MarketView for November 14

Summary

The Dow Jones Industrial Average and the S&P 500 indexes ended the day on Thursday at new highs after comments from Janet Yellen, the nominee to replace Chairman Ben Bernanke, suggested the Fed's accommodative policies would continue as long as the economy remains fragile.

Yellen's Q&A followed late gains in the market Wednesday ahead of the release of her prepared remarks. In her testimony, Yellen said the Fed's current $85 billion in monthly bond purchases "cannot continue forever," but dismissed the notion current prices suggest bubble-like conditions.

Gains by the Nasdaq and the Dow were held back by Cisco, however, after the networking giant reported disappointing results on Wednesday. The company’s shares posted their worst day since February 10, 2011, ending down nearly 11 percent at $21.37 after it warned its revenue could fall by as much as 10 percent this quarter and keep contracting until after the middle of 2014.

Shares of Kohl's fell 8.1 percent to $53.55 after the department store chain reported lower-than-expected quarterly results and cut its full-year earnings forecast.

Houghton Mifflin ended the day up 32 percent to close at $15.86 on the textbook publisher's first day of trading after emerging from bankruptcy last year. Wal-Mart rebounded rising 0.2 percent to $79.08 after the shares decline that resulted from lower-than-expected quarterly sales.

About 6.020 billion shares changed hands on the three major equity exchanges, a number that was slightly below the five-day average closing volume of about 6.314 billion shares, according to BATS exchange data.

The Economy Remains Weak

The U.S. trade deficit widened in September as imports rose to their highest level in almost a year and exports fell for a third consecutive month, suggesting the third-quarter growth estimate will probably be lowered.

Other data on Thursday painted a less upbeat picture of the labor market than had been suggested by last week's sturdy October payrolls report. First-time applications for jobless benefits fell last week, but the decline in claims for the week ended November 2 was smaller than previously reported.

Meanwhile, the Commerce Department reported that our trade deficit increased 8.0 percent to $41.8 billion, the largest deficit since May. Imports from China increased in September, lifting the contentious U.S. trade deficit with China to a record $30.5 billion.

When adjusted for inflation, the deficit on the trade balance widened to $50.4 billion, also the largest since May, up from $47.4 billion the prior month.

This measure goes into the calculation of gross domestic product and its rise in September suggested the government will probably trim its initial third-quarter GDP estimate by between 0.1 and 0.2 percentage point, according to economists. Trade was reported to have contributed 0.31 percentage point to the economy's 2.8 percent annualized growth pace in the July-September quarter.

In a separate report, the Labor Department said initial claims for state unemployment benefits fell 2,000 to a seasonally adjusted 339,000. However, claims for the prior week were revised to show 5,000 more applications received than previously reported. The four-week moving average for new claims, which irons out week-to-week volatility, dropped 5,750 to 344,000.

Wall Street was unmoved by the trade and jobless claims data, taking their cue from a Senate panel confirmation hearing of Federal Reserve chairman nominee Janet Yellen for clues on the near-term path of monetary policy.

Yellen made plain she would press forward with the Fed's ultra-easy monetary policy until officials were confident a durable economic recovery was in place that could sustain job creation. We are unlikely to see any change until early 2014 as the economy struggles to gain speed and inflation remains benign.

The lack of price pressures was underscored by a second report from the Labor Department showing unit labor costs fell at a 0.6 percent rate in the third quarter after rising at a marginal 0.5 percent pace in the prior quarter.

Sluggish demand was also highlighted in Wal-Mart Stores' third-quarter results, which showed another quarterly decline in comparable domestic sales.

Lackluster domestic demand is preventing the labor market from generating stronger job growth that would decisively lower the unemployment rate. Employers added 204,000 new jobs last month, but a 16-day government shutdown temporarily pushed the jobless rate up by a tenth of a percentage point to 7.3 percent.

While trade has supported the economy's recovery, slowing global demand is eroding export growth. Exports slipped 0.2 percent to $188.9 billion in September, the third straight month of declines.

Imports rose 1.2 percent to $230.7 billion, the highest level since November last year. Imports of automobiles hit a record high. However, with consumer spending having slowed significantly, some of the imported goods could end up piling up in warehouses. As a result, businesses might be reluctant to keep on rebuilding stocks and the slowdown in inventory accumulation would undercut fourth-quarter GDP growth.

Large Banks Could Be In For Increased Regulation

The largest banks can still borrow more cheaply than competitors and should face tougher rules, the Janet Yellen told lawmakers on Thursday. Large banks may have an edge because markets think they have government backing in times of crisis, Yellen said, unveiling some new steps the central bank could take to encourage those firms to downsize.

"Most studies point to some subsidy that may reflect too big to fail," she said during a hearing into her nomination before the Senate Banking Committee. "Since those firms do pose (a) systemic risk to the financial system, we should be making it tougher for them to compete, and encouraging them to be smaller and less systemic."

Yellen echoed the Fed's existing policy on bank regulation, but did reveal some new details of her thinking about Wall Street's role in commodity markets and on short-term funding. Wall Street critics argue that banks such as JPMorgan Chase and Citigroup are too big to fail, and politicians such as Sen. Sherrod Brown - an Ohio Democrat - have introduced bills that could force them to cut their size.

A government report found on Thursday that the country’s larger banks received more support than smaller ones from government backstops, such as deposit guarantees and the Fed's discount window, during the 2007-09 financial crisis.