Solid Employment Report Causes Spike in Interest Rates – by Minyanville

 

 

Overnight, all of the Asian indices were in the green on news that the Chinese government had set up several special economic zones within the country, which have typically resided in the Guangdong Province. Japanese indices were up more up than 1.5% while Chinese indices all closed in positive territory. Yesterday, while US markets were closed, the ECB and BoE took extraordinary steps to give forward guidance on monetary policy, something neither central bank has done in their history.

The biggest market mover today in what was otherwise a quiet session was the June employment report. Nonfarm payrolls rose by 195,000 vs. an estimated gain of 165,000 though unemployment remained unchanged at 7.6%. However, the 3-decimal unemployment remained nearly unchanged at 7.557% from 7.555% the month prior, which is very close to rounding down to 7.5%. There were a number of positive details to the report including a rising average weekly earnings, a rising participation rate, and an increase in the number of people who voluntarily left their jobs. On the other hand, the number of workers who took part-time employment due to economic reasons rose at an alarming rate. Lastly, the biggest market mover came from the positive revisions of 70,000 payrolls over the prior two months.

The Treasury market was the most volatile following the employment data as it priced in an accelerated pace of increases in the Fed funds rate over the coming years. The 10-year Treasury yield rose 22 basis points to 2.72%, the largest one-day move in interest rates this year. In response, a number of mortgage originators raised the interest rate on their loans by 0.25%.

Equities remained in positive territory despite the massive shock to interest rates. S&P 500 futures were up 16 points to 1625 at the time of the employment report and at one point touched negative territory in the early going. Later in the day, prices stabilized slightly below this level with the number of advancing stocks roughly equal to the number of declining stocks. Real estate investment trusts (REITs) and other interest rate-sensitive sectors were the clear underperformers while financials and tech led.

Monday will bring May growth in consumer credit data, which is forecast to rise by an adjusted rate of $12.5 billion from the month prior. May will be the first month where consumers have experienced sharply higher interest rates so the outcome will be important in determining whether or not it has affected loan growth.

Globally, Germany and Switzerland will release industrial production and the Sentix eurozone investor confidence survey will be released. Additionally, Canada will release housing starts and building permits from June.

Alcoa (AA) will report after the close and kick off 2Q earnings. The other notable report for Monday is WD-40 Company (WDFC).

Markets Grind Higher, Treasuries Stay Flat

The S&P 500 continued its grind higher today, closing above the 1400 level for the first time since May of 2008. Apple (AAPL) touched $600 in pre-market trading, eclipsing the $550 billion market cap mark before finishing the day lower.

Commodities were rocked intraday when a news report leaked that the US and UK were contemplating releasing oil from the Strategic Petroleum Reserve (SPR). This was quickly refuted by the White House, but not before crude plunged over $2.

Treasuries had a relatively flat day after a severe sell-off yesterday. Ten- and 30-year bonds had a minor sell-off while the shorter-term two-year bonds rose, a potentially negative sign for Treasuries.

Jobless claims beat expectations for the eighth time out of the 11 reports this year, helping markets continue their march higher. The Bloomberg Consumer Comfort Index also rose to its highest point since March of 2008.

Traders will be keeping a keen eye on the way the Treasury market reacts as a large sell-off could indicate institutions are rotating capital from fixed income into equities, potentially sparking a further rally.

Treasuries and commodities will also be keyed in on the Consumer Price Index report in the US tomorrow morning. CPI is a true gauge of inflation, and rising inflation would indicate higher Treasury yields and higher prices for commodities.

CWS Market Review – January 13, 2012

The stock market continues to have an impressive 2012. The S&P 500 has closed higher on seven of the eight trading days so far. The index is now up 3.01% for the year while our Buy List is up by 3.57%.

Things are about to get much more interesting as the earnings reports start coming in for our Buy List stocks. JPMorgan Chase ($JPM) will report on Friday. Wall Street will be watching this report very closely for signs of how well the banking sector did during Q4. For most banks, it’s not going to be pretty.

The consensus among analysts is for JPM to report 90 cents per share, and what I’ll be paying most attention to is any full-year earnings guidance from the bank. JPM remains one of the best-run large banks around, and the stock is cheap. Be sure to visit the blog for the latest earnings news.

In this week’s CWS Market Review, I want to shift gears and talk more about the bond market since that’s often a future driver of stock prices. Beginning in late July of last year, the long end of the Treasury market took off while stocks slumped. Even though stocks have recovered somewhat, Treasury yields remain low. Very, very low.

Last week I said that the bond market’s 30-year bull run may already be over. The bond market had other ideas and yields dropped even lower this past week. The Treasury has had no problems auctioning off new debt. Just this week, an offering of 10-year debt was auctioned off at the lowest yield ever. On Wednesday, the yield on the five-year Treasury nearly hit an all-time low.

Honestly, I don’t see how much longer these low yields can last. The math is, quite simply, horrible. Investors can’t even get 2% from a 10-year Treasury while there are gobs of blue chip stocks yielding 3% or more. Sysco ($SYY), for example, yields 3.68% and Johnson & Johnson ($JNJ) yields 3.50%. Compare this to even a two-year Treasury which will fetch you a yield of just 0.22%. Sure it’s safe, but at what price?

Part of the reason for the wide stock-bond divergence is probably the safe haven effect. When things get bumped, investors gravitate toward safety. Or in this case, they stampede. The latest trouble spot is Germany where it appears that their economy is in a recession. Short-term yields there recently turned negative, so that may be driving some of the demand for our debt.

What’s especially puzzling about the latest rally in bonds is that it’s occurring amid positive economic news and a rally in cyclical stocks. Cyclical stocks often do well as long-term yields rise. This isn’t a hard rule, but it’s a well-known generality.

Last week I said that cyclical sector is starting to look more attractive. The Morgan Stanley Cyclical Index (^CYC) has outperformed the broader market for ten straight sessions.  This clearly reflects greater optimism for the U.S. economy, although the market would have had a tough time becoming more pessimistic. To be fair, last week’s jobs repor t wasn’t too bad, and earlier this week, we learned that consumer credit had its largest monthly gain in a decade. I think it’s possible that Q4 GDP topped 4%.

As far as corporate earnings go, I continue to be a realist. I think that more than a few companies will disappoint investors this earnings season. We’ve already seen plenty of lower guidance. This is Wall Street’s old trick of lowering the bar to six inches off the ground and expecting a standing ovation for stepping over it. That ain’t gonna happen this time around.

Many of our Buy List stocks will serve as an oasis. Stryker ($SYK), for example, just gave very good preliminary guidance for 2012. The company won’t report its Q4 earnings until January 24th, but it already said to expect a sales increase of 11%. Stryker also said that full-year earnings should range between $3.72 and $3.74 per share. By my count, this is the second time the company has raised the low-end of its guidance.

But I was most impressed to hear the company say that earnings-per-share should rise by “double digits” in 2012. I don’t think many companies will be telling investors that this month, and even fewer will be able to deliver. I don’t have any such doubts about Stryker. We should also remember that last month the company raised its quarterly dividend by 18%. That sends a strong message to investors. Until now, I had been urging some caution towards Stryker until I heard better news. Now that it’s here I feel much better about the stock. Stryker is an excellent buy up to $55 per share.

Shares of CA Technologies ($CA), one of our new stocks this year, also had some good news this week. The shares got a nice lift on Thursday when Taconic Capital, a prominent hedge fund, announced that it had acquired a large position. Any holding of more than 5% has to be made public, and Taconic got a hair more than 5% so they most certainly knew their position would cause a splash. Shares of CA Technologies jumped 4.2% on Thursday. The stock is already up 7.9% for the year.

Taconic is known as an activist investor, which means they make recommendations about how to quickly improve a business. In the case of CA, I have to admit that their ideas are very sound. CA Technologies is a very strong buy up to $24 per share.

I’m particularly optimistic about Ford ($F) right now. The company said that it ended 2011 on a strong note and the stock seems to be riding the cyclical rally. I think the stock can reasonably hit $15 before the end of the year.

That’s all for now. Be sure to keep checking the blog for daily updates. The stock market will be closed on Monday in honor of Dr. Martin Luther King. The civil rights leader would have been 83 years old. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy