U.S. stocks closed solidly, broadly higher Friday after April U.S. employment data showed a slowing in job losses and government stress tests indicated that U.S. banks aren't in as bad shape as some investors had feared.
Financial stocks were up following the release after Thursday's market close of the results of the government's stress test of 19 major U.S. banks. The Fed sees up to $600 billion in bank losses. Energy issues were also higher as crude oil prices continued to advance.
The market was also seeing some buying following news that April nonfarm payrolls fell 539,000 after skidding 699,000 in March, the jobless rate rose to 8.9% from 8.5%, and wholesale inventories fell 1.6%. The data suggest the economy might be finding its footing, according to S&P MarketScope.
On Friday, the 30-stock Dow Jones industrial average finished higher by 164.80 points, or 1.96%, at 8,574.65. The broader S&P 500 index gained 21.84 points, or 2.41%, to 929.73. The tech-heavy Nasdaq composite index added 22.76 points, or 1.33%, to 1,739.00. On the New York Stock Exchange, 26 stocks were higher in price for every four that declined. Nasdaq breadth was 24-7 positive. Trading was active.
Treasuries were higher. The dollar index was sharply lower. Gold futures were little changed.
Richmond Federal Reserve Bank President Jeffrey Lacker said he sees the recession ending later this year in a speech on the economic outlook before the Washington, D.C., Chamber of Commerce. He said he spotted evidence of consumers spending "more vigorously" and "improving housing data" to back up his claim. Lacker said the worst of manufacturing declines as over, though the non-residential construction sector as still vulnerable. He said deflation risks are overstated and inflation risks from the Fed's bigger balance sheet as "legitimate," while choosing the right time to end monetary stimulus as challenging. In that regard he is leaning toward avoiding risks of moving too slowly in removing stimulus.
The results of the U.S. stress tests did not reveal any major surprises and add to the perception that financial and economic conditions are improving. Of the 19 major banks the market focused on, 10 are being required to raise capital totaling $75 billion with potential for $599 billion of losses if the economic performance is worse than expected.
|Company||SCAP Buffer (additional capital needed)|
|American Express Company (AXP)||No need|
|Bank of America (BAC)||$33.9 billion|
|BB&T Corp. (BBT)||No need|
|Bank of New York Mellon Corp. (BK)||No need|
|Capital One Financial Corp. (COF)||No need|
|Citigroup (C)||$5.5 billion|
|Fifth Third Bancorp (FITB)||$1.1 billion|
|GMAC LLC||$11.5 billion|
|Goldman Sachs Group (GS)||No need|
|JPMorgan Chase & Co. (JPM)||No need|
|KeyCorp (KEY)||$1.8 billion|
|MetLife Inc. (MET)||No need|
|Morgan Stanley (MS)||$1.8 billion|
|PNC Financial Services Group (PNC)||$0.6 billion|
|Regions Financial Corp. (RF)||$2.5 billion|
|State Street Corp. (STT)||No need|
|SunTrust Banks, (STI)||$2.2 billion|
|U.S. Bancorp (USB)||No need|
|Wells Fargo (WFC)||$13.7 billion|
Bank of America's Kenneth Lewis said he plans to close a $33.9 billion capital gap by selling assets and tapping future profits after his "humbling" ouster as chairman last month, according to a Bloomberg News report. The lender, the biggest U.S. bank by assets, plans to sell common shares, divest at least two businesses and add board members after the results of the stress test, seeking to reduce government involvement in its operations.
Royal Bank of Scotland (RBS), now 70% state-owned, fell to a slim January-March loss after bad debts quadrupled to 2.9 billion pounds and it took a 2.1 billion pound writedown on risky assets. "We expect credit conditions to continue to deteriorate over the next few quarters consistent with these trends and that there will be a slowdown in financial market activity compared with the very buoyant conditions seen in the first quarter," Chief Executive Stephen Hester said. He said bad debts this year will be at least four times the first-quarter level, so over 11.4 billion pounds, more than 50% above last year's level.
Meanwhile, Germany's Commerzbank made an 861 million euro loss in the quarter, after a 1.2 billion euro charge from the investment bank and a 54 million euro charge from its commercial real estate unit. The Frankfurt-based bank which has been hit by writedowns on debt products related to the U.S. residential mortgage market unveiled bullish targets as part of a planned overhaul, which included a reshuffle of its board.
In economic news Friday, U.S. nonfarm payrolls fell 539,000 in April, while the unemployment rate jumped from 8.5% to 8.9%. The market consensus forecast had called for a 625,000 decline in payrolls and an unemployment rate of 8.9%, although the numbers had moderated after the release of the ADP employment estimate Wednesday.
Job losses remain concentrated in construction (down 110,000) and manufacturing (down 149,000). Service jobs dropped 269,000, despite a 72,000 rise in the government workforce. The average workweek was unchanged at 33.2 hours, while average hourly earnings rose only 0.1%. However, the March job drop was revised to 699,000 from the 663,000 reported last month.
Inventories held by merchant wholesalers fell 1.6% in March, while sales were down 2.4%. The inventory decline was much bigger than the 0.5% expected by the market. The inventory/sales ratio rose to 1.32 months from 1.31 in February and 1.12 a year ago. Auto inventories (imported cars, since domestic are considered retail inventory) fell 5.0%.
"The drop suggests a drop in imports, since wholesale inventories (especially autos) are dominated by imported goods," says S&P chief economist David Wyss. "The impact on U.S. GDP is thus limited."