MarketView for March 3

 

 

 

Summary 

 

The major equity indexes ended the day relatively unchanged on Wednesday as concerns over bank regulation and a setback at Pfizer offset signs of improvement in the labor market and services sector. Pfizer fell 1.6 percent after its Alzheimer's drug did not meet the main goals of a late-stage clinical trial.

 

Draft proposals to regulate the financial sector, including provisions to stop proprietary trading at banks, pressured financials, as concerns mounted on Wall Street over President Barack Obama's attempts to revive his healthcare overhaul. Obama said it is time to pass his sweeping healthcare overhaul using only a slim Democratic majority in Congress if necessary, saying the issue is too important to be delayed by politics after a year of debate.

 

Stock prices rose initially after the Institute for Supply Management's gauge of service sector activity and ADP's report on private employment pointed to a strengthening economy and a stabilizing labor market. The main focus for investors will be Friday's Labor Department data on unemployment in February.

 

That view of steady improvement was reinforced by the Federal Reserve, which said economic activity strengthened modestly across most of the 12 Fed districts during February, according to its Beige Book summary.

 

Signs the economy was improving helped cushion the S&P 500 as stocks in the materials sector gained along with rising commodity prices and a falling dollar.

 

Adding to the market's jitters, draft language on the so-called "Volcker rule" from the Obama administration suggested that banks would be banned from proprietary trading and other large financial firms would face limits on such activity. That news reignited fears of a tougher stance toward banks following talk proposed regulations would be watered down.

 

Obama Pushes Volcker Rule

 

The Obama administration reasserted its commitment to banning proprietary trading by banks in a message to Congress on Wednesday, despite signs lawmakers were unlikely to adopt such a rule.

 

Apparently the White House wants to see a limit on risky "prop trading" -- or the buying and selling of investments on financiers' own books unrelated to customers' needs -- at large, non-bank financial firms.

 

The message showed the White House is determined to push ahead with its so-called "Volcker rule," first proposed in January to markets' surprise, as the Senate inched its way toward acting on new financial reform legislation.

 

Authored chiefly by White House economic adviser Paul Volcker, the rule arrived late in a reform debate that has raged for months since the severe 2008-2009 financial crisis tipped the U.S. economy into a deep recession.

 

Separately, Treasury Secretary Timothy Geithner said on Wednesday that he would not accept regulatory reform that failed to protect financial consumers. He called for a dedicated, independent authority to do that.

 

By the time Obama and Volcker unveiled it almost six weeks ago, the Senate was well along in its debate about reforms. The Volcker rule complicated Senate Banking Committee Chairman Christopher Dodd's task of moving a reform bill to the Senate floor, and he has still not managed to do that.

 

Amid ferocious lobbying by banks and Wall Street firms opposed to reforms, Republicans have pushed the Senate toward a narrower, compromise bill that looks likely to exclude the Volcker rule and other key Obama proposals.

 

Dodd and Republican Senator Bob Corker, a first-term banking committee member, on Wednesday were near a final deal on revised legislation, with sources saying a summary of their plan was being drafted for release within days. Despite shaky political support for their approach, Dodd and Corker were expected to call for making a new government watchdog for financial consumers a part of the Federal Reserve, instead of making it an independent agency as Obama proposed.

 

The president's proposal to create an independent Consumer Financial Protection Agency to regulate mortgages and credit cards has been the main obstacle for weeks to a bipartisan Senate compromise on financial reform.

 

Senior Democrats in Congress on Tuesday sharply criticized the Dodd-Corker proposal. Representative Barney Frank, chief architect of reform in the House, told Reuters he "thought it was a joke" when he learned about putting the watchdog in the Fed, which has been criticized for its record on that front.

 

Lobbying groups for large banks sent a letter to lawmakers on Wednesday saying that the Fed should retain its role as the supervisor of large bank holding companies.

 

Despite sharp criticism leveled at the Fed over its failures as a bank supervisor before the crisis, the approach backed by the lobbyists also will likely be included in the Dodd-Corker bill, said lawmakers, aides and lobbyists.

 

They said another component of the deal calls for forming a "hybrid resolution fund" for financing the dismantling of large financial firms that get into trouble. Some money for the fund would be fronted by large firms, held by the Federal Deposit Insurance Corp, and invested in Treasury securities that banks could keep on their balance sheets, with insurance companies partly exempt, they said.

 

Job Market Outlook Becoming Positive

 

Private jobs data and a Federal Reserve report showed glimmers of improvement in the U.S. labor market last month, considered key to propelling the economic recovery, while the U.S. services sector grew at its fastest pace since the recession began. Private employers eliminated fewer jobs last month, and another report showed planned layoffs by firms in February fell to the lowest level since 2006.

 

The news came ahead of the key monthly U.S. nonfarm payrolls report on Friday. The ADP report is used by economists as a clue to what official payrolls numbers from the Labor Department might reveal.

 

Private employers cut 20,000 jobs in February, compared with 60,000 job losses in January, the report by ADP, a payroll processor, showed on Wednesday. The February number was in line with the median estimate.

 

Separately, the Institute for Supply Management said its services index rose more than expected in February and hit the highest reading since December 2007. An employment component in the index also rose. The services sector accounts for the majority of U.S. employment.

 

Planned layoffs in February fell to the lowest level since July 2006, according to a report by Challenger, Gray & Christmas Inc., a global outplacement consultancy.

 

The Institute for Supply Management services sector data follows another ISM report Monday that showed the manufacturing sector grew in February, though more slowly than expected.

 

Data in Europe was somewhat less positive. A survey on the euro zone services sector on Wednesday showed the sector expanded more slowly in February than expected.

 

Fed Says Economy Stronger in February

 

Economic activity strengthened modestly across most of the 12 Federal Reserve districts during February and likely would have done better if not for heavy snowstorms that battered many areas. "Economic conditions continued to expand since the last report, although severe snowstorms in early February held back activity in several districts," said the so-called Beige Book summary prepared by the Kansas City Fed.

 

The pace of layoffs slowed but hiring plans were "generally soft," according to the survey which also said wage and price pressures were muted except for commodities such as lumber and raw materials that were moving up.

 

The Beige Book is an anecdotal summary of conditions within the 12 districts across the country that together make up the U.S. Federal Reserve. The latest one is based on data collected by February 22, a period that included periods of severe winter weather across much of the country. The survey findings are taken into consideration by Fed governors when they gather to set interest-rate policy.

 

It said manufacturing activity gained steam in most districts, especially for high-tech equipment, autos and metal industries. There also was some reported improvement in consumer spending, though weather again dampened shopping in some districts.

 

Real estate markets were problematic. While residential markets firmed up in several districts, most described commercial real estate and construction activity as weak or still in decline.

 

The banking sector also was soft, with demand for loans still weak across most of the country and banks wary about lending. "Atlanta reported that banks had ample liquidity but were reluctant to reduce cash reserves," the Beige Book said in a typical commentary on activity in the sector.

 

Aside from commodities, companies in most districts were optimistic that price pressures were unlikely to develop soon, which may help the Fed keep interest-rate levels low for an extended period. "Districts generally expected stable prices overall heading forward," the Beige Book said.