MarketView for October 7

 

 

Summary 

 

Weak commodities and a firmer dollar pressured share prices on Thursday ahead of Friday’s jobs report that could determine the next move from the Fed. Last month, the Fed hinted at the possibility that it might pump more cash into the U.S. economy, probably through buying bonds, in an additional round of quantitative easing to bolster the anemic recovery after the worst recession since the 1930s. Growing conviction of further fuel from the Fed in part helped the S&P 500 rally 8.8 percent in September.

 

The dollar reversed a long downtrend, slamming oil and gold markets, which in turn took a toll on energy and mining stocks as the price of gold retreated from a new record high and oil fell nearly 2 percent, or $1.56, to settle at $81.67 per barrel. Newmont Mining was down 2.6 percent at $63.03 and Freeport-McMoRan declined 2.4 percent to $91.40. Meanwhile, the better-than-expected weekly jobless claims limited declines, but the spotlight was on Friday's larger non-farm payrolls report.

 

The euro's recent rally against the dollar stalled as a result of profit-taking. The dollar and equities have had an inverse relationship as funds move out of stocks for the perceived safety of the dollar.

 

Alcoa kicked off the unofficial start to earnings season after the closing bell, reporting a lower third-quarter profit, but said global markets were strengthening. Its shares rose 3.2 percent to $12.59 in extended trading.

 

But some lackluster earnings reports weighed on the market during the regular session after PepsiCo trimmed its earnings forecast, while Marriott International's numbers failed to exceed expectations. Pepsi closed down 3 percent at $66.10, while Marriott fell 5.8 percent to close at $35.67.

 

On the upside, Abercrombie & Fitch closed up 8.9 percent at $42.03 and American Eagle Outfitters gained 8.1 percent to $16.23 as teen apparel retailers led the pack with generally stronger-than-expected same-store sales in September.

 

Unemployment Claims Down Again

 

The Labor Department reported on Thursday that initial claims for state unemployment benefits fell by 11,000 claims to a seasonally adjusted 445,000 new claims, the lowest since the week of July 10. It was the lowest level for that statistic in nearly three months, according to the Department. The report indicates an increasing degree of stability within the labor market.

The government revised the prior week's figure up to 456,000.

 

Although the data has little bearing on September's employment report due on Friday as it falls outside the survey period, it does little to change perceptions the Federal Reserve will roll out a new asset purchasing program next month to keep interest rates low.

 

A Labor Department official said only one state had been estimated in last week's claims data. The four-week average of new jobless claims, considered a better measure of underlying labor market trends, to fell 3,000 to 455,750, the lowest level since the July 24 week.

 

The second straight week of declines in new applications for unemployment benefits pushed them further away from a nine-month high of 504,000 touched in mid-August. Claims are now in the upper end of the 400,000-450,000 range that is normally associated with labor market stability.

 

The number of people still receiving benefits after an initial week of aid dropped 48,000 to 4.46 million in the week ended September 25, the lowest since June 26, from an upwardly revised 4.51 million the prior week.

 

The insured unemployment rate, which measures the percentage of the insured labor force that is jobless, slipped to 3.5 percent during that period from 3.6 percent the prior week. The number of people on emergency benefits increased 157,735 to 4.1 million in the week ended September 18.

 

Alcoa Kicks Off Earnings Season

 

Alcoa's third-quarter profit beat Wall Street estimates and the largest domestic aluminum producer increased its outlook for global aluminum demand, sending its shares up more than 3 percent.

 

Alcoa raised its 2010 global aluminum consumption growth forecast to 13 percent from 12 percent, noting growing demand for in countries such as China, Brazil, India and Russia.

 

"We are mutedly optimistic," Chairman and Chief Executive Officer Klaus Kleinfeld told Wall Street analysts on a conference call on Thursday. "We see good pockets of growth in some major regions and some specific end markets."

 

He said Alcoa was boosting the outlook for its aerospace business from essentially flat to a growth of 2 percent to 4 percent this year.

 

"We see orders, build rates, as well as deliveries up. Deliveries year-to-date are up 3 percent," Kleinfeld said, noting Boeing and Airbus were ramping up narrow-body aircraft production and international air traffic is expected to rise about 8 percent.

 

For its automotive business, the Alcoa chief said although August saw the lowest U.S. car sales in nearly 30 years, September was the highest selling month in over a year.

 

"So we believe sales will continue to improve on a slow pace, probably slower than we are historically accustomed to."

 

Alcoa expects a modest decline in the beverage can and packaging business in North American caused by week summer promotions and inclement weather. However, the worst sector for aluminum, he said, was commercial building and construction.

 

"We expect it to go further down. Our expectation is for a 25-percent reduction ... though this market has not yet bottomed out," he said.

 

In its third-quarter earnings release, Alcoa said net income was $61 million, or 6 cents per share, compared with $77 million or 8 cents per share in the same quarter last year, the Pittsburgh-based company said, citing a drop in the price of aluminum and a weaker dollar. The results included a negative impact for special items of $35 million, or 3 cents per share.

 

Profit from continuing operations was 9 cents per share, said Alcoa, traditionally the first of the Dow Jones industrial average components to issue quarterly figures.

 

Fed Considering New Inflation Target

 

The Federal Reserve is considering whether it might help to shoot for inflation above their informal target. Two key Fed officials, including New York Fed President William Dudley, the vice chairman of the policy-setting Federal Open Market Committee, have suggested the Fed consider making up for inflation shortfalls now by aiming for higher inflation later.

 

Dudley has said that to the extent such a policy were credible it could help keep inflation expectations from falling. "This might make monetary policy more simulative and, thus, might help the FOMC achieve its objectives more quickly," he said on October 1.

 

This could help return the price level to what was expected by people who signed long-term contracts before inflation slowed and could help support expectations of future inflation in a way that could battle deflation risks. In theory, so-called price level targeting can ease financial conditions: If people expect inflation to go up in the future, the real cost of credit -- which is adjusted for inflation -- would fall.

 

The Fed, with a dual mandate of promoting full employment and price stability, has already cut interest rates to the bone and bought $1.7 trillion of assets to further lower borrowing costs. Markets expect the Fed to embark upon a new program of asset buying as early as its next meeting on November 2-3.

 

Chicago Fed President Charles Evans, in an interview with the Wall Street Journal earlier this week, said he worried asset purchases may not be enough on their own to push inflation higher and may need to be supplemented by other options.

 

But many experts -- including Dudley -- say a price-level target is difficult to communicate to the general public whose views of future inflation may be closely tied to what has happened with prices in the past.

 

However, there is the risk that the targeting hurts the Fed's hard-won credibility if it fails to deliver on its promise. And it could bind the hands of future Fed policy-makers, who may not be willing to tolerate slightly higher inflation. Fed Chairman Ben Bernanke appears to have some strong reservations about the tool.

 

Speaking in August, Bernanke said a price-level targeting strategy "is inappropriate for the United States in current circumstances" when inflation expectations and actual inflation were within ranges consistent with price stability.

 

The Fed has an informal inflation target of 1.7 to 2 percent. For the 12 months through August the core personal consumption expenditure price index -- the Fed's preferred inflation gauge -- was running at 1.4 percent.

 

Another concern is that the approach would necessarily be asymmetrical. When inflation was running above target, officials may be hesitant to intentionally push it below target out of fear of creating a deflation risk.

 

In his August speech, Bernanke warned that price-level targeting could make inflation more volatile, adding that "the potential for destabilizing movements in commodity and currency markets would likely overwhelm any benefits arising from this strategy."

 

Of course, just discussing the option could signal to the markets that the Fed is willing to do more to avert a dangerous downward price spiral. Jeff Fuhrer, director of research at the Federal Reserve Bank of Boston, said uncertainty is high about the effectiveness of any the Fed's current options.

 

"As a consequence, I could imagine trying several in combination," he said. "If any or all have effects, I'd be delighted."

 

No Decision by the Fed on Further Easing

 

Officials at the Federal Reserve have not made any decision whether to pump more cash into the economy, Dallas Fed President Richard Fisher said on Thursday.

 

"The markets have drawn too quick a conclusion that this is a likely event," Fisher told reporters following a speech at the Economic Club of Minnesota. "If it is to occur it will only occur after thoughtful discussion."

 

He said he would not use "reluctant" to describe his attitude toward further Fed action, and added he, along with other Fed officials who have made recent public comments in support of further easing, wants to hear all arguments before making a decision.