MarketView for October 8

 

 

Summary 

 

The Dow Jones industrial average finally closed above the 11,000 mark for the first time since May 3 on Friday as a surprisingly weak jobs report strengthened the case for more stimuli from the Federal Reserve. Although a loss of 95,000 jobs normally might be expected to send the equity indexes into negative territory, the market's desire for cheap money trumped the slow economy.

 

Agriculture-related shares surged in sync with corn and soybean futures after the Department of Agriculture stated that the corn crop is likely to be far smaller than expected. Caterpillar rose 2.1 percent to $80.37 and was the best performer among the Dow industrials

 

Deere saw its share price close up 4.8 percent to $75.35 on the belief farmers will use some of their profits from higher crop prices to buy new tractors and harvesting equipment.

 

Stocks have rallied in recent weeks on expectations of further government stimulus, but earnings season will take center stage next week. Corporate results and guidance could provide additional confirmation for the gains.

 

Expectations of more quantitative easing could also keep the dollar on a downtrend, which in turn signals more gains for Wall Street. An inverse correlation between the dollar and equities has prevailed in the last three months.

 

For the week, the Dow added 1.6 percent, as did the S&P 500, while the Nasdaq rose 1.3 percent.

 

Consumer discretionary companies got a boost after hedge fund manager William Ackman acknowledged he has large stakes JC Penney and Fortune Brands. JC Penney rose 2.7 percent to $32.49, while Fortune closed up 7.4 percent at $55.85.

 

Alcoa marked the unofficial start to earnings season, rising 5.7 percent to $12.89 a day after its results beat estimates and increased its outlook for global aluminum demand.

 

Data showed the economy shed jobs in September for a fourth straight month as government payrolls fell and private hiring slowed. Although initially taken as a negative, investors ultimately viewed the gain of 64,000 private-sector jobs as a positive step in the right direction.

 

The expectation of further stimulus was also weighed against comments from St. Louis Fed President James Bullard, who said the Fed faces a difficult decision at next month's policy meeting on whether to offer further stimulus to a U.S. economy that is still growing but only slowly.

 

As the drop in the government's non-farm payrolls report increased the likelihood of more quantitative easing by the Fed, the dollar weakened while commodity prices rose.

 

Options traders also remained confident about the market as the volatility index continued to slide. The CBOE Volatility index .VIX, Wall Street's favorite fear gauge, fell 3.9 percent to 20.71, the lowest since May.

 

On the Nasdaq, Apple gained 1.7 percent to $294.07 after two firms raised their price targets on the stock.

 

Payrolls Fall

 

The lost jobs in September for a fourth straight month as government payrolls fell and private hiring slowed, thereby increasing expectations for more stimulus from the Federal Reserve to spur the recovery. Specifically, according to a report by the Labor Department released Friday morning, nonfarm payrolls fell by 95,000 jobs, due in part to the end of temporary jobs for the Census and steep losses at struggling local governments.

 

Private employment, a better gauge of the labor market, rose 64,000 after a 93,000 gain in August, below levels that would suggest a self-sustaining recovery from the recession. Nonetheless, the unemployment rate remained unchanged at 9.6 percent, making it almost certain that the Fed would announce a second program of asset purchases next month.

 

While financial markets appear to have priced in further monetary easing next month, some Fed officials are not so sure. St. Louis Fed President James Bullard said that policymakers could wait until December if they felt the need for greater clarity on the outlook.

 

"This upcoming FOMC meeting is going to be a tough call, because the economy has slowed but it hasn't slowed so much that it's an obvious case to do something," Bullard said.

 

Although the recovery from the longest and deepest downturn since the 1930s has slowed, a new downturn is unlikely.

 

Meanwhile, Friday's data came as top finance officials from around the world gathered for International Monetary Fund meetings in Washington, where the falling dollar and rising emerging market currencies are at the top of the discussion agenda.

 

8.5 Million Hires Qualify for Tax Break

 

The Treasury Department reported on Friday that from Feb. 10 to Aug. 10, businesses hired approximately 8.1 million workers who qualify for the tax breaks. They added 1.2 million from July 10 to Aug. 10, the report said.

 

President Barack Obama signed a law in March that exempts businesses hiring people who have been unemployed for at least 60 days from paying the 6.2 percent Social Security payroll tax through December. Employers get an additional $1,000 credit if new workers stay on the job a full year.

 

"Targeted programs like the HIRE Act tax credit provide an incentive for private-sector employers to hire new workers sooner than they otherwise would," Assistant Treasury Secretary Alan B. Krueger said in a statement. "Since it's only in effect through the end of the year, the HIRE Act encourages businesses to accelerate hiring in order to get the maximum benefit from this temporary tax credit."

 

Unfortunately there is no way to know how many of the unemployed workers would have been hired without the tax credit.

 

At the same time, many employers have also cut jobs - the Labor Department announced on Friday that a wave of government layoffs in September outpaced weak hiring in the private sector, reducing the nation's payrolls by a net total of 95,000 jobs. However, there has been a net increase of 613,000 jobs since the start of the year, according to the Department's business payroll survey.

 

IMF Tries to Ease Tension Among Currencies

 

World finance leaders sought on Friday to tamp down simmering currency tensions that threaten to drag on an economic recovery that is already too slow and uneven for their liking. The

Group of 20 finance ministers met at a breakfast some said an effort was under way to come to grips with the ongoing tensions. IMF officials are scheduled to attend Friday's G20 breakfast, and are hopeful that some progress can be made toward resolving reform issues by a G20 leaders’ summit in Seoul next month.

 

Canadian Finance Minister Jim Flaherty told reporters as he arrived for the meeting that it was vital G20 countries not engage in protectionist measures as a response to currency strains but he also singled out China, saying it must live up to a commitment to allow more currency flexibility.

 

He expressed hope finance ministers meeting in Washington over the weekend could find a way through the thorny thicket of currency tensions that has raised fears of a global round of competitive devaluations.

 

"I would expect that we'd arrive at a consensus with respect to the necessary direction," he said.

 

The smaller group of G7 was set to hold a closed-door dinner later Friday at which currencies were also expected to be discussed. China's policy of managing the value of its yuan has raised the hackles of trade partners who consider it unfairly undervalued and who charge it permits China to rack up huge surpluses at others' expense.

 

The yuan ended at its highest closing level on Friday since a landmark revaluation in July 2005, possibly a sign that Beijing is sensitive to the growing demands to let it rise more rapidly.

 

Olli Rehn, the European Union's economic and monetary affairs commissioner, said currencies were on the table but in the broader context of trying to rebalance global growth to make it more durable.

 

"We are discussing what kind of policy measures are needed to rebalance global growth and the currency issue is certainly one of those," Rehn said. But the currency issue is complicated. Some countries, including Japan, have made clear they reserve the right to intervene to curb their currencies' values if necessary.

 

"We are approaching a G7 meeting, but regardless of this, Japan will take firm measures, including intervention, when needed," Japanese Finance Minister Yoshihiko Noda said.

 

China, usually at the center of the currency debate, has company this time, but Japan's intervention last month to weaken the yen put Tokyo on the hot seat, too. The United States can also expect criticism over its seemingly benign neglect of the sinking dollar.

 

The currency strains are symptomatic of the more complex problem that most advanced economies are not growing rapidly enough to reduce unemployment despite trillions of dollars in government stimulus spending and emergency loan guarantees. For the United States and much of Europe, options for providing more stimulus are limited because either politics, creditors or both prevent them from amassing significantly larger piles of government debt.

 

Until the wealthier nations find their footing, emerging markets will be the strongest source of global growth. So far, they appear to be up to the task. The IMF expects emerging markets to grow at three times the pace of advanced economies next year.

 

Those countries are clamoring for greater decision-making power at the IMF, commensurate with their growing economic prowess. This has been another thorny issue for G7 and G20 leaders who have yet to agree on how exactly to divvy up power when no one wants to relinquish their own position.

 

The United States thinks Europe ought to give up some if its seats on the IMF executive board, while European countries have proposed a seat-sharing rotation.

 

Inflation Pressures Ease

 

A monthly measure of U.S. inflation pressures rose in September, pushed up by inflationary moves in all components except the industrial sector, the Economic Cycle Research Institute reported on Friday.

 

The Economic Cycle Research Institute's future inflation gauge, which is designed to anticipate cyclical swings in the rate of inflation, came in at 98.0 for September, as compared to 97.3 in August, which was originally reported at 96.7.

 

"Thus, inflation pressures are still restrained, but are starting to creep up," ECRI Managing Director Lakshman Achuthan said in a statement.

 

The index’s annualized growth rate, which tries to remove some of the monthly fluctuations, fell to 1.0 percent from a revised 1.1 percent, originally reported as 0.2 percent.

 

Crude Prices Increase

 

Crude prices rose on Friday as the weak unemployment numbers increased the certainty that the Fed will move towards a somewhat looser monetary policy that will in all liklihood weaken the dollar. Crude also received some price support from a strike at France's top oil port, now in its 12th day, that threatened to cut European oil products output. At the same time, a surprisingly sharp cut in the corn crop estimates sent cash ethanol prices sharply higher.

 

Texas sweet crude for November delivery settled up $1, or 1.22 percent, at $82.67 per barrel, having traded from $80.30 to $83.13. Brent November crude rose 63 cents, or 0.76 percent, to settle at $84.06 a barrel.

 

Four oil refineries in southern France face closure this weekend, the country's oil lobby said on Friday, after workers at a key oil port voted to continue a strike for a 12th day.

 

Earlier this week, the U.S. Energy Information Administration data showed U.S. crude stocks rose by a greater-than-expected 3.09 barrels last week, though refined fuel stocks fell. Crude and refined oil stocks remained above year-ago levels, the EIA said.

 

The Organization of the Petroleum Exporting Countries meets in Vienna next week to consider production and market share policy with crude prices since May hemmed between the $64.24 intraday low on May 20, the weakest price since July 30, 2009, and the 2010 peak of $87.15 reached on May 3.