Too much of a good thing? That was the question many traders were asking at the end of an event-filled week in which major averages rose smartly. Friday's employment report was far and away the dominant event in a week also featuring OPEC's production cut; the European Central Bank's decision to leave rates unchanged; earnings news both good (from the likes of Best Buy ( BBY)) and bad ( QLogic ( QLGC)); and a
settlement between longtime rivals Sun Microsystems ( SUNW) and Microsoft ( MSFT). The surprisingly strong March payrolls data -- growth of 308,000 vs. expectations of 123,000 plus upward revisions to January and February -- reverberated through financial markets Friday, boosting equities and the dollar while hurting Treasuries and commodities. The Dow Jones Industrial Average rose 0.9% to 10,470.59, ending the week up 2.5%, while the S&P 500 gained 0.9% to 1141.80, up 3% for the week. The Nasdaq Composite climbed 2.1% to 2057.17, ending the week up 4.9%. The dollar stemmed a weeklong stumble vs. the Japanese yen Friday while the euro fell to $1.2132 Friday vs. $1.2353 Thursday. Gold prices, meanwhile, slid 1.5% to $422.50 per ounce Friday, ending the week up 0.2%. Meanwhile, the price of the benchmark 10-year Treasury note tumbled 2 3/32 to 98 28/32, its yield rising to 4.14%. For the week, the 10-year's yields, which moves in opposition to its price, rose 31 basis points. Treasuries clearly reacted to the employment data, which raised the possibility the Federal Reserve will tighten sooner before later. "I don't believe the Fed is going to tighten at its next meeting, but Friday's employment number surely has got people thinking about rates," said Donald Straszheim, president of Straszheim Global Advisors in Santa Monica, Calif. "I wouldn't be surprised if we see the Fed tighten this year."
Al's 'Make Your Own Box' ShopDespite strong GDP growth, the stock market's recovery, and record-setting corporate profits, the Federal Reserve has argued low official inflation rates and stagnant labor markets allow it to keep rates at historically low levels without risking an overheated economy. "At some point, as the economy moves back towards higher levels of employment, policy accommodation will no longer be needed and the funds rate will be raised," Fed Governor Donald Kohn said in a speech this week. "But it does not appear that we are as yet at that point." Friday's employment report puts that rationale at risk, even while confirming longstanding views on Wall Street (and Pennsylvania Avenue) that strong job growth was imminent. Nevertheless, "there is still great resistance on the part of companies to hire and the reason is -- it's expensive," Strazheim said. "The attraction to outsource to save labor costs wherever you can is no different today vs. yesterday." Given this week saw companies such as Sun Micro and Gateway ( GTW) announce significant layoffs, it's quite possible the market -- and the media -- is making too much of Friday's jobs data. That said, there is a powerful argument the Fed already has left rates too low for too long, creating imbalances in, most notably, housing, consumer credit and financial assets. "We could in fact at some point in the future be contributing to the development of some excesses and imbalances that later will have to be worked off," Atlanta Fed President Jack Guynn acknowledged in a speech Tuesday. (Conversely,
A longtime Greenspan critic, Kasriel cited the record high price-to-earnings ratio for housing -- the index of house prices divided by the index of primary-residence rents -- as evidence of a housing bubble and sharp rises in the annualized core producer price index as proof "pipeline inflationary pressures are building." Among other rate-sensitive groups, homebuilding stocks were hit hard Friday -- the S&P Homebuilding Index fell 4.7% -- but the debate over whether there's a housing bubble is hotly contested. Less contentious is the belief the Fed risks inflation by keeping the fed funds rate so low, for so long, something St. Louis Fed President William Poole said this week. Among others, Straszheim has long argued the current 1% fed funds rate is not high enough given the economy's performance and "wouldn't object" if it were at 1.5% by midyear and 2% by year-end. Brian Wesbury, chief economist at Griffin, Kubik, Stephens & Thompson in Chicago, has
long aruged the Fed has fallen behind the inflation curve. He currently foresees the Fed tightening at its Aug. 10 policy meeting. The Fed's next scheduled policy meeting is June 29-30. Notably, few economists seem worried about the election providing any restraint to the timing or size of presumptive Fed rate hikes. The Fed has been active in past election years, and Straszheim suggested Greenspan would only cement criticism he's become a GOP partisan by doing "something that seems not to match independent analysis," i.e., leaving rates too low. Indeed, politics may be the least of the Fed's worries as it contemplates when to tighten, and by how much.
Parting Thoughts and Self-PromotionThe good news, for those long shares, is that concerns about Fed-induced imbalances have been with us for some time and don't appear to be an imminent threat. Furthermore, Friday was a confirmation session -- a more-than 1.7% rally on higher-than-average volume -- for the Nasdaq, "confirming" the March 25 rally marked a change in the previously declining trend.
Friday also seemed to confirm views
expressed here that the dollar was approaching a turnaround, most likely in tandem with shares. Finally, I'll be back on John Batchelor's WABC radio show to discuss these and related issues Friday night/Saturday morning, around 9:30 p.m. PST/12:30 a.m. EST. Check www.wabcradio.com for local listings or Webcast options.