MarketView for May 7

Summary

It was a reasonable trading day on Wall Street on Wednesday after comments from Fed Chair Janet Yellen signaled continued support for the economy. Failing to participate was the Nasdaq, which fell for a second session as momentum names sold off. Financials and utilities were the day's largest gainers.

On the Nasdaq, Yahoo! fell 6.6 percent to $34.07 after Alibaba Group filed for an initial public offering that valued the Chinese e-commerce company well below Street consensus estimate.

However the day was not a good one for a number of key Nasdaq stocks. Google fell 1 percent to $509.96 while Facebook slid 2 percent at $57.39. Amazon was down 1.6 percent to end the day at $292.71. Groupon fell 20.7 percent to end the day at $5.33 as its sales and profit projections for the current quarter trailed some estimates. Twitter lost 3.7 percent to close at $30.66.

Whole Foods also contributed to the Nasdaq's decline as the organic grocer's stock fell nearly 19 percent to end the day at $38.93. Whole Foods was the largest drag on both the S&P 500 and Nasdaq 100, a day after Whole Foods posted second-quarter results and cut its 2014 outlook.

After declining in the morning session, the Dow Jones Industrial Average and the S&P 500 indexes moved into positive territory after Yellen said the economy was still in need of lots of support, given the "considerable slack" in the labor market in remarks to the congressional Joint Economic Committee.

Yellen's comments enabled investors to shift attention to what may be an easing of the tensions in Ukraine, as Russian President Vladimir Putin called on pro-Moscow separatists in Ukraine to postpone a vote on secession just five days before it was to be held.

Of 422 companies in the S&P 500 that had reported earnings through Wednesday morning, 68.2 percent beat expectations, above the 63 percent average since 1994, and exceeding the 66 percent beat rate for the past four quarters, according to Thomson Reuters data. Earnings are expected to rise 5 percent this quarter, down from 6.5 percent estimated at the start of the year, but above the low of 0.6 percent in mid-April, according to Thomson Reuters data.

In the latest snapshot of the U.S. economy, the Labor Department said that U.S. nonfarm productivity fell at its fastest pace in a year in the first quarter because of severe weather. That led to the largest gain in unit labor costs in more than a year. Productivity fell at a 1.7 percent annual rate in the quarter, the Labor Department said.

Approximately 7 billion shares changed hands on the major equity exchanges, a number that was well above the 6.1 billion share average posted over the past five days, according to data from BATS Global Markets.

Productivity Falls

Nonfarm productivity fell at its fastest pace in a year in the first quarter as output slowed sharply, leading to an increase in labor-related production costs. According to a report released by the Labor Department on Wednesday morning productivity declined at a 1.7 percent annual rate after advancing at a 2.3 percent pace in the fourth quarter. It was the largest decline since the first quarter of 2013.

The fall in productivity, which measures hourly output per worker, was in tandem with a weather-driven sharp weakness in the economy during the January-March period. Manufacturing sector hours fell at a 1.4 percent rate. They had increased at a 3.4 percent pace in the fourth quarter.

First-quarter gross domestic product expanded at a 0.1 percent annual rate, the government said in its advance estimate last week, an abrupt slowdown from the fourth quarter's 2.6 percent rate. However, subsequent data on March trade, factory orders and construction spending suggest the economy actually contracted in the first three months of the year.

Nonetheless, the trend in productivity remains on a rising trend. Compared to the first quarter of 2013, productivity increased 1.4 percent.

Growth in output braked to a 0.3 percent rate in the first quarter, also the weakest pace in a year. Output had increased at a 3.8 percent rate in the fourth quarter. Factory output grew at an only 1.8 percent pace, sharply slower than the 4.7 percent rate logged in the fourth quarter.

With overall output slowing sharply because of the adverse weather conditions labor-related production costs jumped.

Unit labor costs, the price of labor per single unit of output, surged at a 4.2 percent rate after falling at a 0.4 percent rate in the fourth quarter. It was the biggest rise in unit labor costs since the fourth quarter of 2012.

Despite the rise last quarter, there was little sign that wage inflation was a matter to be concerned with. Unit labor costs rose only 0.9 percent compared to the first quarter of 2013. Slack in the jobs market is suppressing wage inflation, keeping overall price pressures in the economy benign.

Fed Chair Janet Yellen Speaks

Federal Reserve Chair Janet Yellen said the central bank will continue to provide a high degree of monetary policy accommodation, and cited geo-political turmoil and weak housing data as risks to the U.S. economy.

Yellen, speaking to the congressional Joint Economic Committee on Wednesday, also indicated concerns over investors exerting risky behavior given the extended period of low interest rates.

"Some reach-for-yield behavior may be evident," Yellen said in her prepared testimony, pointing to the lower-rated corporate debt markets as an example.

Yellen added that issuance of syndicated leverage loans and high-yield bonds has expanded, while underwriting standards loosened, though she said that these increases appear modest - particularly at large banks and life insurers.

The Fed Chair repeated the view of the Federal Open Market Committee that despite the expected domestic economic growth, considerable slack in the labor markets and low inflation warrants a "high degree of monetary accommodation."

Interestingly, Yellen knocked down a list of concerns that the Fed’s policies could be fueling bubbles or other threats to financial stability, and complimented the better liquidity and capital positions of the largest financial firms. She said that while there is some evidence of investors reaching for yield, it has not gotten out of hand.

“While some financial intermediaries have increased their exposure to duration and credit risk recently, these increases appear modest to date – particularly at the largest banks and life insurers. More generally, valuations for the equity market as a whole, along with other broad categories of assets, such as residential real estate, remain within historical norms…. For the financial sector more broadly, leverage remains subdued and measures of wholesale short-term funding continue to be far below levels seen before the financial crisis.”

Last month the Fed reduced its monthly bond purchases to $45 billion from $55 billion (32.4 billion pounds).