Clarity Remains Elusive

Investors hope the jobs data Friday can point them in the right direction.
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Market participants eyed Thursday's data with interest, but traders were mostly standing pat a day ahead of the release of the monthly employment numbers, the mother of all economic reports.

Now that the

Federal Reserve

has said it's off autopilot and plans to rely on economic figures to assess future policy, investors are trying to make sense of the newest evidence.

Since the release of the central bank's minutes earlier this week, which suggested the end of rate hikes is near, the market has seen mixed holiday sales and a drop in pending home sales, along with fewer jobless claims and strength in the service sector of the economy. Taken together, these data make it about as difficult as it could be to take a stance one way or the other.

Before the market opened,

Wal-Mart

(WMT) - Get Report

, the world's biggest retailer, warned that fourth-quarter earnings would be at the lower end of its previous guidance as holiday sales came in below expectations. Other chains, such as Wal-Mart rival

Target

(TGT) - Get Report

and apparel seller

Aeropostale

(ARO)

, seemed to fare better.

Blue chips have been up for two straight sessions but were under pressure Thursday. In recent action, the

Dow Jones Industrial Average

was down 9.76 points, or 0.1%, at 10,870.39. The

S&P 500

was losing 1.29 points, or 0.1%, to 1272.17, while the

Nasdaq Composite

was gaining 10.93 points, or 0.5%, to 2274.39.

Reports that both

Hewlett-Packard

(HPQ) - Get Report

and a private-equity group are considering making bids for

Computer Sciences

(CSC)

boosted tech shares.

As things stand, two key opposing scenarios about the economy -- a slowing housing market possibly undermining consumption vs. strong business and employment growth -- appear to be neutralizing each other in terms of their implications for Fed policy.

"The market is looking for signs of a slowdown in the housing market, which has been feeding into wealth and has supported consumers," says David Wat, senior economist at BMO Nesbitt Burns. "So far it's a moderate slowdown."

On Thursday, the National Association of Realtors said pending home sales dropped 2.5% in November, the third monthly decline in a row.

However, it's too early, according to Wat, to really say that the cooler housing market is feeding a drop in consumption. Likewise, it's hard to say the past holiday shopping season was really disappointing, given that consumers are increasingly shopping online.

On the other side of the equation, jobless claims unexpectedly fell by 35,000 to 291,000 in the week ended Dec. 31, reaching their lowest level in more than five years. The four-week moving average of 317,000 claims is still consistent with a reading of more than 200,000 new jobs added to U.S. payrolls.

Elsewhere, the December survey of the service sector by the Institute for Supply Management painted a picture of strength outside manufacturing, which represents the bulk of all jobs.

Thanks to the good behavior of crude oil prices through the end of the year, the prices paid component fell to 69.5 last month from 74.2, its lowest reading since August. But Ralph Kauffman, chairman of the ISM's services survey, noted that price pressures remained high.

"Concern about the relatively high level of energy prices has lessened somewhat, although the effects of high energy prices are still being felt through price increases and surcharges for other products," he wrote in an ISM report.

The bond market, which had been rallying over the past two days since the Fed's minutes, took a step back following the ISM report. The two-year note, the issue most influenced by the Fed's rate hikes, was recently down a fraction. The yield, which moves inversely to the price, stood at 4.32%. The benchmark 10-year Treasury dropped 4/32 while its yield rose to 4.36%. Inflation erodes more of the value of longer-maturing debt.

Economists at UBS note that while fourth-quarter GDP growth should drop to 3.0% from 4.1% in the third-quarter, it should rise again to 3.7% in the first quarter, thanks in large part to government spending to rebuild parts of the southeast that were devastated in the wake of Hurricanes Katrina and Rita.

This, says BMO's Wat, will have the Fed on alert regarding the housing market and the labor and commodity price pressures that can feed into other parts of the economy.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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