Weekly Recap

The stock market had a pretty good week...until Friday. That day, the market become shocked, shocked, to learn that the yield on the 10-year note was rising. Friday wiped out the gains from the rest of the week.

It was a slow week for news. That left the recent modestly bullish underlying tone intact during the early part of the week. On Monday, the S&P gained 3 points. On Tuesday, it gained 8 points. On Wednesday, it gained 6 points. Throughout that period there was little specific news to account for the upward drift. It was a continuation of the trend of prior weeks, with support from chart considerations and "internals" factors such as the number of new 52-week highs.

On Thursday, some actual bad news hit. March same stores sales for retail chains were soft. Wal-Mart posted a disappointing 1.3% gain over a weak March of last year. Most other major chains also posted soft numbers. Many retailers blamed a late Easter that pushed retail sales into April, but the excuse was widely viewed as only moderately plausible. That day, the S&P lost 3 points.

The real selling hit on Friday. The March employment data that morning was initially greeted with enthusiasm. Payrolls were up a slightly stronger-than-expected 211,000. Hourly earnings were up a less-than-expected 0.2%. The S&P opened 5 points higher on the seemingly strong economic data and low inflationary implications of modest wage gains.

Yet, the bond market quickly turned south on the belief that a drop in the unemployment rate and strong payroll gains means a tightening in labor market conditions. This reflects high resource utilization (of labor) that the Fed noted as a concern in the most recent FOMC statement. Suddenly, the data was seen as creating a risk that the Fed might raise rates more than just one time.

The 10-year note yield surged to 4.96% by the end of the day. This was a major factor behind the 14 point plunge in the S&P on Friday.

This was a case of underlying fears rising up as much as a rational reaction to data. The 10-year note yield had risen from 4.67% to 4.85% the week before and there was little stock market reaction. The yield had inched higher to 4.89% through Thursday of this week and was barely noticed.

But as the yield rose towards 5%, the latent stock market concerns about rising interest rates suddenly burst through. The previous modestly bullish sentiment gave way quickly.

This sets a less optimistic tone for the market as earnings season begins on Monday. Earnings reports are not heavy next week, but will soon be the focus. Guidance for the second quarter will be more important than usual, given the risk that earnings growth will slow if the Fed keeps raising interest rates.

Another potential factor for the market is commodity price trends. The price of a barrel of oil rose to $67.39 this week, up from $66.63 last week and $64 the week before. It pushed near $70 at times, and a move above $70 could add to concerns that consumer spending might slow in the months ahead. Gold and other commodity prices have also been rising, but have generally been viewed as a curiosity. Now, they are looked on as possible reflections of inflation pressures.

The action on Friday presents a risk that the recent resilience in the market and the underlying upbeat tone will give way to a more somber outlook.

-- Briefing.com