MarketView for March 3

 

Summary 

 

Wall Street chalked up its best one-day rally in three months on Thursday, although weak volume lingers as a concern for those hoping for another leg higher. At the same time, with oil pausing from its recent climb, the market's focus shifted to stronger-than-expected economic data a day before the February U.S. employment report, with the result that the Dow Jones industrial average and the S&P 500 indexes managed to chalk up their largest one-day gains since December 1.

 

However, volume continued to be below average on days when the market rallies, causing some traders to be skeptical about the durability of the rally. About 7.99 billion shares traded on the three major exchanges, a number that was well below last year's daily average of 8.47 billion shares.

 

The put-to-call ratio in the options market also didn't change much despite the day's rally as traders continued to hedge against a potential drop in the market. Initial jobless claims fell last week to 368,000 -- a 2-1/2 year low -- one day after a robust report on private-sector hiring.

 

The Institute for Supply Management's non-manufacturing index rose to 59.7 in February, slightly above forecasts and higher than the January result.

 

Industrial stocks led the market higher, boosted by a weaker dollar and an improving outlook for global demand. The S&P industrial index .GSPI gained 2.4 percent, with Caterpillar Inc (CAT.N) up 3.2 percent to $104.25.

 

Stocks have shown resilience in the face of economic headwinds. The broad S&P 500 is down only about 1 percent from a peak in late February after falling around 3 percent due to growing violence in oil-producer Libya.

 

The Arab League said a peace plan for Libya was under consideration. The plan put forth by Venezuelan President Hugo Chavez, if successful, could remove a major headwind for equities.

 

Oil prices retreated from near 2-1/2 year highs. Brent crude futures fell $1.56 to settle at $114.79 after Venezuela's proposed plan to end Libya's crisis set off profit-taking.

 

Job Picture Improves

 

The number of Americans filing new claims for jobless aid hit its lowest level in more than 2-1/2 years last week and service sector hiring picked up in February, signs the labor market recovery was quickening. Initial claims for state jobless benefits dropped 20,000 to 368,000, the lowest since May 2008, the Labor Department said. The four-week average of claims, a better measure of underlying trends, fell below 400,000 for first time since July 2008.

 

Separately, growth in the huge U.S. services sector touched a fresh 5-1/2 year high in February. The Institute for Supply Management's index of non-manufacturing activity edged up to 59.7, the highest since August 2005, from 59.4 in January. Its employment component rose to 55.6, its highest level since April 2006, from 54.5. A reading above 50 indicates an expansion in the sector, which accounts for about 80 percent of the U.S. economy. A services employment gauge hit its highest level since April 2006.

 

The jobless claims data fell outside the survey period used for the most recent jobs report for February due on Friday. However, it was consistent with other recent signs that the labor market recovery was quickening.

 

Despite six straight quarters of growth, the economy has only managed to replace a fraction of the more than 8 million jobs lost during the recession. Fewer layoffs and gains in new jobs should help the economy weather a rise crude oil prices to over $100 a barrel in the past month in the wake of unrest in the Middle East.

 

A second report from the Labor Department on Thursday said nonfarm productivity increased at an unrevised 2.6 percent annual rate in the fourth quarter, which marks a sharp slowdown from a peak of 8.9 percent in the second quarter of 2009. Unit labor costs, a gauge of potential inflation pressures, fell at an unrevised 0.6 percent rate.

 

The drop in labor costs, which account for about 70 percent of production costs, showed the economy was facing little inflation pressure outside of globally driven increases in food and energy costs.

 

Retail Sales Up Sharply

 

Top retailers posted stronger-than-expected sales gains for February, a show of strength that could dissipate this spring as rising gasoline and food prices take their toll. The 25 retailers in the Thomson Reuters same-store sales index reported a rise of 4.2 percent in sales at stores open at least a year, beating forecasts of a 3.6 percent increase. The Street’s reaction to the strong February results remained muted, in part because February is the smallest of the year, accounting for only about 7 percent of annual sales.

 

Saks and Victoria's Secret parent Limited Brands, were among the largest gainers, while Target and Gap missed Street expectations. Part of the reason was that retailers received some benefit from January snowstorms that delayed some shopping, and consumer confidence has risen. However, retailers still face major challenges.

 

Higher fuel prices will lead shoppers to consolidate trips, meaning fewer impulse purchases, especially by lower-income shoppers. "When you're pumping in $50 to $75 to fill up your car, or more depending on what you drive, it's a major hit for a lot of consumers," said Retail Metrics President Ken Perkins.

 

The ICSC expects same-store sales to be flat to up 2 percent in March, with larger gains in April because of Easter's timing. At the same time, oil prices settled at their highest level since August 2008 on Wednesday. There is also growing pressure from food prices. Kroger said on Thursday that food stamp use remains at peak levels.

 

Several retailers said they were expecting sales declines in March because Easter is on April 24, three weeks later than last year. The weeks leading up to the holiday are when many shoppers start buying clothing for warmer weather.

 

Nordstrom and Neiman Marcus also reported large gains, helped by Valentine's Day sales. J.C. Penney’s sales were strong, but its shoppers are particularly price-conscious, and the department store operator's shares fell 0.7 percent. Saks stock rose 5.7 percent, while Nordstrom gained 1.6 percent.

 

A number of other chains catering to bargain hunters, such Kohl's, as well as low-priced retailers TJX and Ross, who sell designer brands, reported strong results. Limited Brands' same-store sales rose 12 percent, while Wet Seal reported an unexpected increase. Gap was one of the biggest losers, missing estimates as it continued to struggle with a tepid response to its merchandise, both domestically and abroad.

 

Crude Prices Fall

 

The price of crude oil fell from near 2-1/2-year highs on Thursday as traders took profits after Venezuela pitched a plan to resolve the Libyan crisis, even though the market was deeply skeptical about whether it would work. The pull-back follows two days of strong gains that sent a key technical indicator to its most overbought level in more than five years for Brent crude. Few traders expect any quick resolution to the violence that has halved Libyan oil output and sparked concerns over unrest across the Middle East.

 

Venezuelan President Hugo Chavez's plan to negotiate a resolution met with little immediate support. The chairman of the rebel National Libyan Council entirely rejected any talks with Libyan leader Muammar Gaddafi while Arab League President Amr Moussa said it was merely "under consideration".

 

President Obama said his administration was preparing a full range of options over Libya. The United States and international community must be ready to act rapidly if warranted by a humanitarian crisis or to stop violence against civilians in the North African country, Obama said.

 

Brent crude futures for April delivery settled $1.56 lower at $114.79 a barrel, after dropping to a session low of $113.09. It had settled at $116.35 on Wednesday, the highest close since August 2008. Crude futures for April settled at $101.91, down 32 cents, after hitting a low of $100.15. On Wednesday, it closed at $102.23, the first time U.S. crude had finished above $100 since September 2008.

 

Crude's losses were softened by data showing that the number of Americans filing for jobless benefits for the first time fell last week to the lowest level in more than 2-1/2 years, signaling stepped-up job creation could be under way.

 

The 14-day Relative Strength Index for Brent topped 80 on Wednesday, the highest level since March 2005, while U.S. crude topped 74, the highest in over 2-1/2 years. Technical analysts consider anything over 70 is overbought.

 

Open interest in U.S. crude futures has been on the rise in recent sessions and on Wednesday, it hit 1,574,584 lots, just below the record 1,579,109 set on July 16, 2007.

 

As trading hit a feverish pitch in recent sessions, the CME Group, parent company of the New York Mercantile Exchange, said it would again raise margins on crude oil trading, effective Friday. It was the second margin increase imposed in two consecutive weeks. Higher margins tend to compel traders, particularly speculators, to close out positions, as it drives up investment costs.

 

Brent's premium to domestic crude shrank to below $13 after last week's record $16.91. Investors were unwinding some positions on the Brent-West Texas Intermediate spread, knocking down Brent faster than. crude.

 

Libyan output has fallen to 700,000-750,000 barrels per day from normal levels of 1.6 million bpd as most foreign oil workers had taken flight, according to Shokri Ghanem, the head of Libya's state-owned oil company. Despite the unrest, tankers were still leaving and waiting to enter Libya's ports, sources said. At least one empty tanker left a Libyan terminal on Thursday to take on cargo in Egypt, and at least two more tankers were waiting to enter Libyan ports.