MarketView for January 6

Summary 

The equity markets did well during the first week of 2012, even though news that the jobless rate neared a three-year low did not whet the appetite of the Street for additional investment in equities on Friday. Nonetheless, the markets came into the New Year revisiting familiar theme of lingering concerns over the euro zone's debt crisis. However, with continuing signs indicating that the economic recovery is gathering speed, some of the focus off of the European Union. The result shows up in the week's numbers. The Dow rose 1.2 percent, the S&P gained 1.6 percent and the Nasdaq added 2.7 percent for the week, with most gains coming from cyclical sectors tied to growth.

Data this week also painted a rosier picture on the labor, housing and retail markets, auguring a recovery in growth in 2012. The government's report on non-farm payroll jobs for December earlier on Friday was the latest in a list of economic numbers that were stronger than anticipated. Yet, the data did not eliminate the seemingly never-ending worries about higher bond yields in Italy and Spain, as well as potential oil supply disruptions in the Middle East.

Next week brings bond sales by Italy and Spain. Caution ahead of those auctions sent Italian benchmark yields above 7 percent while yields in Spain's 10-year paper also edged up to end the week at 5.758 percent.

Volume on Friday remained weak, with about 6.3 billion shares changing hands on the three major equity exchanges, as compared to last year's daily average of 7.84 billion shares, although the CBOE volatility index fell almost 12 percent this week.

Best Buy rose 3.3 percent to close at $24.22 as the company stood by its profit outlook for the financial year. Amazon and Netflix did their part to help raise the Nasdaq. Amazon added 2.8 percent to close at $182.61, while Netflix gained 8.8 percent to close at $86.29 and was up nearly 25 percent this week. Alcoa fell 2.1 percent to $9.16 after the aluminum producer said it will cut global smelting capacity amid a steep drop in metal prices. The Dow component is expected to post a fourth-quarter loss next Monday.

Unemployment Level Falls

According to a report by the Labor Department Friday morning, the unemployment level fell to a near three-year low of 8.5 percent as employment growth accelerated last month attesting to the strongest evidence yet the economic recovery is gaining steam. Nonfarm payrolls increased 200,000 in December. It was the largest rise in three months and well exceeded Street expectations.

The unemployment rate fell from a revised 8.7 percent in November to its lowest level since February 2009, a heartening sign for President Barack Obama whose re-election hopes could hinge on the state of the labor market.

A string of better-than-expected data in recent weeks has highlighted a contrast between the recovery in the world's largest economy and Europe, where the economy is widely believed to be contracting.

The economy added 1.6 million jobs last year, the most since 2006, and the jobless rate, which peaked at 10 percent in October 2009, has dropped 0.6 percentage point in the last four months.

Employment remains about 6.1 million below its pre-recession level and at December's pace of job growth, it would take about 2-1/2 years to win those jobs back. There are roughly 4.3 unemployed people for every job opening.

Unseasonably mild weather last month helped fuel a hefty gain in construction employment. Courier jobs also rose sharply, a move the Labor Department pinned on strong online shopping for the holiday season.

Those jobs could be lost in January and the unemployment rate might rise as Americans who had abandoned the hunt for work are lured back into the labor market. The drop in the jobless rate was mostly due to strong hiring. The labor force shrank only modestly.

A broad measure of unemployment, which includes people who want to work but have stopped looking and those working only part time but who want more work, dropped to an almost three-year low of 15.2 percent from 15.6 percent in November. Still, all told, 23.7 million Americans are either out of work or underemployed.

While the prospect of a further easing of monetary policy was damped a bit by the jobs data, the shaky outlook means a third round of asset purchases by the Federal Reserve remains an option.

New York Federal Reserve Bank President William Dudley on Friday suggested the U.S. central bank was still leaning toward buying more bonds to pull borrowing costs lower, describing the recovery as "frustratingly slow" and the unemployment rate as "unacceptably high."

"I believe it is also appropriate to continue to evaluate whether we could provide additional (policy) accommodation," said Dudley.

All the job gains in December came from the private sector, where payrolls rose 212,000 - the most in three months. Government employment contracted 12,000, with most of the drag coming from local government layoffs. However, the pace of government job losses is moderating as some states report revenue growth after years of being in the red.

For all of 2011, the private sector added 1.9 million jobs, while government employment fell 280,000. A measure of the share of industries that showed job gains during the month rebounded to a five-month high in December after diving in November.

Construction payrolls increased 17,000 after falling 12,000 in November as mild weather has boosted groundbreaking for new homes. Transportation and warehousing employment jumped 50,200. The bulk of the rise came from the messenger industry, which added 42,000 jobs, reflecting an increase in deliveries of online purchases made during the holiday season.

Manufacturing jobs rose by 23,000 jobs, the largest increase since July. Factory employment rose 225,000 last year, sustaining gains for the first time since 1997.

Nonetheless, there were soft spots in retail, where payrolls growth slowed to 27,900 after hefty gains in November as retailers geared up for a busy holiday shopping season. Temporary hiring, seen as a harbinger of future hiring, fell for the first time June, dropping 7,500 in December after gaining 11,200.

Hourly earnings rose a modest four cents, indicating that most of the jobs being created are low paying. This is a potentially troubling sign for consumer spending, which has been largely supported by a reduction in savings, although it also signals a lack of inflation pressure.