MarketView for June 3

 

 

Summary  

 

Stock prices were slightly higher on Thursday, led by a late-day surge in technology shares as the Street looked for a strong unemployment report on Friday. However, it was not a walk through the park on as share prices oscillated back and forth throughout the day, shifting between optimism and pessimism on a variety of factors, including technical resistance, the euro's weakness, and supportive labor market data.

 

The S&P 500 was unable to break through its 200-day moving average, making it the third time it has failed to do so in the past five sessions. A break through the 1,106 level would be a bullish sign.

 

Technology shares, key among the beneficiaries of an economic recovery, led the rally, with the Philadelphia semiconductor index up 1.2 percent. Microsoft closed up1.5 percent at $26.86 after Chief Executive Steve Ballmer said the company will continue to prosper even as the transition from PCs to other devices poses a "potential tumult.

 

Volume was light ahead of Friday's nonfarm payrolls report, which is expected to show the economy added 513,000 jobs in May. Most of the gains are expected to be due to temporary Census hiring.

 

Lackluster same-store retail sales for May had earlier pressured the market. Costco Wholesale was down 1.7 percent to $57.93 after its sales missed estimates, while BJ's Wholesale Club closed down 2.6 percent at $38.77.

 

In a data-heavy morning, data showed private employers added jobs in May and initial jobless claims fell last week. In other data, the services sector grew for a fifth straight month in May, according to the Institute for Supply Management, and the federal government reported that new orders received by factories rose in April.

 

Impatience At The Fed

 

It seem that at least one Fed bank president is impatient with the Fed’s continued low interest rate policy. Thomas Hoenig, president of the Kansas City Federal Reserve Bank said on Thursday that the Fed should raise its key Federal funds rate to 1 percent by the end of summer, stating that the economy is strong enough to support such a hike.

 

Hoenig has called for a modest increase in borrowing costs before, but he went further on Thursday stating that it should happen over the next several months and by calling for an increase in borrowing costs to 3 percent shortly thereafter.

 

Known as one of the Fed's most strident anti-inflation hawks, Hoenig stated that the Fed should raise its benchmark federal funds rates to avoid being slow in responding to the recovery.

 

"Based on the current outlook consensus, it seems reasonable that the economy would be well-positioned to accept this modest increase in the funds rate," Hoenig said. According to Hoenig, the recovery is gaining steam and appears stronger and more broad-based than anticipated.

 

"We are now seeing clear signs that the process of job creation is taking hold," he said.

 

Hoenig is a voter on the Fed's policy-setting panel and has dissented against the Fed's exceptionally easy money policies at all three meetings this year. He has said he is worried that rock-bottom borrowing costs for such a long period will fuel another dangerous boom-and-bust cycle.

 

Hoenig said on Thursday the Fed should start by dropping its promise to hold rates exceptionally low for an extended period, as part of the process of bringing interest rates and the Fed's extension of credit to the economy back to normal.

 

The Fed should then raise rates to 1 percent and then stop while it assesses how the economy reacts to the higher rates. If the recovery remains solid, the Fed should push borrowing costs to 3 percent reasonably quickly, he said.

 

The Fed should also sell some of the mortgage-backed securities it bought as it sought to give the flagging economy an additional boost after it chopped interest rates to near zero, he added.

 

Hoenig did concede that the debt crisis in Europe is "fluid" and poses a risk to the recovery, Hoenig said.

 

Labor Picture Improving

 

The private sector added jobs in May and the economy's dominant services sector increased payrolls for the first time in more than two years, building evidence that the labor market is improving. Meanwhile, new claims for unemployment insurance fell last week.

 

Private employers added 55,000 jobs last month, according to the ADP Employer Services report on Thursday, a bit weaker than forecast but still a sign of improved conditions. April's job gain was revised upward to 65,000 from an initially reported tally of 32,000.

 

According to the Labor Department initial claims for state jobless benefits fell by 10,000 claims to a seasonally adjusted 453,000. Service sector employment rose for the first time since December 2007, the month the United States fell into recession, the Institute for Supply Management said.

 

Friday's payrolls report is expected to show that the economy added 513,000 jobs in May and the jobless rate dropped to 9.8 percent from 9.9 percent in April. The negative aspect of the number is that two-thirds of the expected hires are likely to be temporary ones tied to the 2010 U.S. Census. Nonetheless, the gain would still mark the most jobs added since September 1983, when the economy was pulling out of a deep recession. It would also be the fifth straight month of job gains.

 

In a separate report, the Labor Department said non-farm productivity grew at a 2.8 percent annual rate between January and March, the smallest advance in a year. While some companies have held off hiring new workers, opting instead to add hours for the existing workforce, this is an unstable situation that cannot continue indefinitely, which means an inevitable increase in payrolls. 

 

Anthony Nieves, chairman of the ISM non-manufacturing survey committee, said service sector job growth was "really good news but warned, "I would want to see how it trends out.

 

"Because what everyone is stating is it's a jobless recovery, and I can't emphasize enough the long decline we've had," he said. "I don't want to minimize one month of growth, but I don't want to get overly optimistic."

 

Even jobless claims, while lower last week, have been stuck in a range of roughly 450,000 to 470,000 for months. That's above levels usually associated with sustainable employment growth.

 

What's more, the number of people still receiving benefits after an initial week of aid unexpectedly rose 31,000 to 4.67 million in the week ended May 22, the highest since early April, the Labor Department said.

 

May Not A Great Month For Retailers

 

May turned out to be a lackluster sales month for retailers, with discount chains turning in the strongest performance, as consumers again showed their cautious side in a still weak economic climate. Based on 28 retailers tracked by Thomson Reuters, sales at stores open at least a year rose 2.5 percent, just shy of the 2.6 percent that Wall Street predicted. The Standard & Poor's Retail Index was down 0.5 percent, helping drag down the wider market.

 

Target reported May sales just above expectations and forecast a low single-digit percentage rise for June. Target shares were down 0.2 percent.

 

Factors that influenced May shopping included a Memorial Day holiday on the last weekend of the month. That alone probably dragged sales down by a low- to mid-single-digit percentage rate, with more shopping pushed into June. At the same time, cooler weather everywhere but the Northeast, as well as heavier rain in the Northwest, hurt sales of summer apparel, analysts said.

 

Some retailers pointed to stronger demand in late May, suggesting June results could be better. The International Council of Shopping Centers expects June same-store sales to rise about 3 percent. However the next key month will be July, when the back-to-school shopping season kicks off.

 

By segment, discount chain sales were up 5.3 percent, while department stores saw a 1.2 percent increase. Teen apparel sales fell 2.7 percent.

 

BJ's Wholesale Club chalked up an 11.3 percent increase in same-store sales, while TJX Companies posted a better-than-expected gain and cited substantially more demand in late May with warmer weather.

 

Limited Brands said May same-store sales rose 5 percent. However the chain sees June same-store sales to be flat to up in the low single-digits.

 

Other retailers reporting better-than-expected May same-store sales included Macy's, Aeropostale, Gap, Dillard’s, Kohl's and Saks.

 

Costco fell short with a 9 percent gain for the month. Other chains with sales below expectations included Abercrombie & Fitch, Nordstrom, JC Penney and Rite Aid.