MarketView for May 8

 

Summary

 

Share prices were lower on Thursday for the most part with both the S&P 500 and the Nasdaq indexes closing lower, led by losses in the energy and utility sectors. The Nasdaq ended lower for a third straight session, its longest losing streak since early April.

 

A turnaround in beaten-down internet stocks had boosted the Nasdaq earlier, while a drop in initial jobless claims suggested the labor market was improving and had helped lift the broader market. However, a late selloff in utilities and energy, among the best performing sectors recently, dragged the S&P 500 and the Nasdaq to session lows.

 

Twitter was up 4.2 percent to close at $31.96, while Groupon gained 6.1 percent to close at $5.65. Priceline Group fell 2.1 percent to $1,108.00. The travel website operator reported higher-than-expected quarterly earnings but forecast second-quarter profit below estimates. Tesla Motors fell 11.3 percent to $178.59, a day after the company's outlook also disappointed some on the Street.

 

Of 445 companies in the S&P 500 that have reported earnings through Wednesday morning, 68.2 percent beat expectations, above the 63 percent average since 1994 and the 66 percent beat rate for the past four quarters, according to Thomson Reuters data. Earnings are expected to rise 5.3 percent this quarter, down from the 6.5 percent estimated at the start of the year, but above the low of 0.6 percent in mid-April.

 

Federal Reserve Chair Janet Yellen, in testimony to a Senate panel, said no decision had yet been made on the central bank's portfolio of assets, which has swollen to $4.5 trillion from about $800 billion in 2007. If the Fed ultimately shrinks it to a pre-crisis size, the process could take the better part of a decade, Yellen said.

 

Initial claims for state unemployment benefits declined 26,000 to a seasonally adjusted 319,000 for the week ended May 3, snapping three weeks of declines.

 

Approximately 6.7 billion shares changed hands on the major equity exchanges, a number that was above the 6.1 billion share average over the past five days, according to data from BATS Global Markets.

 

Jobless Claims Fall

 

The number of Americans filing new claims for unemployment benefits fell more than expected last week, indicating the labor market was strengthening despite a run-up in applications in prior weeks. The Labor Department reported on Thursday that initial claims for state unemployment benefits fell by 26,000 claims to a seasonally adjusted 319,000 claims for the week ended May 3,. The decline ended three straight weeks of rising claims.

 

Claims for the week ended April 26 were revised to show 1,000 more applications received than previously reported. Claims are volatile around this time of the year as the timing of Easter and school spring breaks can throw off the model that the government uses to smooth the data for seasonal fluctuations.

 

The four-week moving average for new claims, considered a better measure of underlying labor market conditions as it smooth out week-to-week volatility, rose 4,500 to 324,750.

 

Despite the increase, the four-week average remains at levels consistent with an improving labor market. A Labor Department analyst said there were no special factors influencing the state level data.

 

The labor market is firming with employment growth averaging more than 200,000 jobs per month in the first four months of the year. Employers in April added 288,000 jobs to their payrolls, the most since January 2012.

 

The unemployment rate fell to 6.3 percent last month, compared to 6.7 percent at the end of 2013. The decline has been aided by people dropping out of the labor force. The claims report showed the number of people still receiving benefits after an initial week of aid fell 76,000 to 2.69 million during the week ended April 26.

 

Federal Reserve Chair Janet Yellen said on Wednesday conditions in the labor market had improved "appreciably," but she added they remained still far from satisfactory.

 

Fed In No Rush

 

The Federal Reserve is in no rush to decide the appropriate size of its balance sheet, but if it ultimately shrinks it to a pre-crisis size, the process could take the better part of a decade, Fed Chair Janet Yellen said on Thursday.

 

Yellen, in testimony to a Senate panel, said no decision had yet been made on the central bank's portfolio of assets, which has swollen to $4.5 trillion from about $800 billion in 2007.

 

Three rounds of asset purchases meant to stimulate the economy in the wake of the 2007-2009 financial crises have boosted the balance sheet to this record level. Unsatisfied with the recovery, the Fed is still adding $45 billion in bonds each month, though the purchases should end later this year. Yellen said the portfolio should start to shrink once the Fed decides to raise near-zero interest rates.

 

"We've not decided, and we'll probably wait until we're in the process of normalizing policy to decide, just what our long-run balance sheet will be," she told Congress, adding it will be "substantially lower" than it is now.

 

While the central bank could sell the mortgage-based bonds it has accumulated, in the past it has telegraphed that it would more likely simply stop re-investing funds from expired assets and then, over years, let the assets run off the balance sheet naturally.

 

"If we do that and nothing more, it would probably take somewhere in the neighborhood of five to eight years to get it back to pre-crisis levels," Yellen said of halting reinvestments.

 

It was the Fed's most explicit time frame yet for the delicate task of shrinking its balance sheet to a more normal level. The massive portfolio has sparked worries that, once the Fed starts to raise rates, inflation will shoot up. The Fed could also absorb losses if it decides to sell assets in the years ahead, a potential political headache for Yellen.

 

The five-to-eight-year timeline generally aligns with estimates of both private economists and a paper published last year by top Fed economists. A paper by JPMorgan economists predicts shrinking the Fed's portfolio would take seven years.

 

Yellen, in her second day of testimony before lawmakers, again stressed that excessively low inflation drags on economic growth. But she rejected the idea, floated by some private economists, of trying to boost inflation above the Fed's 2-percent target to ratchet down unemployment, saying it was critical to keep inflation expectations firmly anchored.

 

Inflation has been running just above 1 percent in the world's biggest economy while unemployment, albeit falling, is still elevated at 6.3 percent.

 

Asked repeatedly about fiscal policies, Yellen took a page from her predecessor Ben Bernanke and urged the Congress to address the nation's long-term budget challenges, warning that the current course was unsustainable.

 

"We can see that going out 20, 30, 50 years without some further shifts in fiscal policy, it's projected that the ratio of debt to GDP will rise to unsustainable levels," Yellen told the Senate Budget Committee.

 

"I would join my predecessor in saying that I do think it's important that the Congress address that issue," she said, adding recent tightening of fiscal policy had been one of the "headwinds" that had undercut the Fed's efforts to foster a stronger economic recovery.

 

ECB Keeps Rates Unchanged

 

The European Central Bank left interest rates unchanged on Thursday, waiting for updated forecasts from its staff in June before deciding whether to take fresh action to counter low inflation that ticked up last month.

 

Data have since shown euro zone inflation ticked up to 0.7 percent in April from March's 0.5 percent, relieving pressure on the ECB to act this month. But a downward revision in the staff inflation forecasts in June could trigger action next month.

 

The ECB Governing Council met in Brussels against the backdrop of a Franco-German spat over ECB policy towards the euro's exchange rate - one factor ECB President Mario Draghi has identified as a potential trigger for policy action.

 

Germany said on Monday the level of the euro was an issue for the ECB but not politicians, indirectly criticizing France's prime minister after he said the currency was "too high" and a "more appropriate" monetary policy was needed to bring it down. The euro has gained over 4 percent in the past six months and rose against the dollar on Thursday.

 

While the ECB is expected to reiterate its concern about the impact the strong currency has on already-low inflation, data pointing to a firmer recovery and improved financing conditions has eased the pressure to act now.

 

The June meeting is shaping up as a crunch date for a potential policy shift. Many economists expect a downward revision in the ECB staff's inflation forecasts, which could open the way for additional stimulus.

 

Draghi has several policy tools at his disposal, including cutting rates or injecting more liquidity. But the impact of such measures on the exchange rate and inflation is seen as being limited. For more impact, the ECB would need to turn on its money printing press, which is more a complicated option and is not expected to happen any time soon.

 

Draghi said in April that if the inflation outlook were to deteriorate, the ECB could respond with a "broad-based asset purchase program", probably quantitative easing (QE) - effectively printing money to buy assets.

 

Last week, however, he told German lawmakers at a closed-door event that while low inflation would persist in the euro zone, he did not expect deflation, a source who attended the meeting said, adding that Draghi "made clear that we're still some way off QE". The economy is showing increasing signs of stabilization.

 

Demand for home and corporate loans is expected to pick up, an ECB survey showed, while polls of euro zone business indicated on Tuesday they had a solid start to the second quarter.