Apple Added To Dow Industrials, Replaces AT&T

Friday, March 06, 2015

Stocks

U.S. stocks dropped Friday as the dollar soared and Treasury yields jumped after robust jobs growth solidified expectations of a U.S. rate increase as soon as June. "This is one of those instances of good news being reacted to as bad news," said Matthew Rubin, director of investment strategy for Neuberger Berman, adding that much of Friday's selloff was "emotional."

Treasurys

U.S. government bonds suffered the biggest one-day selloff since November 2013 as a solid U.S. employment report stoked fears that the Federal Reserve may raise interest rates in June. Investors including hedge funds and portfolio managers shed holdings as they are worried that higher official interest rates from the central bank would undermine the value of outstanding bonds. Traders said the selloff reminded them of the "taper tantrum" during the summer of 2013 when the bond market was rattled by concerns of a pullback in the Fed's bond-buying monetary stimulus.

Forex

The dollar pushed to a new 11-year high against the euro and rose against the yen Friday after a strong U.S. jobs report solidified market expectations for the Federal Reserve to raise interest rates around midyear. The euro fell to $1.0873, down 1.5% for the day and crossing below $1.09 for the first time since Sept. 4, 2003.

Commodities

U.S. oil futures wavered between gains and losses Friday after monthly domestic job growth data came in better than expected and drove the dollar higher, undercutting crude prices. The U.S. benchmark was mildly higher before the U.S. Commerce Department jobs report was released, but turned negative after it showed the U.S. gained 295,000 nonfarm payroll jobs in February, compared with the 240,000-average estimate of economists surveyed by The Wall Street Journal.

Market Snapshot*

DJIA Nasdaq S&P 500 10-Year 30-Year Euro Nymex Crude

Source: SIX Telekurs, ICAP plc

17856.85

-278.86

4927.37

-55.43

2071.26

-29.77

2.2369%

-1 3/32

2.832%

-2 8/32

$1.08505

-0.0175

$49.61

-1.15

*preliminary values subject to adjustments

Tomorrow's Headlines

US Adds 295,000 Jobs in February

U.S. employers added jobs at a solid pace in February and the unemployment rate ticked down, signs of a strengthening labor market that should keep the Federal Reserve on track to raise interest rates this year.

U.S. nonfarm payrolls grew by a seasonally adjusted 295,000 jobs in February, the Labor Department said Friday. February's rate is the lowest since May 2008. The economy has now added more than 200,000 jobs for 12 straight months, the longest such streak since 1995.

Job creation in prior months was slightly weaker than previously estimated, with revisions showing a net decline of 18,000 jobs for December and January.

The unemployment rate, calculated from a separate survey of households, fell to 5.5% in February, from January's 5.7%. The drop shows employers are hiring steadily, though some of the decline can be attributed to more Americans dropping out of the labor force last month.

Economists surveyed by The Wall Street Journal had expected payrolls to increase by 240,000 in February and the jobless rate to fall to 5.6%.

Apple Added To Dow Industrials, Replaces AT&T

Apple Inc. will join the Dow Jones Industrial Average this month, a long-anticipated change that adds the world's most-valuable company to the 119-yearold blue-chip index.

The move is the latest milestone for Apple, which has emerged in recent years as the standard-bearer for a resurgent U.S. technology sector. The Cupertino, Calif., company in January reported latest-quarter net income of $18 billion, the largest quarterly profit on record, fueled by roaring sales of iPhones.

Apple will replace telecommunication giant AT&T Inc., according to S&P Dow Jones Indices, the unit of McGraw Hill Financial Inc. that owns the Dow. Shares of Apple rose 1.4% in premarket trading Friday to $128.17.

Apple's addition caps the ascendancy of tech in the Dow that started in 1999 when software giant Microsoft Corp. and semiconductor maker Intel Corp. joined, a nod to the "New Economy" boom then sweeping the U.S. Like

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Monday's Calendar

10:00 a.m.

Feb Employment Trends Index US Employment Trends Index (ETI) (previous 127.86), MoM Change (previous +7.6%)

1:45 p.m.

U.S. Treasury Sec Lew tours South Baltimore infrastructure equipment manufacturer

N/A

Obama meets European Council President Tusk at the White House

N/A

FRB Cleveland President Loretta Mester speaks at NABE conference

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Tomorrow's Headlines

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Apple, both companies are listed on Nasdaq. Previously, all Dow components had been listed on the New York Stock Exchange, though there weren't any restrictions against having a Nasdaq stock.

US Trade Gap Narrows in January

Cheaper U.S. energy prices and lower demand for foreign oil helped narrow the U.S. trade gap in January.

The trade deficit shrank to a seasonally adjusted $41.75 billion in January, the Commerce Department said Friday, as crude imports fell and created the lowest deficit for petroleum products in over a decade.

December's deficit was revised to $45.6 billion from an initially reported $46.56 billion. Economists surveyed by The Wall Street Journal had forecast a trade deficit of $41 billion in January.

Overall, exports decreased 2.9% from December to $189.41 billion, and imports also fell 3.9% to $231.16 billion.

The drop off in both imports and exports reflects an array of factors, primarily the steep drop in crude oil prices, but also disruptions related to a West Coast port labor dispute, a firming dollar and the relative strength of the U.S. economy.

Fed's Lacker Sees June As Best Time to Hike Rates

Federal Reserve Bank of Richmond President Jeffrey Lacker told a radio channel Friday he is looking to the central bank's mid-June policy meeting as the best time to raise short-term interest rates.

Given the performance of the economy and very robust improvements in the job market, Mr. Lacker told a SiriusXM radio program that "June has to be on the table." He explained that as long as the economy meets his expectations, "June would strike me as the leading candidate for liftoff" and moving short-term interest rates off their current near-zero levels.

Mr. Lacker was interviewed in the wake of the release of very strong hiring data for February. Most Fed officials favor raising rates this year, with a number of policy makers pointing to the June Federal Open Market Committee gathering as the point at which officials will begin actively considering rate rises. Mr. Lacker, a voting member of the FOMC, was more direct in saying that June would likely be an ideal time to boost rates.

US To File Criminal Charges Against Sen. Menendez

Federal investigators are preparing to file criminal charges against Sen. Robert Menendez, a New Jersey Democrat

who has been under investigation for possible corruption, according to people familiar with the case.

A lawyer for Mr. Menendez declined to comment. The likelihood of charges against Mr. Menendez, the top-ranking Democrat on the Senate Foreign Relations Committee, was first reported by CNN.

The Federal Bureau of Investigation has been investigating Mr. Menendez for more than two years. At first, the probe centered around his travel with a Florida doctor, and a murky allegation that while on such a trip he might have had a tryst with an underage prostitute in the Dominican Republic.

From there, the probe burgeoned to his financial connections to the doctor, who was facing an unrelated probe into his billing practices, and whether the senator improperly sought to help the doctor in that investigation. The FBI also examined whether Mr. Menendez may have improperly used his influence with the Department of Homeland Security on behalf of donors.

The timing and specific accusations of possible charges wasn't immediately clear.

Staples Reports Loss on Write-Down

Staples Inc. reported another quarter of declining sales and dwindling store traffic, deepening the chain's challenges while it awaits regulatory approval for its $6.3 billion takeover of rival Office Depot Inc.

In North America, Staples suffered a 4% sales drop at stores open at least a year, excluding the effect of currency-exchange rates, its 11th straight quarter of sales declines. Store traffic fell 1%, and shoppers spent 4% less per visit for the three months through January. Online sales grew 9%, but that wasn't enough to offset the declines in the chain's store base.

Staples shares fell 3% to $16 in recent trading after the company swung to a fourth-quarter loss.

Staples has been hit by shifts in office needs where basics like paper folders and printer toner are no longer in high demand. In response, the retailer broadened its range of products to include tablet computers and phones as well as coffee makers and cleaning supplies. But sales of computers and tablets fell short of executives' expectations.

Staples and Office Depot have responded to slower store traffic by proposing combining into a single office-supply chain to compete with the discounters and Web retailers that have invaded their turf. The acquisition, however, will have to win approval from regulators who shot down a merger of the same companies 18 years ago.

Consumers' Credit-Card Debt Falls in January

U.S. consumers added to their debt burdens modestly in January, a sign they remain cautious about spending despite sturdier job growth.

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Tomorrow's Headlines

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Outstanding consumer credit--reflecting Americans' total debt outside of mortgages--grew $11.56 billion to $3.33 trillion in January, the Federal Reserve said Friday. That reflected a 4.18% jump at an annual rate.

Economists surveyed by The Wall Street Journal had expected household debt to grow $14 billion in January.

Updated figures showed household debt grew $17.87 billion in December, a bigger increase than the initially reported $14.75 billion gain.

Increased borrowing for cars and higher education drove January's debt increase. Nonrevolving credit, representing mostly auto loans and student debt, grew at a 6.29% annualized rate. Revolving credit, reflecting credit-card debt, fell 1.57% in January, though that followed a sizeable 8.41% increase for December.

Nymex Reports Incorrect Energy Prices

Nymex processed several incorrect oil and gas prices Friday, leading trading platforms to show spikes that never happened.

Trading is now functioning properly, but the incorrect prices may still show up on screens run by other data providers and used by traders and brokers, a CME Group Inc. spokesman said. One of those other companies, CQG, was still trying to correct its prices late Friday morning, a spokesman said.

CQG, a commonly use trading platform, showed frontmonth natural gas spiking 50% in one minute just before 10:30 a.m. EST, and then later showed a dip of 24%. Peter Donovan, broker for Liquidity Energy in New York, said he uses a different platform that showed a 32% spike in December 2018 crude futures to $88.10, a spike so large he dismissed it out of hand.

EU Edges Toward Consensus on Russian Sanctions

European Union governments began two weeks of debate on the bloc's policy toward Russia and Ukraine on Friday, with an apparent consensus emerging that the EU would stick to its sanctions regime against Moscow for now.

Foreign ministers are meeting Friday and Saturday in the Latvian capital of Riga for an informal summit and are then scheduled to gather in Brussels on March 16. EU leaders will discuss the situation at a summit on March 19-20.

On their way into the meeting, most foreign ministers acknowledged that fighting had calmed across much of eastern Ukraine in recent days following the Feb. 12 ceasefire agreement, but remained cautious about the prospects for lasting peace.

"Concerning the situation in eastern Ukraine, we are not where we would like to be," said German Foreign Minister Frank-Walter Steinmeier.

He said over the past few days there had been a noticeable reduction in violence and cease-fire violations but "we are not yet in a phase of a really sustainable cease-fire. Further steps are needed, for instance, the withdrawal of heavy weaponry, the exchange of hostages."

Fiat Chrysler CEO Earned $34.6M in 2014

Fiat Chrysler Automobiles Chief Executive Sergio Marchionne earned 31.3 million euros ($34.6 million) in 2014--a giant package compared with most European corporate chiefs--thanks to a one-off bonus he received for engineering Fiat's full takeover of Chrysler that created the world's seventh-largest car maker and helped fuel a 61% surge in the stock price.

The payoff, disclosed in the annual report released Thursday, is especially noteworthy for Europe, but is also higher than the chiefs of U.S. auto giants Ford Motor Co. and General Motors Co.

Mr. Marchionne, who has run Fiat Chrysler for a decade, last year earned 2.5 million euro in salary and 4 million euro in annual incentives. On top of that, nonexecutive directors gave Mr. Marchionne a one-off bonus of 24.7 million euro "as a recognition he was instrumental in major strategic and financial accomplishments for the Group," Fiat Chrysler wrote in its annual report.

NATO Seeks to Speed Up Deployment Decisions

The North Atlantic Treaty Organization is seeking to speed up decision making on military deployments as part of the alliance's response to threats posed by Russia and Islamic State, the alliance's Secretary-General Jens Stoltenberg said Friday.

Speaking to a group of journalists here, Mr. Stoltenberg said that NATO is currently implementing "the biggest reinforcement of our collective defense since the end of the Cold War."

NATO has already beefed up its presence in its eastern member states, with four times more aircraft deployed in the Baltic states, more warships in the Black Sea and Baltic Sea and more troops on the ground undertaking training and exercises.

NATO is currently working out plans to double its so-called rapid response force to 30,000 troops and have a "spearhead force" of a few thousand soldiers able to move within 48 hours.

In addition, the military alliance is setting up command units in the Baltic states, Poland, Romania and Bulgaria of up to 40 staff each, to coordinate between national and NATO military structures, help organize exercises and facilitate the deployment of troops "if needed."

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Equities Week Ahead

Retail Sales Seen Strong

The Commerce Department is scheduled to report on February retail sales Thursday.

Shoppers have skipped the malls lately. Instead of spending the money freed up at the gasoline pump, households are saving the extra cash. Retail sales fell in December and January.

Economists surveyed by The Wall Street Journal expect a small rebound in February. Total sales are projected to increase 0.3%. Sales excluding autos are expected to be up 0.6%.

Jobs Turnover Seen Brisk

The Labor Department is scheduled to report on the comings and goings in the January labor market on Tuesday.

The Job Openings and Labor Turnover survey will offer what is beneath the revised 239,000 gain in January nonfarm payrolls reported Friday. The Federal Reserve looks at the "Jolts" report to see how many job openings were posted and whether more workers voluntarily left their old positions.

Two price reports are on tap next week. Labor is scheduled to report on import and export prices Thursday and on producer prices Friday.

Economists think the drag from falling oil prices has finally run its course. The median forecast expects the top-line import price index will be up 0.2% in February, the first monthly increase since June 2014. Even so, the index will be down from year-ago levels, indicating a temporary deflation run among imported goods.

The top-line Producer Price Index is projected to edge up 0.3% in February. Excluding food and energy, the core index is expected to rise 0.1%.

Fed Calculus Changed By Jobs Report

The robust job market keeps the Federal Reserve on track to alter its guidance on interest rates at its policy meeting this month--and debate whether to start raising short-term interest rates in June.

With an increase of 295,000 in non-farm payrolls in February, reported by the Labor Department Friday, job gains have averaged 322,000 per month for the past four months, the fastest pace since late 1997. Meantime, the unemployment rate has dropped to 5.5%--the top of a 5.2% to 5.5% range of what many Fed officials considered to be full employment.

Fed Chairwoman Janet Yellen signaled in testimony to Congress last week the Fed at its meeting March 17-18 would drop an assurance that it will be patient before raising rates. Friday's robust number assure the central bank will proceed with that plan, opening the door to a rate increase by June.

Still, there's no guarantee the Fed will move by midyear. Officials want to see how output, employment and inflation unfold before acting. They remain concerned that inflation is running below their 2% inflation target.

At $24.78, average hourly earnings for private-sector workers rose 2% in February from a year earlier. That's exactly in line with the modest 2% average over the past four years. "There are perhaps hints," Ms.Yellen told the Senate Banking Committee on Feb. 24, "but we've not seen any significant pickup in wage growth."

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Equities Week Ahead

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Still many officials have signaled the declining jobless rate and reduced labor market slack give them confidence that inflation is on track to return to the Fed's 2% inflation objective in the coming years.

The Fed has held its benchmark short-term interest rate near zero since December 2008 to encourage borrowing in hopes of spurring stronger growth and hiring.

Money Week Ahead: Full Employment?

The U.S. economic recovery reached another milestone in February: The nation's unemployment rate fell to 5.5%, the top end of the range considered normal by most Federal Reserve policy makers.

In their latest economic projections, released in December, 17 Fed officials pegged the longer-run U.S. unemployment rate somewhere in the range of 5% to 5.8%. The so-called central tendency of the range-- removing the three highest and the three lowest estimates--was 5.2% to 5.5%.

The jobless rate fell into their broader range last year. Now, it has reached the range as estimated by the center of the rate-setting Federal Open Market Committee.

That's a significant threshold because it represents what many economists call the nonaccelerating inflation rate of unemployment, or Nairu. The Fed could try to push the unemployment rate lower, but in theory that would stoke inflation--and the U.S. central bank's mandate is to pursue both "maximum employment" and "stable prices."

So does that mean the Fed considers its work done on the labor front? Maybe not. As the Journal's Jon Hilsenrath wrote last month, some Fed officials are thinking about revising down their estimates for long-run unemployment. After all, the jobless rate has fallen sharply with little sign of mounting price or wage pressures.

Fed Chairwoman Janet Yellen told lawmakers last month that while the labor market has seen improvement, "too many Americans remain unemployed or underemployed, wage growth is still sluggish and inflation remains well below our longer-run objective." That didn't exactly sound like a description of an economy operating at full employment.

We'll find out more on March 18, when Fed officials release updated economic projections -- including new estimates for the long-run unemployment rate.

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