.

 

The private sector lost 84,000 jobs in December, which was fewer than the 145,000 jobs lost in November, according to ADP Employment Services. The number of jobs lost did however exceed the 73,000 expected by economists.

 

The number did little to change expectations for Friday's U.S. Labor Department non-farm payrolls data for December. Economists forecast the U.S. lost 8,000 jobs overall last month, fewer than the 11,000 lost in November.

 

Separately, employers announced 45,094 planned job cuts last month, the fewest since December 2007, according to global outplacement consultancy Challenger, Gray & Christmas, Inc. That marked a 73 percent decline from 12 months ago, when 166,348 job cuts were reported, the report showed.

 

Last year marked the worst year of corporate job cuts since 2002, with employers announcing plans to cut 1,288,030 jobs. The pace of layoffs fell by 56 percent in the second half of the year however.

 

Service Sector Growing Again

 

A measure tracking the U.S. service sector returned to growth last month, helped higher by the holiday season's retail sales, but the slight expansion wasn't enough to kick-start hiring.

 

The Institute for Supply Management, a private trade group, said its service index rose to 50.1 in December from 48.7 in November. Analysts polled by Thomson Reuters had expected a reading of 50.5.

 

A level above 50 signals growth. The gauge rose in September for the first time in 13 months, but the comeback has been fitful amid tiny gains in consumers' incomes and tight bank lending to small businesses.

 

Seven industries reported growth, led by agriculture and retail.

 

ISM's service-sector gauge is closely watched because service jobs comprise more than 80 percent of non-farm U.S. employment.

 

ISM said its employment measure shrank in December, but at a slower pace than in November. It hasn't grown in 2 years. The employment index was 44 in December versus 41.6 a month earlier. The four industry groups adding jobs were retail, finance and insurance, public administration and what is called other services.

 

Meanwhile, new orders, a signal of future business, expanded for the fourth straight month, although less quickly than in November. Business activity also grew, as did the prices paid by businesses.

 

That may mean service companies will pass their higher costs on to consumers, collecting higher revenue.

 

More spending by U.S. consumers will translate into higher sales for the nation's service providers — and eventually, should mean more jobs.

 

ISM said on Monday that manufacturing grew in December for the fifth straight month. A rebound in the industrial sector has been helping the U.S. limp out of the recession, but manufacturing doesn't add many American jobs. The service sector, which depends on consumer spending and tends to be less efficient, is currently the key to job creation.

 

Fed Minutes Show Lingering Concern over Housing has Fed Befuddled

 

Some Federal Reserve officials worried last month that waning government support could snuff out a fragile housing market recovery and a few believed it might be desirable to step up asset purchases.

 

Minutes of the Fed's closed-door meeting on Dec. 15-16 revealed that a "few members" thought that the Fed's $1.25 trillion program to buy mortgage securities from Fannie Mae and Freddie Mac might need to be expanded and extended beyond its current end date of March 31. Such an additional dose of stimulus would be especially needed if the economic recovery were to weaken, they argued. However, one member thought the program could be "scaled back" given the improvement in economic and financial conditions.

 

The debate over the future of the program comes amid uncertainties about the vigor of the budding economic recovery. The Fed decided not to make any changes to the program. At their September meeting, they opted to slow the pace of the purchases, wrapping them up by the end of March, rather than the end of 2009.

 

The minutes don't identify speakers by name but seeks to provide a more detailed account of the Fed's private discussions. Specifically, some officials remained concerned about the economy's ability to mount a self-sustaining recovery once government supports are removed. To that end, those officials worried that improvements seen in the housing market might be "undercut" this year as the Fed's mortgage-buying program winds down, the government's home buyer tax credits expire at the end of April and home foreclosures grow.

 

"Some participants ... noted the risk that improvements in the housing sector might be undercut next year as the Federal Reserve's purchases of (mortgage-backed securities) wind down, the homebuyer tax credits expire, and foreclosures and distress sales continue," minutes of the Fed's December 15-16 policy-setting meeting said.

 

Labor market weakness remained an important concern for Fed officials, the minutes released on Wednesday showed, with officials saying they expect unemployment to remain high for "quite some time."

 

Views about policy differed. Some officials said persistently high unemployment might make it desirable at some point to expand or extend large-scale purchases of assets. However, one policy-maker said improvements in financial markets and in the economy may warrant scaling back the Fed's purchases and reducing holdings over time.

 

Getting the housing market back on firm footing is a key ingredient to a lasting recovery. The collapse of the housing market, which dragged down home prices with it, was the catalyst for the longest and worst recession to hit the country since the 1930s.

 

"Generally the outlook was for gains in housing activity to continue. However, some participants still viewed the improved outlook as quite tentative and again pointed to potential sources of softness," the minutes said.

 

To nurture the recovery, the Fed at the December meeting kept its key bank lending rate at a record low near zero and pledged to hold it there for an "extended period." The goal: low interest rates will entice people and businesses to boost spending, which will fuel economic growth.

 

Economists said the Fed is all but certain to leave rates at record lows at its next meeting on Jan. 26-27 and probably for a good chunk of this year.

 

"Overall, there is nothing here to suggest that interest rates will rise for quite some time," Paul Ashworth, economist at Capital Economics Ltd., said of the Fed minutes. Ashworth is among the economists predicting economic growth will slow in the second half of this year as President Obama's $787 billion stimulus package of tax cuts and increased government spending fades.

 

Most Fed officials don't currently see inflation as a problem because companies have "little ability to raise their prices" in the fragile economic environment. But they had mixed views about inflation risks.

 

Some noted that rising prices of oil and other commodities could boost inflation pressures down the road. Others thought investors' expectations of inflation could edge up because of large federal government budget deficits and vast sums of money the Fed pumped into the economy to fight the financial crisis.

 

However, others predicted that the sluggish recovery and "slack" in the economy — meaning factories operating well below capacity and the weak labor market — would keep inflation under wraps.

 

At the December meeting, Fed staff gave several presentations on research into "inflation dynamics." The biggest challenge facing Fed Chairman Ben Bernanke and his colleagues is to decide when to start boosting interest rates. Moving too soon could short-circuit the recovery. Waiting too long could unleash inflation.