Interview: Personal income report
>> we just heard from june grasso about consumer spending. let’s get to the reaction in the bond market where there was negative reaction. look at what happened to the 10-year, the notes rising for the second week in three, pushing yields lower. a government report showed consumer spending grew less than forecast. yields did touch 4% earlier this week -- one poll has french opposition to the e.u. constitution referendum at 57%. next week, the labor market will take centerstage when the next employment report is released. bruce kasman is joining us from his firm in new york. we’re glad you found time for us. i know you found the personal income report today particularly interesting, up .7%. does it show that there’s inflation people aren’t seeing?
>> i think the inflation question remains open. we do believe inflation is moving up but the one point, i think, which comes from from today’s report and the revisions we saw yesterday is that labor income is growing at a remarkably strong pace. there’s a perception that households haven’t gotten the fruits of their labor and that’s just not true. that’s why higher gasoline prices are not killing this economy right now.
>> even as high as gas prices have gotten, have the income increases been enough to compensate?
>> they’ve been enough to lessen the blow. household spending has slowed and i think we’re running around a 3% real gain or so in the current quarter on consumer spending but that’s a much more moderate hit than what we got last year at this time when gasoline prices went up and the reason, again, is you have much better labor income growth and the benefits of low interest rates helping out, as well.
>> tying it into the jobs report coming out next friday, what kind of job creation are you forecasting?
>> we’re looking for a slowing, 175,000 gain. but i think that has to be put in the context of last month’s supercharged gain. the trend we think is running at 200,000 in payroll gains, a solid, healthy gain for the economy. it’s one generating very healthy wage and income gains for the household sector to keep going here.
>> what’s interesting, your comments, bullish across the board so far in terms of our discussion. it doesn’t seem to match with what the bond market is saying.
>> it is a question why 10-year yields are as low as they are.
>> i think the fed has clearly the right message when it told us this week in its minutes that it sees policy as still accommodative. i think there’s a simple point to get across here which is you don’t hurt the u.s. economy and you certainly don’t hurt the u.s. housing market unless interest rates go up and right now interest rates for most borrowers are going down.
>> do you think the fed should pick up the pace of raising rates?
>> i don’t think the fed needs to pick up the pace here. the economy is going through adjustments, rising energy prices are hurting growth. we have a manufacturing sector responding to global weakness so the economy is not booming right now. inflation is moving higher but from a low level. i think the fed needs to continue what it’s doing, a steady hand and continue raising rates gradually.
>> where do you think it will end the year?
>> we think the rate will go to 4.25%.
>> where do you think the 10-year will go to match that or not?
>> i wish i had a confident answer in that but we believe 10-year yields will eventually respond to the dynamics of a better economy. we think 10-year yields will be above 5% by the end of this year.
>> what did you make of comments this week when some economists and forecasters at other firms cut their forecast for the 10-year?
>> i think what people are doing, they’re coming down based on the idea that the recent trends in 10-year yields will continue. i think there is some argument to be made that 10-year yields will stay lower than they have historically but i think it’s a mistake to think that the fed will stop here or that the economy will slow appreciably and as a result, i do think you’ll see an adjustment upward in yields through the second half of the year.
>> what else is key to watch next week?
>> i think we’ll see a significant upward revision to unit labor costs. that’s partly in reflection of the revised data on labor income. that’s going to get the fed’s attention because unit labor costs are something that feeds broadly into inflation pressures so i think we’ll see a little bit of a risk there and on the other side we’ll see manufacturing sector weakness continuing with a fall in the i.s.m. survey.
>> after that, we have auto sales next week. any surprises given the sorry state people have already seen in the auto area?
>> well, basic tone of the may data should be softer than april and just like the payroll report will show some slogs, we think car sales will, as well. but if they slow to the 17 million unit pace we’re expecting, that’s still well above the first quarter. so may data should be softer but not soft.
>> bruce kasman at j.p. morgan, thank you. when we return, shares of pfizer down today following concerns about the company’s viagra drug. bob bowden will join us with the story.
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Listen Market briefing --- Ellen (slow)
Stock market story --- Deirdre (slow)
NYSE --- Deb (fast)
Nasdaq --- Robert (slow)
Personal spending --- June (slow)
i’m ellen braitman. here are your closing numbers. the dow basically unchanged -- our top story, alberto vilar, president and founder of amerindo investment advisers, and ranked by “forbes” magazine as 327th richest person in the u.s., was arrested and charged with stealing $5 million from a client. in a complaint unsealed today, prosecutors say vilar used an investor’s money to make contributions to washington and jefferson college, his alma mater, and pay for a catering service and dishwasher repair. the postal inspector said in the complaint the $5 million was used in vilar in 2002 “as a personal piggy bank―“ citing news reports, the complaint says vilar has given gifts of more than $200 million to opera groups, medical institutions and his college. co-founder and co-chief of the hedge fund, gary tanaka was accused of stealing investors’ funds, accused of using the money for racehorses. deirdre bolton has the stock market story.
>> new york stock exchange volume traded under just 950 million shares, 30% lighter than average. many people are leaving work early, many investors today are looking ahead to see what happens after the long weekend. traders will return to a market where the s&p 500 has gained for the past five of six weeks. the question for investors, where do we go from here? along with interest rates and oil prices, money managers say a lot depends on corporate profits.
>> as we get through second-quarter earnings season, into july and begin of august, we’ll look at the guidance companies are providing for the rest of the year. we still remain concerned that the growth rate, the s&p 500, in terms of earnings per share, will slow in the second half of the year.
>> earnings concerns hurt pharmaceutical stocks friday. pfizer pushed markets down after u.s. regulators said they may require a label warning that pfizer’s iiagra drug has been linked to blindness and vision lost. schering-plough, bristol-myers squibb and genzyme all closed lower.
>> the large pharmaceutical companies are on the defensive, facing legal challenges, patent challenges and they don’t have the good news that normally helps to move the stock prices up, namely research and development gains or posting strong resultsist gaining on the day, energy stocks, including exxon-mobil. oil closed above $50 a barrel, its fifth straight gain. some analysts expect prices to remain high.
>> we expect it to stay, give or take a little bit, around in the $50 range for the next 18 months and we think that the reason for that is simply put, there is very little spare capacity in the world.
>> energy is the best performing group year to date. it is up better than 13%, compared to the s&p 500’s 1% drop during that time. back to you.
>> certainly, deirdre, oil seems to be on many investors’ minds heading into the holiday weekend. deborah kostroun has more from the big board.
>> as we head into the memorial day holiday, of course, the kickoff to summer and 31 million americans will be traveling 50 miles or more this holiday weekend. we’re talking about oil stocks, mainly because energy stocks, the best performers in the s&p 500 on the day and also for the week. gainers for the s&p 500 energy, insurance and utility stocks and energy and insurance, two best performers this week. crude oil had its biggest weekly gain in five weeks and a lot of talk about where crude oil prices may be going. a survey of analysts and strategists by bloomberg say crude oil prices may rise next week as refiners increase processing to boost gasoline stockpiles for the peak demand in the summer season. one of the things we saw, a.i.g., once again in today’s session, biggest gainer in the dow jones industrial average after bank of america saying that slowly but surely, a.i.g.’s regulatory overhangs are being resolved. the analyst said a.i.g. is expected to file its 10-k on next tuesday, coming after eliot spitzer announcing a civil suit against the company and hank greenberg, that was in yesterday’s session. trading of pfizer, 44% higher than the three-month daily average, about 34.8 million shares being traded. the worst performance in the dow jones industrial average, that after the company received 23 reports of blindness and vision loss since viagra was introduced in 1998. also, steel stocks on the upside mainly because merrill lynch saying that shares of u.s. steel, looking like a good value after their decline this quarter. u.s. steel, that stock price has tumbled 22% this quarter. steel stocks on the plus side. also, we did hear from one particular steel stock, timken, saying steel prices will increase this quarter. i’m deborah kostroun at the new york stock exchange.
>> and today, the nasdaq finished higher for a fourth straight week, the longest streak of gains since november. we’ll get details from robert gray at the nasdaq marketsite.
>> the nasdaq composite finishing near the highs of the session on friday and higher for the week, as well, up 1.4% for the week and 9% from its closing lows on april 28. the volume was the lowest so far this year. the average daily volume is 1.9 billion shares and this was the slowest volume day, eclipsing the 1.4 billion shares that traded on april 11. john glassman at pacific american securities saying he’s encouraged by the tone of the market . he says the economic numbers released this week in line with expectations and inflationary and growth numbers seem to have found a comfortable balance. after the personal spending and income numbers were released, we did see retail stocks moving to new records in friday’s session. beeb bee shares up 45% so far year to date. joseph a. bank at a new record, coldwater creek and urban outfitters. tivo shares rising sharply on earnings at the open and ended up closing lower. they make the digital video recorders, reporting a loss of one cent. piper jaffray cutting it to market perform saying the stock has come too far, too fast. google shares gaining more than 200% from i.p.o. to date now, rising to a record for the eighth time in nine sessions, falling just six times since april 15 and rising 40% since then. intel shares gaining for the 13th consecutive session, the longest in their history as a publicly traded company. apple computer, one of the big winners for the week, lower friday but up 15% since april 15 and sanmina is the best performer of the nasdaq 100 since the nasdaq bottomed april 28, gaining more than 4.5% on friday’s session.
>> certainly, the summer travel season officially begins this weekend. consumers seem to be ready to spend more money. let’s get the details after a report today showed personal spending rose for a third straight month in april. june grasso has those numbers.
>> consumers are spending more because their incomes are rising as hiring is picking up. spending rose .6% in april, following a revision to march’s figures which were lifted to a .9%. march’s spending was the strongest this year. as for salaries, income rose .7% last month after a .5% increase in march.
>> consumers feel very solid but i think what you’re going to see this year because consumers are seeing it right now, retail stores, retailers are not taking any chances. you’re seeing 40%, 50% off over memorial day weekend and i think that will drive sales up up to 6.5% this memorial day weekend.
>> citigroup economist steven weiting says the increase in income is enough to get decent increases in consumer spending even if gas prices hold near current levels. another economist says wage growth is as strong as it was in the late 1990’s.
>> what’s coming from the data, though, is that wages are accelerating quite sharply here. we saw a 7.5% year-over-year increase in wages and income.
>> economists expect the increase in prices to keep alan greenspan on his path toward higher interest rates, including a quarter-point increase next month. still, consumers say they’re less confident in the future. the university of michigan’s may confidence report fell for a fifth month. it’s the longest losing streak for that indicator in three years. people tell the university they’re concerned about gas prices and high home prices but as the spending report showed, those concerns are not affecting their spending habits. back to you.
>> june, we’ll talk more about those wage increases as well as what lies ahead for the economy. we’ll be joined by j.p. morgan economist bruce kasman after the break.
