MarketView for March 4

Summary 

After a day that saw some early volatility, better-than-expected monthly sales from retailers, combined with the decline in the number of new claims for jobless benefits, had share prices rallying in the last 15 minutes of the regular trading day.

It was a sign that the Street is now bullish ahead of the jobs data being released tomorrow. The rise in February retail sales, which were expected to have been hurt by the severe weather across the United States, lifted retailers' shares. For example, Target, a retail bellwether, added 2.4 percent to close at $52.94 after it said same-store sales rose 2.4 percent for the month.

The market has been strong recently with the S&P 500 up 1.7 percent so far this week. The Dow Jones industrial average turned the corner to become positive for the year, joining the S&P 500 and the Nasdaq, which rose above the break-even mark earlier in the week.

The Russell 2000 index of small-cap stocks closed at another 17-month high, a move that suggests it may just be a matter of days before other indexes retest the highs of the rally from the lows hit in early March 2009. Fundamentally, small-caps are considered harbingers of an early upturn in the economic cycle since smaller companies are more sensitive than multinationals to domestic business activity.

In a mixed day for economic indicators, National Association of Realtors said pending home sales fell unexpected in January, while a separate government report showed factory orders rose 1.7 percent for the month. Data from the housing market has been weak recently and the latest data weighed on home builders' shares.

Positive comments from several brokerage firms helped blue chips head higher, with Boeing, Walt Disney and Coca-Cola ranking among the Dow's top gainers. At the same time, natural gas futures slid after a government report showed an unexpectedly light inventory drawdown. The NYSE Arca Natural Gas index slipped 1 percent, while crude oil futures fell nearly 0.5 percent toward $80 a barrel.

Economic Data Continues to Dominate

The number of workers filing initial claims for unemployment insurance fell last week, but an unexpected decline in pending home sales to a 10-month low in January underscored the uneven nature of the economic recovery. Initial claims were down by 29,000 claims to a seasonally adjusted 469,000, the Labor Department said on Thursday, in line with Street expectations. The four-week moving average of new claims fell to 470,750. The number of people still receiving benefits after an initial week of aid dropped to 4.5 million in the week ended February 20, the lowest since early January 2009. Meanwhile pending sales of previously owned homes fell 7.6 percent in January to their lowest level since March last year. The weak housing report was offset by the jobless claims data and solid February retail sales.

Retailers posted their strongest monthly sales performance last month since before the start of the recession in December 2007 as leaner inventories allowed for more sales at full price. This should bode well for overall retail sales in February.

Reports on consumer spending and manufacturing this week suggested the economic recovery remained on course, with the jobs picture steadily improving. A separate report from the Commerce Department indicated that factory orders rose 1.7 percent in January on top of a 1.5 percent December rise, indicating the recovery in manufacturing was becoming entrenched. Furthermore, even as the economy buckled from the downturn, nonfarm productivity rose at a brisk 6.9 percent annual rate in the fourth quarter, a second Labor Department report showed, rather than the 6.2 percent pace estimated last month.

Unit labor costs, a gauge of inflation and profit pressures closely watched by the Federal Reserve, fell a sharp 5.9 percent in the fourth quarter, more than initially estimated. Compared to a year earlier, unit labor costs were down a record 4.7 percent.

Fed Policy Reiterated to Continue As Is

The Federal Reserve does not need to tighten its extraordinarily loose monetary policy, Chicago Federal Reserve Bank President Charles Evans said Thursday. "If inflation actually started to rise, we'd be very concerned, and we would be altering the trajectory and calibration of our policy," he said. But so far inflation is relatively stable, he said.

"We'll be looking for the economy - is it beginning to recover in a truly vibrant fashion, or is it simply gaining momentum and it's going to take some time," he said. "All of those will feed into our assessment of when the accommodation should be removed. At the moment, I think that that's still quite a ways away."

Fed policy makers are still discussing the right sequencing of exit strategies when the time comes for monetary tightening, he said.

Retailers Post Excellent Results Despite Weather

Retailers posted their best monthly sales performance since just before the recession started in 2007, as lean inventories meant they did not need to resort to steep discounts. The February results are the latest indication that consumers are coming out of hibernation, although many of the largest retailers do not report monthly sales data. Sales would have been even better, except that record-setting snow in much of the eastern part of the country curbed gains, retailers said.

Even those retail sectors that have struggled in the past year, like department stores, were able to beat expectations. Macy's said sales at stores open at least a year increased 3.7 percent in February, and Dillard's reported a 2 percent rise. Teen apparel retailer Abercrombie & Fitch, another long-time laggard, posted a surprise 5 percent increase in same-store sales instead of the expected 6.9 percent decline.

February, typically the slowest sales month of the year, also benefited from weak comparisons with the year-earlier month, when consumers reined in spending during the height of the recession, shopping only for deeply discounted merchandise. February sales also showed the biggest gain since November 2007, a month before the recession started. March sales will benefit from an earlier Easter than last year.

Teen retailers like Abercrombie and Zumiez were a surprise bright spot as younger customers seemed to take to spring fashion. Sales of denim were strong at chains like Buckle and Wet Seal helping a sector that was expected to lag. Gap also surprised as same-store sales rose 3 percent, compared with expectations for a 1.8 percent increase.

Lower-priced retailers also fared well, with Target posting a 2.4 percent increase. TJX posted a 10 percent rise, beating an 8.9 percent estimate. Family Dollar posted a same-store sales rise of 3.6 percent for the quarter that ended February 28 and said it expected earnings for the period to exceed estimates.