MarketView for February 3

 

 

Summary 

 

Encouraging retail sales raised the Street’s confidence on Thursday, a day ahead of Friday's jobs report. The Morgan Stanley retail index rose 2.8 percent, driven by companies such as Sears Holdings, up almost 8 percent, and Ross Stores up 6 percent, as sales climbed 4.8 percent in January, adding to the growing evidence of an economic rebound.

 

The wider market had come under pressure for most of the day on the belief that the markets are a bit overbought and are in need of some degree of retrenchment after weeks of gains and prior to another run up. The S&P 500 index has rallied more than 10 percent since breaking out of a trading range at the start of December and is up 21 percent since the end of August.

 

Within the retail sector, BJ's Wholesale Club said it may put itself up for sale. Shares of BJ's, which is under pressure from a private equity firm that may make a hostile bid, rose 12.2 percent to $48.25.

 

The strong performance in retail shares comes ahead of Friday's employment report that is expected to show the U.S. economy added 145,000 jobs in January. At the same time, the latest economic data indicated that the services sector rose at its fastest pace since August 2005 in January, and initial claims in the latest week for state unemployment benefits fell more than expected.

 

Clashes continued in Egypt, adding to concern that has pressured equities recently. Meanwhile, a stronger dollar weighed on the natural resource sector.

 

Merck fell 2.7 percent to $32.90 and was the top drag on the Dow after the company forecast 2011 earnings well below Street estimates and withdrew its longer-term profit view.

 

Trading volume was 7.69 billion shares on the major exchanges, down from last year's estimated daily average of 8.47 billion shares.

 

Warning From Bernanke

 

Federal Reserve Chairman Ben Bernanke issued a stern warning to Republican lawmakers that delays in raising the United States' $14.3 trillion debt limit could have "catastrophic" consequences.

 

"Beyond a certain point ... the United States would be forced into a position of defaulting on its debt. And the implications of that on our financial system, our fiscal policy and our economy would be catastrophic," he said.

 

Bernanke coupled his warning with a call for the Obama administration and Congress to put in place a credible plan to curb future budget deficits. However, if Congress does not raise the limit in a timely way, the government could be forced to scale back operations. A failure to lift the limit could raise the specter of a first-ever Treasury debt default and push interest rates up sharply.

 

Financial markets have not yet shown any nervousness over the debt limit, which has typically been raised after political grumbling, and Bernanke said the chances of a default were "very remote."

 

Still, his comments echoed dire warnings issued by Treasury Secretary Timothy Geithner and other Obama administration officials, who have also said failure to raise the debt ceiling could be "catastrophic." The Fed chairman called on lawmakers not to hold the issue hostage to the contentious debate over how best to rein in record budget gaps.

 

"I would very much urge Congress not to focus on the debt limit as being the bargaining chip in this discussion, but rather to address directly the spending and tax issues that we have to deal with in order to make progress on this fiscal situation," Bernanke said.

 

In discussing the recovery, Bernanke provided a modestly more rosy outlook than he has in other recent appearances, citing gains in household spending, improved consumer and business confidence and stepped-up bank lending as signs 2011 may bring stronger growth than 2010.

 

But he made clear Fed officials were not yet satisfied.

 

"Although economic growth will probably increase this year, we expect the unemployment rate to remain stubbornly above, and inflation to remain stubbornly below, the levels that Federal Reserve policymakers have judged to be consistent over the longer term with our mandate," he said.

 

Bernanke's comments on the economy suggest the Fed believes it has plenty of time to let its policies boost growth and pull down a high unemployment rate before it needs to worry about tightening financial conditions to keep inflation in check.

 

The hard-hit job market shows some grounds for optimism, but modest growth and cautious hiring suggest that it will be several years before the jobless rate returns to a more normal level, Bernanke said. "Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established," he said.

 

Bernanke played down worries that recent commodity price rises pose an inflation threat in the United States. "Overall inflation remains quite low," he said, adding that downward pressure on wages and prices was not surprising, given the "substantial slack" in the economy.

 

He also countered accusations the Fed's easy monetary policy was behind surging prices for food and other raw materials around the globe, saying the increases primarily reflected strong demand in emerging economies.

 

Economic Growth Is Building Momentum

 

Growth within the services sector in January was the fastest in more than five years, another sign the economy started 2011 on a solid footing, with measures of employment showing more strength.

 

Reports on Thursday, including a sharp fall in weekly claims for jobless benefits, painted a bullish picture for the economy as it recovers from the recession. Inflation pressures appear under control even as commodity prices rise sharply.

 

The Institute for Supply Management's index of national non-manufacturing activity rose to 59.4 last month, its highest level since August 2005, from 57.1 in December. The expectation had had been for a decline to 57.0. A reading above 50 indicates expansion in the service sector, which accounts for more than 80 percent of jobs, and it was the 14th straight month of growth.

 

The surprise pick-up in growth, which mirrored a similar acceleration in manufacturing in January, was further confirmation that the economic recovery was broadening.

 

A surge in consumer spending lifted the economy to a 3.2 percent annual growth rate in the fourth quarter of 2010, quickening from a 2.6 percent pace in the three prior months.

 

A Labor Department report showed new claims for state jobless benefits fell 42,000 to a seasonally adjusted 415,000, unwinding most of the previous week's weather-induced spike.

 

The economy probably created 145,000 jobs, according to a Reuter’s poll, after adding 103,000 in December. Expectations for a pickup in job growth were bolstered by a jump in the ISM's employment gauge to its highest since May 2006.

 

The improving U.S. economic picture was underscored by retailers posting a 4.2 percent rise in sales. Sales grew strongly despite the snowiest January in six years. Heavy snow and cold weather slowed the downward trend in initial jobless claims by causing a backlog in applications but economists believe they will soon drop below 400,000, a level believed to signal strong job growth.

 

A second Labor Department report showed that although businesses faced rising input costs, they kept labor costs down by wringing more from workers, helping keep inflation muted. Nonfarm productivity, a measure of hourly output per worker, rose at an annual rate of 2.6 percent in the fourth quarter after rising at a 2.4 percent pace in the third quarter. The increase was well above expectations for a 2 percent growth rate. Unit labor costs, a gauge of potential inflation pressures closely watched by the Fed, fell at a 0.6 percent rate after dipping 0.1 percent in the third quarter.