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Rate Picture Nears Focus
By Liz Rappaport
Markets Columnist
5/5/2006 10:21 AM EDT
Updated from 7:14 a.m. EDT
Stocks were looking for direction all week. On Friday, they got some.
According to the Labor Department, the U.S. economy added 138,000 nonfarm jobs last month, well short of economists' 205,000 consensus estimate. Despite evidence of robust wage growth, the number filled the beaks of policy doves and sent stock and bond prices skyward in early trading.
Recently, the S&P 500 was up 9 points, or 0.7%, to 1321, suggesting a five-year closing high is in reach for the broad market proxy. The Dow, which closed at six-year highs on Tuesday and Thursday, but posted declines on Monday and Wednesday, was recently up 0.6% at 11,508. Fixed-income traders also celebrated, pushing the yield on the 10-year note down 5 basis points to 5.11%.
Friday's report, which showed the unemployment rate holding steady at 4.7% and average hourly wages growing 0.5%, looked poised to end a frustrating week of indecision in the stock market. (Average hourly earnings were expected to rise 0.3%; the unemployment rate was expected to remain unchanged at 4.7%.)
With the Federal Reserve on the precipice of a possible shift in monetary policy, April's anemic gain suggests a "one and out" turn could be in the cards. While fed fund futures continue to price in a 100% chance of a quarter-point hike on May 10, odds of another bump in late June fell to 32% from 44% in the report's aftermath.
"It's a disappointment in terms of jobs added, but it builds speculation that the Fed will raise one more time and then pause in June," said Peter Cardillo of S.W. Bach & Co. "The report in itself showed jobs growth is much less robust, lessening concerns that the jobs market is overheating. All in all, this will feed the bulls."
Prior to the report, John Bollinger, president of Bollinger Capital, said the yield on the five-year Treasury bond would be key to divining the future. A strong number might have pushed the yield solidly past 5% and kept it there, he noted. As it happened, the five-year handle eased from 5.01% prior to the April number to 4.98% afterward.
While stocks and Treasuries rallied in the wake of the jobs report, the dollar continued its recent swoon. The euro was recently trading at $1.2753 vs. $1.2708 late Thursday. The dollar was at 112.63 yen vs. 113.64.
"It was the worst of both worlds (slower growth and rising inflationary threats)," Ashraf Laidi, chief currency analyst at MG Financial Group, says of the jobs data.
Stocks have been swatting away many challenges of late. Prior to Friday's report, it seemed the seesawing over "one and done" was fading as investors and traders started to focus instead on corporate earnings and strong balance sheets. The steps back are getting smaller as the Dow and the S&P move past six- and five-year highs, respectively, depending on the day.
"People's expectations are for one or two hikes to come, but that maybe the Fed will take a break," said Michael Driscoll, senior managing director of listed trading at Bear Stearns. Over the past five sessions, the odds that the Fed will hike in June had fluctuated between 24% and 60%, depending on who spoke that day or what data came out. Their now back to mid-April levels, before the Fedspeak-storm that culminated in Ben Bernanke's dinner chat with CNBC's Maria Bartiromo.
The buyers keep coming back, said Driscoll. For example, Wednesday and Thursday's declines in the price of crude oil from over $74 per barrel to $69.94 initially damaged stocks in the oil service sector, but they rebounded sharply off their lows, he noted. For example, Transocean (RIG:NYSE - commentary - research - Cramer's Take) and Halliburton (HAL:NYSE - commentary - research - Cramer's Take) closed up by 1.46% and 1.02%, respectively, Thursday on higher-than-average volume. In the same vein, the market didn't sell off as sharply on strong econ data this week, such as Wednesday's nonmanufacturing ISM report, as it did just last week following strong data such as the durable goods report.
The Element of Surprise
But payrolls, like any data these days, bring volatility. History shows that economists miss on their expectations for this data by an average of 90,000 jobs, says James Bianco, president of Bianco Research LLC. With median expectations at 205,000, Friday's print was within the range of possibility.
Possibly mitigating the surprise factor was a new monthly employment report released for the first time Wednesday by employment services provider Automatic Data Processing and Macroeconomic Advisers. The ADP National Employment report measures the change in nonfarm private employment each month, and its first release stated that 178,000 new jobs were added to the U.S. labor market in April.
Back-testing this new data series, there was a roughly 90% correlation between the monthly percent change in the ADP National Employment Report and the monthly percent change in nonfarm payrolls from January 2001 to December 2005, according to ADP.
Another Lagging Indicator
But given the Fed's stated "data dependency," it's important to recall the employment data are a lagging indicator. It's more important to recall given the recent trends in other measures of employments.
For the first time in four months, April's initial state unemployment claims rose 3.1%, noted John Lonski, chief economist at Moody's Investors Service. Initial jobless claims for the week ended April 29 were the highest this year at 322,000, as well. And key inflationary measure, unit labor costs, rose 2.5%, higher than the 1.2% expected increase.
"These disappointing jobs gains [including Friday's report] indicate that strong first-quarter growth is not carrying over into the second quarter," says Peter Morici, professor at Robert H. Smith School of Business at University of Maryland.
Speaking of lagging indicators, neither stagnating wages, rising rates, high gas prices, or a modestly slowing housing market kept consumers from shopping in April. Retail sales made a strong showing Thursday. Wal-Mart (WMT:NYSE - commentary - research - Cramer's Take) announced its same-store sales were up 6.8% for the month; Target's (TGT:NYSE - commentary - research - Cramer's Take) were up 10.4%, while Federated Department Stores (FD:NYSE - commentary - research - Cramer's Take) reported sales down 0.8%.
(for now).
