News Column

MARKET ANALYSIS: Strong Job Growth May Trigger Monetary Policy Worries

May 2, 2014

WASHINGTON (Alliance News) - The major US index futures are pointing to a higher opening on Friday, with sentiment reflecting modest optimism in response to the non-farm payrolls numbers. The economy added jobs briskly and the unemployment rate dropped sharply, which was achieved on the back of a reduction in the participation rate. Though the markets may view the data as positive, fears of monetary policy may kick in and result in some selling in overbought markets.

US stocks traded on a lackluster note on Thursday, as traders digested some mixed economic data and looked ahead to the monthly jobs report. The major averages opened near the unchanged line after separate reports showed that jobless claims rose more than expected and personal spending and income growth was stronger than expected. After declining in early trading, the averages recovered in early afternoon trading. The Dow Industrials and the S&P 500 Index retreated back into negative territory after seeing some strength in the afternoon before closing lower. At the same time, the Nasdaq Composite Index recovered and held mostly above the unchanged line and ended higher for the session.

The Dow Industrials ended down 21.97 points or 0.13% at 16,559 and the S&P 500 Index closed 0.27 points or 0.01% lower at 1,884, while the Nasdaq Composite Index ended at 4,128, up 12.90 points or 0.31%.

Twenty-three of the thirty Dow components closed lower, with IBM (IBM), United Technologies (UTX) and Exxon Mobil (XOM) declining sharply. On the other hand, Visa (V), Verizon (VZ), 3M Co. (MMM) and Merck (MRK) saw notable strength.

Gold and computer hardware stocks were among the worst performers of the session, while airline and housing stocks rose sharply.

On the economic front, the Labor Department reported that jobless claims jumped to 344,000 in the week ended April 26th from 330,000 in the previous week. The four-week average was almost unchanged at 320,000. Continuing claims calculated with a week's lag rose by 97,000 in the week ended April 19th.

Meanwhile, personal income and spending rose more than expected in March. Personal income increased 0.5% month-over-month, with wages and salaries rising 0.6%, marking the biggest increase since November. Personal spending was up 0.9%, the biggest monthly gain since August 2009, reflecting positive performances by rent and healthcare spending. The faster rate of growth in spending relative to income led to a 0.4 %age point drop in the personal savings rate to 3.8%. The core price consumption expenditure index rose 1.2% year-over-year, up from a 1.1% rate in March.

Motor vehicle sales came in roughly in line with expectations at a seasonally adjusted annual rate of 16 million units in April compared to 16.4 million units in March.

The results of the Institute for Supply Management's manufacturing survey showed that manufacturing activity in the US quickened in April. The headline manufacturing index rose 1.2 points to 54.9 in April. The new orders index was unchanged at 55.1 but the order backlogs index eased 2 points. The employment index rose to 54.7 from 51.1. The expansion was broad based, with seventeen of the eighteen industries surveyed reporting growth.

Final estimates released by Markit showed that its manufacturing index for the US came in slightly softer than expected at 55.4 in April, while economists expected a reading of 55.8.

A separate Commerce Department report showed that construction spending rose 0.2% month-over-month in March. February spending was downwardly revised to show a 0.2% drop compared to the 0.1% growth estimated initially. Residential construction spending climbed 0.8%, while non-residential construction spending edged up by 0.2%.

The Dow Industrials has been on a consolidation move in recent sessions, as it awaits a meaningful catalyst to break out of the range. The 16,577, 16,635 levels are key levels to watch out for on the upside in the eventuality of an upward thrust. Meanwhile, the index has strong support around 16,535, 16,498, 16,445, its 21-day MA (currently at 16,401) and its 50-day MA (currently at 16,337).

Commodity, Currency Markets

Crude oil futures are rising USD0.37 to USD99.79 a barrel after receding USD0.32 to USD99.42 a barrel on Thursday. Meanwhile, gold futures are currently moving down USD0.90 to USD1,282.50 an ounce. In the previous session, gold fell USD12.50 to USD1,283.40 an ounce.

Among currencies, the US dollar is trading at 102.77 yen compared to the 102.33 yen it fetched at the close of New York trading on Thursday. Against the euro, the dollar is valued at USD1.3826 compared to yesterday's USD1.370.


The Asian markets closed on a mixed note, although caution was the undercurrent, as traders in the region awaited the US monthly jobs report. The Chinese market remained closed for a public holiday. The Japanese, South Korean, Malaysian and Singaporean markets ended lower, while the remaining major markets advanced.

Japanese stocks succumbed to profit- taking following the previous session's rally. The Nikkei 225 average languished below the unchanged line for the bulk of the session before closing down 27.62 points or 0.19% at 14,458. Most export stocks closed higher for the session but utility and resource stocks came under selling pressure. Sony ended modestly lower in reaction to its profit warning.

Australia's All Ordinaries, which spent a nervous session moving back and forth across the unchanged line, moved decisively above the unchanged line in late trading before closing up 8.40 points or 0.15% at 5,439. Healthcare, financial and consumer staple stocks advanced, while energy and material stocks moved to the downside.

Hong Kong'sHang Seng Index closed at 22,261, up 126.70 points or 0.57%.

On the economic front, Japan'sMinistry of Internal Affairs and Communication reported that average household spending in Japan rose 7.2% year-over-year in March, notably higher than the 2% increase expected by economists. The upside came as spending was pushed ahead before the sales tax increase went into effect in April.

A separate report showed that the Japanese jobless rate held steady at 3.6% in March. The Bank of Japan reported that the monetary base in Japan jumped 48.5% year-over-year in April.

A report released by the Australian Bureau of Statistics showed that producer prices in Australia rose at a faster than expected rate in both month-over-month and annual terms.

Meanwhile, new home sales in Australia rose 0.2% month-over-month in March, according a report released by the Housing Industry Association, with the modest increase following a 4.6% spike in February.


European stocks showed uncertainty in early trading and are mixed ahead of the US non-farm payrolls report. That said, M&A news is offering some encouragement.

In corporate news, Germany's BASF reported better than expected first quarter profits and also affirmed its forecast for the year. Meanwhile, Software AG reported a decline in its first quarter profit, although it confirmed its 2014 growth forecast.

InterContinental Hotels reported a 6% increase in its global REVPAR in the first quarter and also said it would pay a USD750 million special dividend. RBS reported higher pre-tax profits for its first quarter.

On the economic front, revised estimates released by Markit showed that its manufacturing purchasing managers' index for the eurozone rose at a slightly faster than initially estimated pace. The index came in at 53.4 in April compared to March's 53 and the preliminary estimate of 53.3.

Meanwhile, construction activity in the UK rose at a slower pace in April, as the Markit/CIPS construction purchasing managers' index for the UK slipped to 60.8 from 62.5 in March.

US Economic Reports

Employment in the US rose by much more than anticipated in the month of April, according to a report released by the Labor Department, with the report also showing a much bigger than expected drop in the unemployment rate.The Labor Department said non-farm payroll employment surged up by 288,000 jobs in April compared to economist estimates for an increase of about 218,000 jobs.

Additionally, the report showed upward revisions to the job growth in the two previous months. Revised data showed that employment rose by 203,000 jobs in March and 222,000 jobs in February, reflecting a new upward revision of 36,000.

The Commerce Department is scheduled to release its factory orders report for March at 10 am ET. The consensus estimate calls for a 1.4% month-over-month increase in factory orders.

In February, factory orders rose 1.6% month-over-month, with a 7% increase in transportation equipment orders responsible for much of the upside. Meanwhile, durable goods orders that make up the bulk of factory orders rose a better than expected 2.6% month-over-month in March. Excluding transportation, orders were up a robust 2%.

Stocks in Focus

Pfizer (PFE) confirmed that it has submitted a sweetened offer for AstraZeneca (AZN), offering to buy the company in a cash and stock deal valued at 50 pounds per AstraZeneca share.

Akamai Technologies (AKAM) reported first quarter earnings and revenues that were ahead of expectations. Qlogic (QLGC) also reported better than expected results for its fourth quarter.

Wynn Resorts (WYNN) reported first quarter earnings and revenues that exceeded estimates.

Meanwhile, Fluor's (FLR) results were below estimates and the company lowered the high end of its earnings guidance for 2014.

Expedia (EXPE) reported first quarter adjusted earnings that beat estimates by a penny and its revenues exceeded estimates.

LinkedIn (LNKD) reported a first quarter loss due to higher costs, but its adjusted earnings and revenues were ahead of expectations.

PMC-Sierra's (PMCS) first quarter results were also better than expected. Western Union (WU) reported first quarter earnings that beat estimates, while its revenues were shy of estimates. The company reaffirmed its 2014 guidance.

Starwood Hotels (HOT) announced a special dividend of 65 cents per share along with a 35 cents per share quarterly dividend. The company also said it would utilize the remaining USD614 million available under its repurchase authorization by the end of 2014.

XL Group (XL) reported better than expected first quarter operating earnings. Separately, the company announced a deal to sell its life reinsurance subsidiary to GreyCastle for USD570 million in cash.

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Source: Alliance News

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