MarketView for March 31

 

 

Summary

 

The major equity indexes ended a solid quarter with the barest of moves on Thursday, as Wall Street looked ahead to Friday's jobs report to provide a catalyst to push indexes to new highs for the year. After gaining 5.4 percent in the first quarter, the S&P 500 index remained near the 1,330 level, where it has been unable to go beyond despite several tries during the past month or so. A strong payrolls number may tip it over and technical momentum could kick in, lifting stocks further.

 

Share prices were resilient through the first quarter, despite a number of global crises, including Japan's earthquake and nuclear reactor difficulties, along with a variety of uprisings in North Africa and the Middle East. Friday's jobs report would confirm the optimism necessary to override the resulting nervousness in the financial markets.

 

In March, the Dow industrials outperformed both the S&P 500 and Nasdaq, indicating preference for stronger companies as overseas concerns lingered. At the same time, initial claims for unemployment benefits last week showed the trend of labor market improvement remains intact, but at a slow pace. The data precedes Friday's closely watched employment report from the Labor Department, which is expected to show the U.S. economy added 190,000 jobs in March.

 

Daily volume was light again, continuing the week's pattern. About 6.9 billion shares changed hands on the three major exchanges, a level that was considerably below last year's estimated daily average of 8.47 billion shares.

 

For the month, the Dow Jones industrial average was up 0.76 percent, the S&P was down 0.1 percent and Nasdaq fell 0.04 percent. That trend was similar to what we saw for the first quarter as a whole, with the Dow up 6.4 percent, while the S&P's was up of 5.4 percent and the Nasdaq up 4.8 percent.

 

Berkshire Hathaway's class B shares fell 2.1 percent to close at $83.63, a day after the resignation of David Sokol, the man widely seen as the leading successor to Warren Buffett to run Berkshire. Sokol resigned after Buffett revealed that Sokol had bought shares in chemical company Lubrizol Corp before advising Buffett to acquire it. In an interview on CNBC, Sokol said he did nothing wrong in buying the shares.

 

Retailers ranked among the day’s worst performers, dragged lower by Carmax, down 7.2 percent to close at $32.10 after posting fourth-quarter earnings.

 

Employment Picks Up

 

The number of Americans filing unemployment claims was lower last week and factory employment in the Midwest hit a 27-year high in March, indicating that an improvement in the job market is under way. The decline in layoffs and pick-up in hiring may relieve concerns about economic growth early in the year.

 

Initial claims for state jobless benefits fell by 6,000 claims to a seasonally adjusted 388,000 claims the Labor Department reported on Thursday, a day before the release of the government's closely watched employment report. Though annual revisions to the jobless claims series back to 2006 showed slightly higher readings for recent prior weeks than previously estimated, the downward trend remained intact. The claims data falls outside the survey period for March's employment report, to be released on Friday.

 

Nonfarm payrolls are expected to have increased a solid 190,000 after rising 192,000 in February, according to a Reuters survey, with the unemployment rate seen holding steady at a near two-year low of 8.9 percent.

 

The Institute for Supply Management-Chicago's employment index hit the highest level since December 1983, jumping to 65.6 in March from just under 60 the month before. Its overall business barometer dipped to 70.6 from 71.2 in February but remained in expansion mode.

 

Although the four-week moving average of unemployment claims -- a better measure of underlying trends - rose 3,250 to 394,250, it held beneath the key 400,000 level for a fifth consecutive week. Overall claims have been below the level that is associated with steady job growth for three weeks in a row.

 

The claims report showed the number of people still receiving benefits under regular state programs after an initial week of aid dropped in the week ended March 19 to its lowest level since October 2008. A total of 8.77 million people were claiming unemployment benefits under all programs in the week ended March 12, the latest week for which data is available.

 

Geithner Poses Currency Problem Again

 

Tightly controlled exchange rate regimes are the main flaw in the international monetary system and the solution is simple, Treasury Secretary Timothy Geithner told a G20 meeting on Thursday. In a thinly veiled swipe at the Chinese hosts of the seminar of the Group of 20 wealthy and developing economies, Geithner said that countries should have flexible exchange rates and permit free flows of capital to be major players in the global currency order.

 

He also used his speech to call for a stronger International Monetary Fund and to defend U.S. policies, acknowledging that past failures had caused much damage but saying the government was aiming to stabilize debt levels to avoid future problems.

 

The G20 seminar was spear-headed by France, which is pushing a bold reform agenda in its year-long presidency of the group, and was meant to be focused on ills in the monetary system.

 

Geithner offered a straightforward diagnosis. While major currencies moved freely and most emerging economies were well along that path, there were still some with little exchange rate flexibility and extensive capital controls, he said.

 

This asymmetry fueled inflation risks in the economies whose exchange rates are undervalued, magnified currency appreciation in others and also generated protectionist pressures, he said.

 

"This is the most important problem to solve in the international monetary system today. But it is not a complicated problem to solve," he said, according to the prepared text of his remarks.

 

"It does not require a new treaty, or a new institution. It can be achieved by national actions," he added.

 

Although Geithner did not mention China by name, the United States has long called on Beijing to let its currency rise more quickly, accusing it of keeping its exchange rate artificially cheap to give its exporters an unfair advantage.

 

In recent months, Geithner has taken to casting the Chinese currency as a broader global problem, saying that it is making life difficult for other developing economies. India and Brazil, among others, have agreed, saying that a cheap yuan has undermined their competitiveness.

 

The Chinese government told countries attending the G20 seminar in the eastern city of Nanjing not to mention specific currencies in their speeches and to keep their focus on broader questions in the global monetary system.

 

While saying that national governments held the key to reform in their own hands, Geithner called for a stronger International Monetary Fund to shine a spotlight on risks. "We would also support giving the IMF a greater capacity to help influence the policy choices made by the major economies, including greater independence to publish its analysis," he said.

 

The IMF should be able to make recommendations for how to preempt the emergence of large imbalances in the global economy, he said.

 

On the Special Drawing Right (SDR), the IMF's unit account that France and China believe should take on a bigger role in the international monetary system, Geithner was clear.

 

Both French President Nicolas Sarkozy and Chinese officials have said it is time to consider bringing the yuan into the basket of currencies that constitutes the SDR, which is currently restricted to the dollar, euro, yen and pound. Geithner suggested that certain conditions should be met first.

 

"We believe that currencies of large economies heavily used in international trade and financial transactions should become part of the SDR basket, and that to achieve this objective, the concerned countries should have flexible exchange rate systems, independent central banks, and permit the free movement of capital flows," he said.

 

Emphasizing that solutions to the global monetary system's problems rest at the national level, Geithner said the United States had made progress in fixing the policy mistakes that caused damage in the global financial crisis but still had work to do.

 

"We are committed to ... fiscal reforms that will reduce deficits as a share of the economy to three percent over the next several years so that we stabilize the ratio of debt to GDP at a level that will not threaten future economic growth," he said.