EmailFollowing three straight sessions of 1.0%+ moves (both up and down), the S&P 500 meandered through Wednesday's trade and ended the session little changed.
We read an adequate summation of things earlier that suggested yesterday's action wasn't so much a case of sellers making their presence felt as it was buyers showing some exhaustion.
That is understandable knowing the S&P 500 is already up 6.0% year-to-date and that there has been a litany of warnings from pundits that the market is due for a pullback. The latter view, however, has often been couched with the acknowledgment that there is a lot of frustrated money on the sidelines waiting to buy on weakness.
So far that seems to be the case, as the market has shown resilience to selling efforts in the absence of any new, negative catalysts.
If anything, we have seen some of the familiar fears of the past start to appear again (e.g., political turbulence in the eurozone, partisan politics in the US), but this market continues to operate on the assumption that worst-case scenarios will always be averted.
To us, that is an increasingly risky belief ahead of the Italian election and the March 1 sequestration. Central bank support, however, continues to serve as the market's security blanket.
On a related note, both the Bank of England and the ECB announced this morning that their key lending rates would be left unchanged at 0.50% and 0.75%, respectively.
ECB President Draghi is conducting a press conference as we write. Notably, he has indicated trade imbalances could impact the recovery. This is a tacit way of saying the strong euro is working against the eurozone economy. The euro, which was up earlier, has reversed sharply in the wake of his remarks and is now down 0.3% against the dollar.
Separately, initial claims for the week ending February 2 fell by 5,000 to 366,000 (Briefing.com consensus 360,000). The latest reading indicates two things: (1) the seasonal adjustment problems in January have been worked out and (2) there hasn't been any notable change to labor market dynamics as the current level fits squarely in the range of 350,000 - 400,000 where initial claims have been bounded for most of the last year.
Nonfarm labor productivity declined 2.0% in Q4 2012 after increasing an upwardly revised 3.2% (from 2.9%) in the third quarter. That was the first decline since Q1 2012. The Briefing.com consensus expected productivity to fall 1.2%.
Overall, productivity increased 1.0% in 2012. That was up from a 0.7% gain in 2011 but below the 3.1% gain in 2010.
The drop in fourth quarter productivity was the result of a very small increase in output (0.1%) combined with a solid increase in hours worked (2.2%).
Unit labor costs increased 4.5% after declining 2.3% in the third quarter. That was the biggest increase in unit labor costs since increasing 6.4% in Q1 2012.
Unit labor costs are a volatile indicator and seeing large increases following a decline is not abnormal. If costs continue to rise at this rate in Q1 2013, however, there will likely be an increase in layoffs in the middle of the year.
The S&P futures are trading slightly above fair value, creating an expectation for a slightly higher start for the cash market which is also drawing a measure of support from some reasonably good same-store sales results for January
