AI
Sunday, January 07, 2007 6:41:56 PM
Market Update 070105
http://biz.yahoo.com/mu/update.html
4:20 pm : Stocks closed lower across the board as reduced expectations of a Fed rate cut anytime soon and revived worries about corporate profit growth overshadowed surprisingly strong jobs growth. A burgeoning sense that the market is ripe for a pullback of some sort also contributed to a day of broad-based consolidation.
With earnings season officially beginning next week, Motorola (MOT 18.94 -1.61) cutting its Q4 guidance kicked things off on a sour note, pushing the stock down as much as 12% in early trading before shares closed down nearly 8% - the biggest one-day decline in about four years. Motorola's preannouncement prompted several analysts to lower their ratings and estimates, which brought the valuations of other tech names into question as well. Seventeen of 18 companies in the PHLX Semiconductor Sector Index losing ground, due largely to multiple analyst downgrades (e.g. INTC, BRCM, NVDA, MRVL) also weighed on the sector and contributed to the tech-heavy Nasdaq turning in the day's worst performance among the majors.
The biggest news item of the day, though, was the closely-watched employment report given its influence on the market's outlook for the economy and Fed policy. At 8:30 ET, the Labor Dept. showed that nonfarm payrolls unexpectedly rose 167K in December and that the unemployment rate held steady at a still historically low 4.5%. Thus, it appears the Fed is still on pace to engineer a soft landing, as the data assuaged previous concerns about the severity of the economic slowdown.
However, with the Fed more concerned that the high level of resource utilization has the potential to sustain inflation pressures, a larger than expected 0.5% rise in hourly earnings, and what it can mean for Fed policy, acted as an offset to the biggest payroll gain in eight months. Even though wage gains remain supportive for consumer spending, the fact that hourly earnings rose the most since April, which will push inflation higher over time, diminished the likelihood of a Fed easing in early 2007.
Fed funds futures now show only a 6% chance of a rate cut in late March, down from 17% a day earlier, and price in only a 50-50 possibility of a rate cut through the first half of 2007.
Aside from profit taking across the board in Technology on the heels of yesterday's 1.8% tech rally, the absence of notable leadership from the rate-sensitive Financials sector further underscored the uphill battle faced by the bulls Friday.
Treasuries, which were pricing in a weaker than expected read on payrolls, completely reversed course in early action. Bond yields surging across the curve, with the spread between the 2 and 10-year note slipping deeper into inversion, took an added toll on banks borrowing money at short-term rates. Boston Fed President and voting member Cathy Minehan noting that the inversion "may be flashing yellow," in it's projection of slowing economic growth, exacerbated the lack of enthusiasm to own Financials.
Energy, though, was a bright spot for investors for the first time in three sessions. However, renewed interest in beaten down energy stocks came at the expense of a 1.2% rebound in oil prices following their largest two-day decline (-8.9%) in two years. While oil's recovery lent some reassurance that energy profits will again be a large contributor to the overall earnings picture for the S&P 500, the commodity's potential to sustain inflation pressure served as a reminder about the Fed's concerns about inflation risks and merely added uncertainty as to when policy makers will ease. BTK -0.7% DJ30 -82.68 DJTA -1.3% DJUA -1.7% DOT -0.4% NASDAQ -19.18 NQ100 -0.4% R2K -1.8% SOX -1.1% SP400 -1.1% SP500 -8.63 XOI +0.4% NASDAQ Dec/Adv/Vol 2274/807/2.09 bln NYSE Dec/Adv/Vol 2451/813/1.67 bln
5:04 pm Weekly Wrap
This holiday-shortened three-day trading week saw the upward momentum evaporate from the S&P 500 index. The focus shifted to the Nasdaq, as a focus on tech stocks re-emerged.
The S&P lost 2 points on Wednesday, gained 2 points on Thursday, and then dropped 9 on Friday. It isn't exactly a bear market, or even a correction, but the index remains below the highs of mid-December. The upward momentum has faded, and the reaction to negative news has increased.
An example of that was on Wednesday with the release of the December 12 FOMC (Fed policy meeting) minutes. The minutes noted that the "predominant concern" of members was that inflation would fail to moderate as desired. This is not the least bit of a surprising comment from a group of central bankers determined to fight inflation. It also reflects discussion prior to a flat November core CPI as reported on December 15.
Nevertheless, it was taken by the markets as a sign that the Fed might not be as likely to lower rates in 2007 as previously expected. This was despite the fact that the minutes also noted "downside risks to economic growth."
The minutes in fact were hardly surprising in any respect and reflected data as existed at that time. The market reaction, viewing the comments from a negative standpoint, was more noteworthy.
The market got a boost on Thursday when tech stocks took off. There is a general belief that tech stocks have underperformed and represent value. There were also some positive analyst comments on Intel, Comcast, Amgen, and Qualcomm. The Nasdaq surged 30 points, but the S&P only managed a 2 point gain.
The sluggish tone continued on Friday as the S&P dropped 9 points despite a mixed employment report. December nonfarm payrolls rose a larger than expected 167,000. The two prior months' numbers were also revised higher. This reflects a strong labor market that should have helped quell concerns about economic growth. The market got no boost, however, in part because hourly earnings were up 0.5%. The Fed has noted rising wage costs as a potential inflationary factor. The data further increased the belief that rate cut hopes had become too optimistic.
The other economic data this week leaned slightly bullish. The December ISM manufacturing index jumped back above the key 50 level to 51.4 from 49.5 in November. The ISM service index held at a decent 57.1 in December from 58.9 in November. November construction spending dipped 0.2% and November factory orders were up a bit less than expected.
More significantly, December auto sales were up a bit, and same store sales data from retail chains reflected moderate growth. Wal-Mart posted what for them is now a good gain of 1.6%, while Target came in at 4.1% and Costco a very good 9.0%.
The economic data overall suggest continued moderate real GDP growth near a 2% annual rate heading into 2007. Steady growth in consumer spending, supported by strong payroll growth, is keeping the economy on course.
It was a slow weak for corporate news. Immucor had a good earnings report, while Motorola warned.
Oil dropped to $56.31 a barrel this week. This was due mostly to warm weather, but also may reflect some weakening in global demand. The 10-year note yield ended little changed at 4.65%.
http://biz.yahoo.com/mu/update.html
4:20 pm : Stocks closed lower across the board as reduced expectations of a Fed rate cut anytime soon and revived worries about corporate profit growth overshadowed surprisingly strong jobs growth. A burgeoning sense that the market is ripe for a pullback of some sort also contributed to a day of broad-based consolidation.
With earnings season officially beginning next week, Motorola (MOT 18.94 -1.61) cutting its Q4 guidance kicked things off on a sour note, pushing the stock down as much as 12% in early trading before shares closed down nearly 8% - the biggest one-day decline in about four years. Motorola's preannouncement prompted several analysts to lower their ratings and estimates, which brought the valuations of other tech names into question as well. Seventeen of 18 companies in the PHLX Semiconductor Sector Index losing ground, due largely to multiple analyst downgrades (e.g. INTC, BRCM, NVDA, MRVL) also weighed on the sector and contributed to the tech-heavy Nasdaq turning in the day's worst performance among the majors.
The biggest news item of the day, though, was the closely-watched employment report given its influence on the market's outlook for the economy and Fed policy. At 8:30 ET, the Labor Dept. showed that nonfarm payrolls unexpectedly rose 167K in December and that the unemployment rate held steady at a still historically low 4.5%. Thus, it appears the Fed is still on pace to engineer a soft landing, as the data assuaged previous concerns about the severity of the economic slowdown.
However, with the Fed more concerned that the high level of resource utilization has the potential to sustain inflation pressures, a larger than expected 0.5% rise in hourly earnings, and what it can mean for Fed policy, acted as an offset to the biggest payroll gain in eight months. Even though wage gains remain supportive for consumer spending, the fact that hourly earnings rose the most since April, which will push inflation higher over time, diminished the likelihood of a Fed easing in early 2007.
Fed funds futures now show only a 6% chance of a rate cut in late March, down from 17% a day earlier, and price in only a 50-50 possibility of a rate cut through the first half of 2007.
Aside from profit taking across the board in Technology on the heels of yesterday's 1.8% tech rally, the absence of notable leadership from the rate-sensitive Financials sector further underscored the uphill battle faced by the bulls Friday.
Treasuries, which were pricing in a weaker than expected read on payrolls, completely reversed course in early action. Bond yields surging across the curve, with the spread between the 2 and 10-year note slipping deeper into inversion, took an added toll on banks borrowing money at short-term rates. Boston Fed President and voting member Cathy Minehan noting that the inversion "may be flashing yellow," in it's projection of slowing economic growth, exacerbated the lack of enthusiasm to own Financials.
Energy, though, was a bright spot for investors for the first time in three sessions. However, renewed interest in beaten down energy stocks came at the expense of a 1.2% rebound in oil prices following their largest two-day decline (-8.9%) in two years. While oil's recovery lent some reassurance that energy profits will again be a large contributor to the overall earnings picture for the S&P 500, the commodity's potential to sustain inflation pressure served as a reminder about the Fed's concerns about inflation risks and merely added uncertainty as to when policy makers will ease. BTK -0.7% DJ30 -82.68 DJTA -1.3% DJUA -1.7% DOT -0.4% NASDAQ -19.18 NQ100 -0.4% R2K -1.8% SOX -1.1% SP400 -1.1% SP500 -8.63 XOI +0.4% NASDAQ Dec/Adv/Vol 2274/807/2.09 bln NYSE Dec/Adv/Vol 2451/813/1.67 bln
5:04 pm Weekly Wrap
This holiday-shortened three-day trading week saw the upward momentum evaporate from the S&P 500 index. The focus shifted to the Nasdaq, as a focus on tech stocks re-emerged.
The S&P lost 2 points on Wednesday, gained 2 points on Thursday, and then dropped 9 on Friday. It isn't exactly a bear market, or even a correction, but the index remains below the highs of mid-December. The upward momentum has faded, and the reaction to negative news has increased.
An example of that was on Wednesday with the release of the December 12 FOMC (Fed policy meeting) minutes. The minutes noted that the "predominant concern" of members was that inflation would fail to moderate as desired. This is not the least bit of a surprising comment from a group of central bankers determined to fight inflation. It also reflects discussion prior to a flat November core CPI as reported on December 15.
Nevertheless, it was taken by the markets as a sign that the Fed might not be as likely to lower rates in 2007 as previously expected. This was despite the fact that the minutes also noted "downside risks to economic growth."
The minutes in fact were hardly surprising in any respect and reflected data as existed at that time. The market reaction, viewing the comments from a negative standpoint, was more noteworthy.
The market got a boost on Thursday when tech stocks took off. There is a general belief that tech stocks have underperformed and represent value. There were also some positive analyst comments on Intel, Comcast, Amgen, and Qualcomm. The Nasdaq surged 30 points, but the S&P only managed a 2 point gain.
The sluggish tone continued on Friday as the S&P dropped 9 points despite a mixed employment report. December nonfarm payrolls rose a larger than expected 167,000. The two prior months' numbers were also revised higher. This reflects a strong labor market that should have helped quell concerns about economic growth. The market got no boost, however, in part because hourly earnings were up 0.5%. The Fed has noted rising wage costs as a potential inflationary factor. The data further increased the belief that rate cut hopes had become too optimistic.
The other economic data this week leaned slightly bullish. The December ISM manufacturing index jumped back above the key 50 level to 51.4 from 49.5 in November. The ISM service index held at a decent 57.1 in December from 58.9 in November. November construction spending dipped 0.2% and November factory orders were up a bit less than expected.
More significantly, December auto sales were up a bit, and same store sales data from retail chains reflected moderate growth. Wal-Mart posted what for them is now a good gain of 1.6%, while Target came in at 4.1% and Costco a very good 9.0%.
The economic data overall suggest continued moderate real GDP growth near a 2% annual rate heading into 2007. Steady growth in consumer spending, supported by strong payroll growth, is keeping the economy on course.
It was a slow weak for corporate news. Immucor had a good earnings report, while Motorola warned.
Oil dropped to $56.31 a barrel this week. This was due mostly to warm weather, but also may reflect some weakening in global demand. The 10-year note yield ended little changed at 4.65%.
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