MarketView for May 3

 

 

Summary

 

The Dow and S&P 500 advanced to all-time closing highs on Friday, with major indexes rising about 1 percent after an unexpectedly strong April jobs report eased concerns about an economic slowdown. The S&P closed above 1,600 and the Dow briefly traded above 15,000 for the first time as stocks extended this year's rally.

 

Both the Dow and S&P ended at all-time closing highs.  Bellwether companies, including Chevron, Boeing and Johnson & Johnson reached 52-week highs. For the week, the Dow rose 1.8, the S&P gained 2 percent and the Nasdaq rose 3 percent in its biggest weekly climb since the first week of the year.

 

Non-farm payrolls rose by 165,000 last month and the unemployment rate fell to 7.5 percent, a four-year low, from 7.6 percent, the government said. In addition, hiring was much stronger than previously thought in February and March.

 

Sectors tied to the pace of economic growth and to commodity prices were among the strongest gainers. U.S. Steel rose 6.3 percent to $18.14 while crude oil futures rose 1.5 percent to settle at $95.43 a barrel. Freeport McMoRan Copper & Gold Inc (FCX.N) closed up 2.6 percent at $31.13, after prices of copper posted the biggest daily gain since late October 2011.

 

General Electric rose 1.1 percent at $22.57, led gains among industrials after it won approval to buy oilfield pump maker Lufkin Industries for about $3 billion. The deal will allow GE to sharply increase its presence in the market to extract oil and natural gas from shale.

 

Gilead Sciences rose 5.7 percent to $55.15 after reaching a record high of $56.35. The world's largest maker of branded HIV drugs reported a big rise in quarterly profit late on Thursday.

 

LinkedIn fell 13 percent to $175.59 a day after the social network reported disappointing revenue forecasts.

 

Of the 404 companies in the S&P 500 that have reported earnings so far, 68.3 percent have beaten earnings expectations, but only 46.3 percent have reported revenue above expectations. Over the past four quarters, 67 percent of companies beat on earnings and 52 percent beat revenue estimates.

 

In other economic reports on Friday, factory orders fell sharply in March while the pace of growth in the vast U.S. services sector eased in April to the slowest pace in nine months.  About 6.33 billion shares changed hands on the three major equity exchanges, a number that was below the daily average so far this year of about 6.36 billion shares.

 

Surprise on Jobs

 

Employment was up more than expected in April and hiring was much stronger than previously thought in the prior two months, easing concerns belt-tightening in Washington was dealing a big blow to the economy. According to a report released on Friday morning by the Labor Department, nonfarm payrolls rose 165,000 last month and the jobless rate fell to 7.5 percent, the lowest level since December 2008, the Labor Department said on Friday.

 

Payrolls rose by 138,000 jobs in March, 50,000 more than previously reported, and job growth for February was revised up by 64,000 to 332,000, the largest gain since May 2010.

 

The drop in the jobless rate reflected a gain in employment, rather than people leaving the workforce. The workforce actually expanded, while the labor force participation rate - the share of working-age Americans who either have a job or are looking for one - held steady at a 34-year low of 63.3 percent.

 

Still, construction employment fell for the first time since May, while manufacturing payrolls were flat. The average workweek pulled off a nine-month high, with a gauge of the overall work effort falling, but average hourly earnings rose four cents.

 

The relative strength of the data was particularly surprising given other recent signs that suggested the economy had slowed sharply in recent weeks. Although the economy expanded at a 2.5 percent annual pace in the first quarter, a wide range of data suggested it ended the period with less speed. Further, factory activity barely grew in April.

 

While the pace of hiring was stronger than expected in April, it remained below the pace needed to put a significant dent in the jobless rate. All the job gains last month were in the private sector, which added 176,000 new positions. Gains were led by a rebound in retail employment, which had dropped in March after eight straight months of increases. Retail payrolls rose 29,300.

 

But construction employment surprisingly fell, shedding 6,000 jobs after 10 straight months of gains. Residential construction has been marching higher and the pullback in construction jobs could be the result of cold weather in April. Manufacturing employment posted no gains last month.

 

Government payrolls fell by 11,000 jobs after falling 16,000 in March. Most of the job declines last month came from the federal government and the U.S. Postal Service.

 

There Is No Inflation

 

For all the trillions of dollars-worth in new money that central banks are printing, financial markets seem to be signaling that fears of rampant global inflation are unfounded.

 

Over the past month, investors have devoured virtually any fixed income securities on offer, from the U.S. Treasury to tech giant Apple, debt-laden euro sovereigns Italy or Slovenia and even debut bonds from exotic African countries like Rwanda.

 

With 10-year yields on lending to United States or Germany now little over 1 percent and the average coupon on high grade global corporate bonds sold so far in 2013 just 4 percent, what seems like ludicrously low 6-7 percent yields to compensate for 10-year Slovenian or Rwandan risk have been wowing the crowd.

 

Yet despite the underlying global growth slowdown and the demand for bonds, investors have also continued to snaffle away western blue-chip equities, where average dividend yields in the United States and Europe are between 2 and 4 percent, and are shunning income-less inflation hedges like oil and commodities.

 

Even as central banks in Washington, Tokyo and Frankfurt continue to flood the world with newly-minted currency via bond buying or cheap loans to their banks, long-held market anxiety about the inflationary consequences appears to be ebbing. Judged solely by the latest consumer price inflation numbers around the world, it's not hard to see why.

 

Flashing a green light for this week's latest interest rate cut from the European Central Bank, annual euro zone inflation tumbled to just 1.2 percent last month - its lowest in more than three years and far below the ECB target of close to but below 2 percent.

 

Earlier last month, much faster-growing China also reported a drop of more than one percentage point in its annual inflation rate in March to just 2.1 percent.

 

And with consumer price growth of little more than 1 percent also below the Federal Reserve's assumed target of 2 percent, the picture looks pretty consistent across the globe. Critically, inflation expectations too are evaporating.

 

Five-year U.S. Treasury break evens fell by more than half a percentage point in just six weeks to fall below 2 percent for the first time in eight months. Little wonder, then, that an unemployment-focused Fed this week signaled no hurry to scale back its current spate of money printing and bond buying and even said it may increase it.

 

Right now may well be a sweet spot for both bonds and equities, it said. But a long-term healing of credit markets and rising global demand for food from swelling global populations would eventually supercharge central bank money floods into an inflationary pulse - even if it takes several quarters or even years to materialize.

 

Factory Orders Fall

 

New orders for factory goods recorded their largest drop in seven months in March, but a gauge of planned business spending rose slightly, suggesting businesses are continuing to spend despite a slowdown in factory activity.

 

The Commerce Department reported on Friday that orders for manufactured goods fell by 4 percent. Factory orders were dented by the aircraft industry, which is prone to sharp swings. Civilian aircraft orders plunged 48.3 percent. Boeing had previously reported orders in March were for 39 aircraft, down from 179 a month earlier.

 

Orders excluding the volatile transportation category decreased 2 percent, pointing to underlying weakness in the manufacturing sector that carried the economy out of the 2008 recession.

 

Orders for non-defense capital goods excluding aircraft - a closely watched proxy for business spending plans - rose 0.9 percent instead of the previously reported 0.2 percent increase. While often looked at as a core reading for orders, this measure has also been quite volatile in recent months. In February, it fell 3.2 percent.

 

The Commerce Department also said orders for durable goods, manufactured products expected to last three years or more, slumped 5.8 percent instead of the 5.7 percent fall reported last week, the biggest drop in seven months.