MarketView for March 31

 

 

 

Summary 

 

The major equity indexes ended the last day of the month and the quarter’s end on a slightly negative note on Wednesday, in part because the ADP Employer Services report indicated an unexpected decline in private sector employment that in turn created a new round of worries over the health of the labor market two days before the government's key jobs data.

 

The data from the Employer Services report showed that private-sector employers unexpectedly cut jobs in March. At the same time, a Chicago Purchasing Managers report indicated that Midwest business activity was not as robust as last month. Needless to say it was not the news Wall Street had hoped to hear. The Street has anxiously been looking for on-going confirmation that the economic recovery is gaining strength.

 

Even so, the benchmark S&P 500 index still managed to chalk up its fourth straight quarterly advance. Furthermore, the feeling on Wall Street is that the second quarter will start off on solid footing if the upcoming earnings season meets its high expectations.

 

Wednesday’s laggards included some of this quarter's best performers, such as Boeing down 1.3 percent on Wednesday to close at $72.61, and Home Depot down 1.04 percent to close at $32.35. Macy's was also down, closing with a loss of 1.6 percent at $21.77. Technology shares, which have also underpinned the market's run-up, sold off as well.

 

After the closing bell, Research in Motion fell an additional 7.4 percent to $68.50 in after-hours trading. The company posted quarterly results that lagged expectations. The stock had ended at $73.97, down 1.3 percent in regular trading ahead of the earnings report.

 

Boeing, was a top drag on the Dow Jones industrial average, but it remained the Dow's best-performing stock so far this year, up about 34.1 percent. 3M was off 0.8 percent at $83.57, making it the Dow's second-worst drag behind Boeing.

 

On the Nasdaq, shares of Microsoft fell 1.6 percent to $29.2875, while Apple was down 0.4 percent to $235.00, after a string of record closes.

 

A legal ruling in Chevron's favor sent company’s shares up 0.7 percent to $75.83, which helped limit the Dow's decline and prompted investors to buy some energy-related shares. A jump in oil's price above $83 a barrel to its highest close since October 2008 also helped the energy sector.

 

President Barack Obama's announcement of a broad expansion of offshore oil and gas drilling also gave Wall Street pause to pick-up up energy shares, with oil drillers like Apache Corp closing up 1.8 percent at $101.50. The S&P 500 is up 72.9 percent from the March 2009 bottom.

 

For the first quarter, the Dow is up 4.1 percent, while the S&P 500 is up 4.9 percent, and Nasdaq is up 5.7 percent. For the month of March alone, the Dow advanced 5.1 percent, the S&P 500 gained 5.9 percent and the Nasdaq was up 7.1 percent.

 

Factory Orders Rise

 

According to a report released by the Commerce Department on Thursday, factory orders rose for a sixth straight month in February, pointing to continued expansion in the manufacturing sector. According to the report, orders rose 0.6 percent after an upwardly revised 2.5 percent jump in January, initially reported as a 1.7 percent advance.

 

Orders, excluding transportation, were up 0.7 percent after a 0.5 percent increase in January, the department said. It was the seventh consecutive month of gains. Orders for non-defense capital goods excluding aircraft, seen as a measure of business confidence, rose 2.0 percent after falling 4.4 percent in January.

 

Unfilled orders rose 0.5 percent last month, the largest increase since July 2008, after increasing 0.2 percent in January. February marked the second straight month that unfilled orders rose.

 

Shipments fell 0.1 percent after increasing 0.7 percent in January.

 

Inventories increased 0.5 percent in February, the largest increase since August 2008, after advancing 0.3 percent the prior month. That left the inventories-to-shipment ratio, a measure of how long it would take to deplete current stocks, unchanged at 1.29 months' worth.

 

The department revised durable goods orders for February to show a 0.9 percent increase rather than the previously reported 0.5 percent. Excluding transportation, orders rose 1.4 percent last month instead of 0.9 percent.

 

Manufacturing is leading the economy's recovery from the longest and deepest downturn since the 1930s as businesses restock their warehouses. Inventories were liquidated to record low levels to cope with weak demand.

 

President of Atlanta Fed Neutral on Discount Rate Increase

 

Dennis Lockhart, president of the Atlanta Federal Reserve Bank, said on Wednesday he is "neutral" on whether the Fed should restore the traditional spread between two key rates to normalize lending.

 

Before the recession, the rate spread between the discount rate the Fed charges for emergency loans to banks and its benchmark federal funds rate was 100 basis points. It is currently at 50 basis points.

 

"I am not totally convinced it has to go back to 100 basis points," Lockhart said. "I'd say I'm neutral on the question of whether we need to restore the traditional spread."

 

He said discount window usage at the Atlanta Fed has dropped dramatically since the Fed's surprise discount rate hike last month.

 

Lockhart also said the U.S. economy remains in a transitional phase from growth relying on government support to growth based on private spending.

 

"There are hopeful, if tentative, signs of improvement in employment markets. We have a long way to go, and for that reason I believe it's premature to assume an imminent reversal of the Fed's accommodative policy," he said.

 

However, Lockhart also said that “It is quite possible circumstances justifying the start of a cycle of policy tightening will develop well before the unemployment rate has found a satisfactory level."

 

He added that tying monetary policy to a goal of bringing unemployment down to pre-recession levels "would be a mistake".

 

At its March meeting the central bank repeated its vow to keep rates extraordinarily low for an extended period. Lockhart said he supports this pledge, but cautioned against linking it to a particular time-frame or a number of meetings. Answering reporters' questions after his speech, Lockhart reiterated that with markets so focused on the phrase, the Fed must not be "cavalier" about changing it.

 

Meanwhile, Federal Reserve Governor Elizabeth Duke said financial conditions have improved in some markets, but the banking sector continues to be under strain. She expressed guarded confidence that banks would step up lending as the economy improves.

 

"Improvements in a number of the conditions that depressed lending in 2009 ... lead me to be somewhat optimistic that we will begin to see an increase in bank loans later this year," Duke said.

 

Speaking after a disappointing report on private sector employment, Lockhart called unemployment "the most vexing current problem" and a "daunting economic challenge".

 

Lockhart, who is not a voting member of the Fed's policy-setting Federal Open Market Committee this year, said that as long as inflation remains subdued the jobs picture will be a key factor for him in determining the right level for interest rates.

 

"I will be looking for signs that employment gains are likely to repeat, accumulate, and once achieved, are likely to be durable," he said.

 

These signs could include an improvement in the process of job creation, a decline in the measured rate of underemployment, as well as a series of employment gains big enough to move the unemployment rate down over time, he said.