MarketView for November 5

 

 

Summary 

 

Share prices were higher as were as the key equity indexes chalked up their fifth straight week of gains. The uptick in prices was due in large part to a continuing euphoria on Wall Street over the recent elections, along with the substantial addition of stimulus to the economy in the form of $600 billion dollars being added to the economy by the Federal Reserve.

 

Following a 3.6 percent rise in the S&P 500 this week, investors locked in profits on Friday, offsetting an unexpectedly strong payrolls report that reinforced optimism about the economy. As a result, the market closed only slightly higher.

 

A government jobs report suggested the recovery in employment could be picking up steam. Non-farm payrolls were up by a solid 151,000 new jobs during the month of October, the first gain since May. The news came two days after the Fed detailed a plan to buy $600 billion in government bonds over coming months to assist economic growth, and three days after Republicans made gains in the recent. elections, thereby signaling a more business-friendly Congress.

 

The S&P 500 is up about 16 percent since September and indexes surged to two-year highs on Thursday, but Wall Street has begun to worry over exactly how long the upward trend will continue without a break.

 

In a technical barrier, the 61.8 percent retracement of the slide in the S&P 500 from the historic highs in 2007 to the lows in March 2009 is 1,228.74, near Friday's session high of 1,227.08.

 

Kraft Foods was the second largest percentage loser on the Dow Jones industrial average, falling 2.2 percent to close at $31.08 a day after it reported third-quarter revenue that was weaker than expected and commented on its 2011 forecast.

 

After the closing bell, Boeing fell 2.5 percent to $69.51 in extended trading on an Aviation Week report that said the Dow component expects delivery delays of its 787 aircraft. Pharmaceutical companies were also lower with Merck down 2.6 percent to $35.70 and Pfizer off 1.2 percent, closing at to $17.18.

 

The Fed is expected to soon allow some healthy banks to increase dividend payments. As a result, JPMorgan Chase was up 2.9 percent to close at $40.94 and Bank of America gained 1.9 percent to close at $12.36.

 

Option traders furiously snapped up calls on the Financial Sector Sector SPDR fund, which rose 1.8 percent.

 

Volume for the day was strong, with about 9.40 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, above the year-to-date daily average of 8.73 billion.

 

Jobs Number A Surprise

 

New jobs creation was higher than expected last month as private companies hired workers at the fastest pace since April; a sign the sluggish economy is finally starting to tick up. Nonfarm payrolls rose by 151,000 in October, the first gain since May, and more than double economists' expectations, a Labor Department report showed on Friday. Private hiring rose by 159,000, while government cut only 8,000 jobs.

 

Concern over the anemic job market was a factor behind the Federal Reserve's decision this week to pump an additional $600 billion into the economy through government bond purchases to push interest rates down and stimulate demand. Friday’s data was not strong enough to knock the Fed off its new policy course, but it tempered speculation the central bank might have to step up its bond buying.

 

Data for August and September also was revised to show 110,000 fewer jobs were lost than previously estimated. Private payrolls have grown above 100,000 for each of the last four months and are now up 1.1 million since December.

 

The upbeat data drew a mixed reaction with share prices moving higher, while the dollar rose and government debt prices fell as the Street reined in bets on a further easing of monetary policy.

 

While the department's survey of employers found solid job growth, a more volatile survey of households showed losses and the unemployment rate remained stuck at a painfully high 9.6 percent for a third straight month. It would have risen had some workers not left the labor force.

 

A 1.8 percent drop in pending sales of previously owned homes in September provided another reminder the economic recovery remained fragile.

 

The Fed, which cut overnight interest rates to near zero in December 2008 and then bought up about $1.7 trillion in debt to spur recovery, has been worried about the level of unemployment and a slowing in inflation. Fed Chairman Ben Bernanke said on Friday that a healthy domestic economy was critical for global growth.

 

"I think it's important to emphasize ... that a strong U.S. economy, a recovering economy, is critical, not just for Americans but it's also critical for the global recovery," Bernanke said.

 

The October payrolls data was the latest in a series of recent signs that economic growth is firming somewhat. Other reports have shown growth in both the manufacturing and service sectors in October. Recovery prospects also brightened as a Fed report showed consumer credit rose in September for the first time since January, a positive sign for consumer spending. Jobs growth in October was supported by the private service-providing sector, where employment jumped by 154,000.

 

Temporary help services, a harbinger of permanent hiring, increased 34,900 from 23,800 in September. Hiring at retailers, in the health care sector and at restaurants was also strong. However, manufacturing payrolls fell 7,000 after declining 2,000 in September. Construction firms unexpectedly added 5,000 workers, helping payrolls in the goods-producing sector to rise 5,000 after falling 4,000 in September.

 

The average workweek increased to 34.3 hours from 34.2 hours in September, another sign economic activity was expanding. Average hourly earnings increased five cents, which should help to support consumer spending.

 

Local government payrolls, which contributed to sinking government employment in September, fell 14,200 in October. There was a small drag on government employment from the departure of 5,000 workers hired temporarily to conduct the decennial census.

 

Although the jobless rate held steady, a broader measure of underemployment edged down for the first time in five months.

 

Pending Homes Sales Fall

 

The National Association of Realtors said its pending home sales index, based on contracts signed in September, fell 1.8 percent to 80.9 from an upwardly revised 82.4 in August. The data reflects home sales contracts, not closings, and is seen as a leading indicator of housing market trends.

 

"Existing home sales have shown some improvement but the foreclosure moratorium is likely to cause some disruption and contribute to an uneven sales performance in the months ahead," NAR chief economist Lawrence Yun said in a statement.

 

Several major U.S. mortgage lenders temporarily halted foreclosures in October as attorneys general in all 50 states investigated whether banks had submitted faulty paperwork to back evictions.

 

Bernanke Defends Fed’s Latest Intervention

 

Federal Reserve Chairman Ben Bernanke on Friday defended the U.S. central bank's bond-buying against beggar-thy-neighbor criticism, saying it was "critical" for global stability that the U.S. economy regain its strength. Doing so, he suggested, would bolster a dollar whose weakness has sparked cries of foul from Bogota to Beijing.

 

The Fed's decision to buy up $600 billion of government debt has drawn scathing comments from a host of nations who contend it is generating global instability by ramping up their currencies against the dollar, inflating asset bubbles and stoking inflation in their economies.

 

"With all due respect, U.S. policy is clueless," German Finance Minister Wolfgang Schaeuble said in Berlin.

 

Meanwhile, Bernanke stressed that Fed policies aimed at giving a boost to the weak U.S. recovery would pay dividends around the world. "I think it's important to emphasize ... that a strong U.S. economy, a recovering economy, is critical, not just for Americans but it is also critical for the global recovery," Bernanke said.

 

The Fed's easy monetary policy, ramped up on Wednesday with the new bond-buying plan, has rankled, especially among emerging market economies and it looks set to be a bone of contention at a G20 summit in Seoul next week.

 

South African Finance Minister Pravin Gordhan said Fed policy "undermines the spirit of multilateral cooperation" that the G20 had sought to achieve. The money will find its way into financial markets of emerging nations with potentially devastating impact on their exports, he charged.

 

Bernanke said he was fully aware of the dollar's importance in the global economy as a reserve currency. The dollar has weakened sharply and did so again after this week's decision on a new round of so-called quantitative easing.

 

"The best fundamentals for the dollar will come when the economy is growing strongly," Bernanke said. "That's where the fundamentals come from."

 

He said that while commodity prices have risen sharply, they were the exception amid generally muted prices for other products and should not cause a serious problem.

 

Bernanke said there was ample slack within the economy that will prevent producers from being able to fully price costlier commodities into finished products that consumers buy.

 

He added that once inflation pressures become visible, the U.S. central bank will be ready to modify its current stance of accommodative monetary policy to block inflation. Official interest rates have been near zero for nearly two years.

 

For the moment, inflation expectations appear to be quite low, Bernanke said, adding the Fed was committed to keeping them that way and expressing confidence it had the tools to do so.