MarketView for November 8

Summary

The major equity indexes moved higher on Friday, rebounding from the previous session's selloff, after an unexpectedly strong payrolls report lent weight to the belief that the economy is stronger than had been expected. With Friday's advance, The Dow Jones Industrial Average and S&P 500 indexes recorded their fifth straight week of gains. For the week, the Dow rose 0.9 percent, the S&P 500 index rose 0.5 percent, and the Nasdaq fell 0.1 percent for the week. The most recent trailing price-to-earnings ratio on the S&P 500 is 16.2 according to Thomson Reuters data, with the forward P/E at 14.8.

The strong jobs report - 204,000 new jobs were created last month, much more than the expected 125,000 - came before the market open and initially pressured futures because it increased chances the Federal Reserve could begin to scale back its stimulus before the end of the year.

Other economic data showed consumer spending rose 0.2 percent after advancing 0.3 percent in August, in line with expectations. The Thomson Reuters/University of Michigan's preliminary reading on consumer sentiment fell to 72.0 in November, its lowest since December 2011 and below both October's final reading of 73.2 and the 74.5 forecast.

The strong aspects of the data sent Treasury prices lower, lifting the benchmark 10-year yield to its highest point in more than three weeks. A four-month rally in yields earlier this year pressured stocks, but the recent strong data has eased concerns over higher borrowing costs.

Financial stocks led the day’s parade on the S&P 500 with a 2.3 percent advance, following a more than 1 percent drop in the sector on Thursday, on the expectation that higher rates will translate into stronger earnings. JPMorgan Chase closed up 4.5 percent at $53.96 while Bank of America and Citigroup both ended the day up more than 3 percent.

The other side of the coin is that homebuilders, seen getting hurt if mortgage rates rise sharply, were lower. Shares of Lennar and Ryland Group both fell more than 4 percent.

Gap's shares led the list of percentage gains on the S&P 500 with a near 10 percent advance a day after it posted October same-store sales well ahead of estimates.

Santarus was up 37.6 percent to close at $31.95 after Salix Pharmaceuticals agreed to acquire the Santarus for about $2.6 billion. Salix shares ended the day up 17.8 percent to close at $84.00.

Twitter fell 7.2 percent to $41.65 a day after its NYSE debut. Shares had rallied 72.7 percent Thursday, though they closed slightly below the opening print of $45.10.

Jobs Report Better Than Expected

The economy added 204,000 jobs in October -- almost double the consensus -- and hiring for September and August were revised up by a combined 60,000, according to the Labor Department. The unemployment rate ticked up to 7.3 percent from 7.2 percent. Concerns that the 16-day government shutdown would mar growth appear to be unfounded but Gene Sperling, director of President Obama’s National Economic Council, says the real question is: Will the shutdown have a lasting negative impact on the economy?

The answer to that question, according to Sperling, depends on whether Washington can get its collective act together and reach a compromise on the budget and debt ceiling.

“If we make it clear there’s not going to be a government shutdown, there's not going to be a threat of default, that will take some uncertainty out of the economy,” he says. “That could help lead to a better holiday shopping season, which is an important time for small businesses…and for many people to pick up extra dollars, sometimes by taking a temporary job.”

Treasury Yields Climb

A robust jobs report caught the Treasury market by surprise on Friday, sending benchmark yields on their biggest one-day climb since July as investors began to price in nearer-term expectations for when the Federal Reserve could start scaling back its bond-buying stimulus. The 10-year note yield, which moves inversely to price, was up 14.5 basis points on the day to trade at 2.750 percent, its highest close since mid-September and nearly 25 basis points higher over the past two weeks. The 30-year bond yield was up 14 basis points to 3.846 percent, and the 5-year note rose 11 basis points to 1.418 percent.

The move in the bond market came after the Labor Department said the economy added 204,000 nonfarm jobs in October, despite a partial government shutdown that was expected to restrain economic growth. The gains doubled economist expectations, and the payrolls for August and September were also revised higher. The unemployment rate rose to 7.3 percent from 7.2 percent in a possible lingering impact from the shutdown.

As the market tries to determine when the Fed will begin winding down its bond purchases, it often looks to the payrolls report, the central bank’s preferred method of measuring employment gains. The Street has been of the opinion that the so-called taper timeline would not start until spring of next year, in part due to the impacts of the shutdown and debt-ceiling debate. However, the resilient labor market sent yields up on nearer-term taper expectations.

Despite talk of earlier tapering, expectations for hikes to the Fed’s policy rate remained subdued. The first rate hike is expected to come in June 2015; according to CME Group data based on fed funds futures contracts. Speculation earlier this week that the Fed could lower its threshold unemployment rate, which could trigger a rate hike, has helped pushed out timing expectations.

Fed Will Continue Along the Current Path Says Williams

The Federal Reserve's bond-buying program and its promise to keep borrowing rates near zero until the unemployment rate drops further are working exactly as planned, a top Fed official said on Friday, as he cited gains in jobs and economic growth.

While the jobless rate is still too high and the pace of the recovery is frustratingly slow, "we have made a lot of progress, and I expect that to continue for the foreseeable future," John Williams, president of the San Francisco Federal Reserve Bank, said in remarks prepared for delivery at a community leaders luncheon in Los Angeles.

Williams enumerated the progress: 2.2 million jobs added over the last year and an unemployment rate now at 7.3 percent, down sharply from its 8 percent level roughly a year ago. And both auto sales and the housing market have strengthened because of the low rates. "This is evidence that our monetary policy medicine is working," Williams said.

Assuming continued super-easy Fed policy, the progress should continue, he said, with the economy growing fast enough to add a significant number of jobs and push down unemployment in 2014 and 2015. He also forecast inflation, now running well below the Fed's 2 percent target, will rise back to that level gradually.

Williams, who does not vote on the Fed's policy-setting panel this year, did not say how long he expects the Fed to continue to buy bonds. Earlier this week he said he would like to see the bond-buying program continue until the Fed is convinced the economic growth has staying power.

The Fed is buying $85 billion in Treasuries and housing-backed securities each month to push down long-term borrowing costs, and it has promised to keep its short-term interest-rate target near zero until unemployment falls to at least 6.5 percent.

Williams blamed some of the slow recovery on tight fiscal policy, which this year has chopped about 1.5 percentage points from growth, he said.

Although the United States in the long run must put itself on a sustainable fiscal path and reduce consumer spending to free up more money for investment, he said, in the short-term what it needs is a bigger boost from consumer spending.