US & World Daily Markets Financial Briefing 03-02-2006

NEW YORK - U.S. stocks lost ground Friday as the latest employment report reignited interest-rate hike fears, with a weak earnings report from Amazon.com Inc. further undermining sentiment.

A dip in consumer sentiment and a weaker-than-expected report on the nation's services sector also weighed.

The Dow Jones Industrial Average was last down 55 points at 10,796.

The Nasdaq Composite Index fell 20 points to 2,261 while the S&P 500 Index dropped 8 points to 1,262.

"You certainly see a market throughout which is reflecting rate worries," said Jim Paulsen, chief investment officer at Wells Capital Management, referring to the pullback in stocks, the rise in bond yields and the jump in the dollar.

On the broader market for equities, decliners outpaced advancers by 3 to 1 on the New York Stock Exchange, and by more than 2 to 1 on the Nasdaq.

Volume was 335 million on the Big Board, and 484 million on the Nasdaq.

Jobs report stokes rate-hike worries

With the Fed having left open the possibility of further rate increases earlier in the week, investors were hoping the January employment report would not give the central bank a reason to hike. 

The U.S. unemployment rate fell to a 5-year low of 4.7% in January as 193,000 jobs were added to nonfarm payrolls, the Labor Department said.

The January payroll figures did fall short of expectations for a gain of 248,000, but with upward revisions to November and December of 81,000, the total payroll count was a bit more than expected. The drop in the jobless rate to the lowest level since April 2001 was a surprise: Economists expected the unemployment rate to remain at 4.9%. 

Average hourly wages rose 7 cents or 0.4% to $16.41, when economists had only been expecting a 0.3% gain.

The Fed has been raising interest rates as it attempts to slow economic growth in a bid to contain inflation. The jobs report shows the economy growing at a healthy pace, but it also reveals that wage inflation is picking up. 

"This report is much stronger than it first appears," said Ian Shepherdson, chief U.S. economist at High Frequency Economics. "If Feb [employment report] is broadly similar, a March 28 hike is assured."

The Fed raised its short-term interest rate by a quarter percentage point to 4.5% last Tuesday. The Federal Open Market Committee, the Fed's interest-rate setting body, next meets at the end of March.

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Dollar, gold, bonds

The employment report filtered through the financial markets.

The dollar gained against both the euro and the Japanese yen as the data helped build a case, among some currency traders, for the Fed to continue raising rates as a tight labor market fuels wage inflation. The euro was last down 0.4% at $1.2029. Against the yen, the greenback was up 0.2% at 118.85.

Gold futures reversed course to edge higher amid continued bullish sentiment. Gold for April delivery was last up 50 cents at $577.30 an ounce.

On the bond market, long-term Treasury prices fell, sending yields higher on concern over the wage inflation component of the report. 

The odds rose on the Chicago Board of Trade's federal funds futures market that the Fed's short-term interest rate will be at 5% by the end of July. 

Mixed data

Among other data of note, U.S. consumer sentiment unexpectedly dipped in January.

Nonmanufacturing sectors of the U.S. economy, meanwhile, expanded at a slower pace during January, the Institute for Supply Management reported. The ISM nonmanufacturing index fell more sharply than expected to 56.8% from 61.0% in December.

Orders for U.S.-made factory goods increased 1.1% in December, led by orders for durable goods and investment in capital equipment, the Commerce Department estimated. The rise in factory orders was above the 0.9% expected by economists surveyed by MarketWatch.

Oil edges higher amid Iran uncertainty

Crude-oil futures edged higher as the International Atomic Energy Agency reconvenes to discuss what measures need to be taken over Iran's resumption of its nuclear program.

On Thursday, futures fell to a three-week low after IAEA said the situation had not yet reached a crisis. Crude for March delivery was last up 7 cents at $64.75 in New York trading. 

In what has been a mixed week for quarterly earnings, Amazon.com Inc. saw its shares slide 11.1% to $37.99 after the online retailer's results came up short, hurt by higher costs and lower-than-expected sales. 

Shares of Electronic Arts Inc. rose 1.9% to $54.59, helped by an upgrade from broker William Blair, even as the video-game maker posted quarterly results that fell shy of estimates. 

Blair said the company's stock price has almost bottomed out, with investors now able to look forward to positive momentum in 2006. Broker Piper Jaffray, however, took a different tack, downgrading the stock on valuation concerns and management's caution regarding growth in 2006. 

On the deal front, ConAgra Foods Inc. said it is planning to sell most of its refrigerated meats businesses, including the Armour, Butterball and Eckrich brands. The combined annual sales for the businesses being offered for sale are about $1.9 billion. ConAgra shares were up 26 cents at $21.

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NEW YORK - The dollar was higher Friday morning, after the January jobs report pointed toward declining unemployment and increased wage inflation, developments that could help persuade the Federal Reserve to continue lifting rates. 

The dollar last was up 0.6% at 119.11 yen, its strongest level since December 13, 2005. The euro fell 0.09% to $1.1989.

The Labor Department said the jobless rate fell to a five-year low of 4.7% last month, alongside a 0.4% increase in average hourly wages.

The department also said 193,000 new jobs were created last month. The gain fell short of a projection for 248,000 new jobs set by economists polled by MarketWatch.

However, with upward revisions totaling 81,000 for November and December, the total count was a bit above expectations. 

"There is a perception that today's unemployment rate numbers could convince the Fed to keep lifting rates into May," said Mike Malpede, senior currency analyst at Man Global Research.

The Fed is known to carefully monitor wage inflation in setting monetary policy.

On Tuesday the Fed put in place its fourteenth consecutive quarter-point rate hike, lifting the fed funds target to 4.5%. If it were to raise rates again at monetary policy meetings in March and May, the key rate would stand at 5%.

Peter Morici, a business professor at the University of Maryland, cautioned against  interpreting the new report as a sign of labor market strength. The drop actually is a consequence of disappointed job seekers calling off their searches, according to Morici. 

"Unemployment fell to 4.7% largely because adults continued to quit the job market." Morici said. "In January the labor force shrunk just as it did in November, and the growing number of discouraged workers is a major public-policy problem." 

"The adult labor-force participation has fallen significantly since George Bush took over stewardship of the economy. If adults were participating in the job market at 2000 levels, unemployment would exceed 6%," he said. 

Because of the preoccupation with the jobs numbers, there was limited market reaction to new reports showing deterioration in consumer sentiment, unexpectedly brisk factory orders and weakening conditions in the services sector. 

The final January reading of the University of Michigan's consumer sentiment index showed a decline to 91.2 from 91.5 in December and 93.4 in mid-January, according to media reports. 

Economists polled by MarketWatch were expecting sentiment to rise to 93.1

The Commerce Department said that orders for U.S.-made factory goods increased 1.1% in December, led by orders for durable goods and investment in capital equipment.

The rise in factory orders was above the 0.9% expected by economists. 

The Institute for Supply Management's survey of the services sector for last month came in below expectations with a reading of 56.8%, down from 61% in December.

Economists were looking the index to slip to 59.5%. New orders fell sharply to 56.0% from 62.2%. The employment index fell to 51.1% from 56.9%. Inflation pressures held steady at 67.2%.

Earlier in Europe, the NTC services sector purchasing managers index rose to a two-year high of 57 from 56.8 in December in the euro zone. In the U.K., the same poll also was at 57.0, down from 57.9 in December.

A figure in these indexes above 50 indicates economic expansion.

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MILAN - Impregilo SpA's largest shareholder IGLI SpA has the right to increase its stake in the company to 29.86 pct by exercising an option to buy an 11.82 pct stake valid from March 31, said market regulator Consob.

MUNICH - Allianz AG is cutting 700 jobs at the back office of its sales organisation, head of Germany operations Gerhard Rupprecht said in an internal online interview released today.

WASHINGTON - The Federal Reserve will likely boost overnight lending rates at least two more times in the first half of the year, traders in the Chicago Board of Trade's federal funds futures market believe. Implied prices of futures contracts give a 68% chance that the fed funds rate will rise from 4.5% currently to 5% by the end of July, up from a 48% chance before a strong January payrolls report was released.

NEW YORK - Bear Stearns & Co. on Friday said it named Michael Alix as chief risk officer and Robert Neff, formerly head of market risk, as deputy chief risk officer. Alix was head of the firm's global credit department and he is head of the credit policy committee at the company. Shares of Bear Stearns closed up 12 cents to $127.15 on Thursday.

MILAN - Riunione Adriatica di Sicurta SpA said that its shareholders holding ordinary shares approved a merger with parent company Allianz AG on the basis of three Allianz shares for every 19 RAS shares.

NEW YORK - Moody's Corp. on Friday reported a 22% increase in fourth-quarter net income as the bond rating and analysis firm's global customized finance business heated up.

AMSTERDAM - Getronics NV said it was awarded a five-year contract valued at some 200 mln eur from Barclays PLC to provide desktop and application management support to over 30,000 users, the majority of which are in the UK.

PARIS - Capitalisation of shares listed on the Alternext market for midcaps and small companies has reached 1 bln eur with the listing of Clasquin on Tuesday and 1000mercis yesterday, taking the number of stocks traded on the market to 24, Euronext NV announced.

LONDON - Lloyd's of London said it plans to take legal action against insurance brokers Benfield Group Ltd and Aon Limited over their role in placing a policy which triggered a high-profile court battle between the London insurance market and six insurers last year.

TAIPEI - Taishin Financial Holding Co Ltd (2887.TW) said it has signed a memorandum of understanding to issue and sell to Newbridge Asia IV LP stocks and bonds through a private placement for a total of 27 bln twd.

FRANKFURT - The fourth quarter operating profit margin at Commerzbank AG's Mittelstandsbank division, which serves small and medium-sized companies, was higher than initially anticipated, said management board member Martin Blessing.

LONDON - Lloyd's of London said it plans to take legal action against insurance brokers Benfield Group Ltd and Aon Limited over their role in placing a policy which triggered a high-profile court battle between the London insurance market and six insurers last year.

PARIS - Market data at 10.29 am:
Major indices:
CAC-40 up 1.99 points or 0.04 pct at 4,929.88
SBF-80 up 9.26 points or 0.17 pct at 5,537.13
SBF-120 up 2.89 points or 0.08 pct at 3,569.68

MILAN - Riunione Adriatica di Sicurta SpA CEO Paolo Vagnone said he expects full-year 2005 profitability significantly improving compared to last year as gross premium income rose 1.7 pct from 2004, in line with the company's targets.

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SAN FRANCISCO - March crude rose 32 cents to $65 a barrel in New York as traders eyed developments in Iran. The International Atomic Energy Agency is set to vote on whether it will report Iran's resumption of nuclear research to the UN Security Council. A meeting Thursday ended without a decision. "Not only did the IAEA fail to reach a decision to report Iran's nuclear power program to the Security Council, comments from both U.S. and EU played down the threat of immediate sanctions," said Michael Fitzpatrick an analyst at Fimat. But the IAEA will report Iran to the Security Council, BBC News reported Friday, citing comments from diplomats.