MarketView for November 21

Summary

It was quite a day on Wall Street on Thursday with the Dow Jones Industrial Average closing above 16,000 for the first time on Thursday as stocks rebounded from three days of weakness, after economic data pointed to a slowly improving labor market and subdued inflation.

Financial shares led the market to its first day of gains after three sessions of losses. Although Wall Street is divided and unsure as to when and by how the Fed’s tapering program will begin it is likely that the markets will weather the eventual pullback just fine.

The Fed has said repeatedly that it will not withdraw support until the economy can stand on its own. Moreover, there is a lot the Fed can do to mitigate and moderate the impact of its tapering program. That includes more forward guidance for markets, which the members of the Federal Open Market Committee discussed during their most recent meeting, minutes released on Wednesday showed.

James Bullard, president of the Federal Reserve Bank of St. Louis and a voting member of the FOMC, said on Thursday that the inflation data gives the central bank some leeway to keep the current accommodative policy in place. The annual inflation rate is at 1 percent, below the Fed's target of 2 percent.

"What we need to do is continue with the program for now as we have, but if an inflation problem starts to develop, we have to be willing to move to arrest that problem," Bullard said. "At that point, I'd put on my inflation hawk hat and spring into action."

Expectations that the Fed could start cutting stimulus - but without raising interest rates - have helped to widen the spread between long- and short term interest rates. That benefits banks, which make money borrowing at short rates and lending at longer rates. As a result, Bank of America ended the day up 3 percent to close at $15.59.

The number of Americans filing new claims for unemployment benefits fell more than expected last week, while producer prices fell for a second straight month in October, indicating inflation pressures remain muted.

Target fell 3.5 percent to $64.19 after comparable sales were less than expected in the third quarter and it lowered its full-year profit forecast.

Economic Data Continues to Improve

The number of new claims for jobless benefits fell sharply last week and a gauge of factory activity hit an eight-month high in early November, indicating an improving economy. Initial claims for state unemployment benefits fell by 21,000 claims to a seasonally adjusted 323,000 claims, the Labor Department said.

The Labor Department made it clear that there were no special factors influencing the data, which covered the survey period for the government's report on employment in November. A four-week moving average meant to iron out week-to-week volatility fell 6,750 to 338,500.

Separately, a survey of factory purchasing managers showed activity picking up. Financial data firm Markit said its preliminary U.S. Manufacturing Purchasing Managers Index rose to an eight-month high of 54.3 from 51.8 in October.

Respondents linked the rebound from a one-year low touched last month partly to the end of a partial government shutdown and a rise in demand from domestic and overseas customers. However, the optimism over manufacturing was tempered somewhat by a regional factory survey showing a sharp slowdown in activity in the mid-Atlantic region in November. Some economists said this was likely a delayed reaction to last month's 16-day government shutdown.

The data helped lift stocks on Wall Street, while the dollar climbed to a 4-1/2 month high against the yen and Treasury debt prices rose. The jobless claims and Markit factory data added to recent reports on nonfarm payrolls and retail sales that have suggested the economy is gaining momentum. Despite the improving growth picture, inflation remains virtually absent.

The Labor Department said its producer price index slipped 0.2 percent last month as gasoline prices tumbled, the largest decline since April. If you exclude the volatile food and energy sectors, producer prices rose 0.2 percent, helped out by the introduction of new motor vehicle models. Excluding cars and trucks, the core PPI was up only 0.1 percent.

Over the last 12 months, overall producer prices have risen just 0.3 percent, with core prices up 1.4 percent. The data follows a report on Wednesday that showed consumer price inflation easing to a four-year low of 1 percent.