Interview: Bear Stearns
>> crude oil rose for the sixth time in seven sessions on ongoing concerns about supply. the price at the close, up 1.5%, to $62.31 a barrel. refineries are running close to capacity as growth in the u.s. and china raise demand, leaving little cushion for disruptions in production. gains also for gasoline, heating oil and natural gas futures. much for investors to react to and a lot of focus on the labor report study out from the government, the jobless rate holding at 5%, retailers hiring the most workers in more than five years. let’s get more on the jobs report, specifically, what it may mean about inflation and the federal open market committee meeting on tuesday. we bring in conrad dequadros with bear stearns. nice to have you on today. how easy is it for focus folks who want one to find a job and i ask this given the numbers that came in today, stronger than anticipated, a lot of questions about labor participation. how easy is it for someone to find a job?
>> one of the better readings on that from the conference board’s consumer confidence report rather than today’s payroll report. they have specific questions about whether respondents find jobs plentiful and specifically jobs hard to get. those indicators suggest that there has been some tightening up in slack in the labor force and jobs are seen by consumers in that report at least as becoming more difficult to find and we’re also seeing that in the unemployment rate with the unemployment rate dropping to 5%, the lowest seen since september 2001.
>> what does that indicate to you about what kind of pace of expansion and jobs we can see in something months?
>> the type of number we saw today, i wouldn’t be surprised if that’s something close to the trend we see going forward. employment creation has been quite stable over the past year and six months or so. we’ve seen somewhere between 180,000 and 200,000 or so payrolls being created with volatility month to month. but we have seen stable and solid payroll growth up to this point and going forward we’re likely to see numbers similar to what we saw today.
>> given the forecast and job creation, tie it in to wage growth. what do you make of wage growth and what it means for inflation?
>> clearly the increase in average hourly earnings was larger than most expected. but yearly, average hourly earnings is unchanged at 2.7%. that is a pickup in wage growth from the past couple of years but if you look at the government’s data from the commerce department on wages and salaries, that shows a stronger trend in wage growth so i wouldn’t be surprised to see the average hourly earnings data pick up further in months ahead.
>> where is that pressure coming from in order for employers to feel they need to increase wages?
>> as we had spoken of earlier, the decline in the unemployment rate suggests the labor market is tightening and we’ve seen the unemployment rate which down significantly in the last year and a half so 5%, the lowest unemployment rate since september 2001. as the labor market tightens, it puts upward pressure on wages.
>> what does this mean in terms of inflation? in your estimation, is it a problem?
>> i wouldn’t say inflation is a problem. we don’t believe inflation pressures simply come from the labor market . we think much of it comes back to the stance of monetary policy and how accommodative the fed’s policy is and how easy it is to pass off the higher costs on to consumers. fed policy is accommodative in our view and with wage pressures rising, we have elevated cost pressures from the manufacturing sector and energy prices, suggesting inflation is likely to head higher but we don’t think inflation will be a problem. our belief is that core consumer inflation will rise to the 2.5% area by the end of this year.
>> what do you expect the fed to do and say on tuesday?
>> what today’s report suggests to us is that the economy is indeed in sustainable recover. y. the g.d.p. report showed 3.4% growth in a quarter that included what people believed was a soft spot. for nine straight quarters g.d.p. growth has been higher than 3%. today’s payroll report suggests momentum in the economy is strong at the beginning of the third quarter and third-quarter g.d.p. growth is likely to be north of 4% so we have a strong growth environment, inflation at the top end of where the fed would like to see it and some wage pressures and pressures poterby from energy costs, pushing inflation higher. we believe this is likely to lead the fed to continue to remove policy accommodation at a measured pace so we look for 25 basis point rate hikes between now and the end of the year, leaving the rate at 4.25%.
>> conrad, thank you very much for joining us. we’ll take a quick break and return to look at what a flattening yield curve means for u.s. stocks. ari levy will have that story in “taking stock.”
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may be picking up. welcome, from world headquarters in new york city, i’m ellen braitman. this is “after the bell.” to see how the market settled this friday, the dow down 62 points, the s&p, 9, and nasdaq losing 13. homebuilders and financials leading declines on concerns about higher interest rates. u.s. employers added 207,000 workers in july, more than economists forecast. the payroll gain was the biggest since april. economists say it is a sign companies can no longer depend on efficiency gains in order to meet demand. the u.s. also added 42,000 more jobs in may and june than had originally been reported. the jobless rate holding at an almost four-year low. ben bernanke, chairman of the white house council of economic advisers expects the labor market will continue to add jobs.
>> it’s difficult to judge where we are in terms of labor market capacity but my guess is we’ll have pretty good numbers, 180,000-plus numbers for some time yet. i think there is slack in the labor market and participation can come up a bit.
>> wages grew at the fastest pace in a year. hourly earnings rising .4% last month. economists say that will support spending even amid higher gas prices. economists also note that is where why the federal reserve is vigilant to prevent inflation. the next fed rate decision comes on tuesday and policymakers are expected to raise the benchmark interest rate a quarter point to 3.5% to help contain inflation. treasuries fell on today jobs data on speculation the fed will continue to raise rates, not just on tuesday, but into 2006, in order to contain inflation. today’s declines add to a six-week slump pushing yields on the 10-year to the highest since mid april. the five-year treasury at 4.23% and as for the two-year, that yield currently at 4.1%. checking the currency market , the july jobs report also sent the dollar higher today against most major currencies. oil was move $62 a barrel, the stronger-than-expected jobs report, a lot for investors to react to today, all of it sending stocks lower. let’s check in with deirdre bolton to get more details.
>> declines were broad with interest-rate-sensitive groups such as real estate and utilities falling the most. s&p 500 real estate index lost more than 3.5%, its biggest drop in more than one year’s time. today’s job report put investors in a quandary. while more americans are going to work, indicating a stronger economy, it can also lead to inflationary pressures and higher interest rates.
>> 70% of the average company in america’s expenses is wages or wage related so with a stronger job market , this could foretell that in the future we will have a wage and inflation problem and knowing that the fed thinks its first job is to fight inflation, that might be what keeps them raising rates longer than we hoped or expected.
>> fears of higher rates sent home build homebuilders d.r. horton, k.b. home and centex sliding. mortgage rates are probably headed higher given the drop in the bond market and that could hurt home sales. wachovia securities downgraded toll brothers, citing weaker-than-expected orders and signs of a slowdown in washington, d.c., a key toll brothers market . utilities, another group affected by changes in interest rates, lost ground as exelon, southern company and dominion resources slipped. as rates go up, dividend-paying stocks become less attractive compared to bonds. prudential strategist ed keon says the fed will continue to walk the fine line between containing inflation without killing economic growth and continues to recommend investors put all of their money into equities. at least one trader shares that outlook.
>> earnings have clearly been very good and confirmation or followthrough with this jobs report, i think, sets the tone very nice for the market going forward.
>> protein design labs outlook pushed that stock to a 3 1/2 year high, saying the full-year revenue could be higher than what analysts predicted.
>> thanks so much. a lot for investors to react to. let’s get more on today’s trading action. here’s a report from deborah kostroun at the big board.
>> both the s&p 500 and the nasdaq reached four-year highs this week but it was very different getting into thursday and friday’s session. if you look at a one-day chart on thursday and also friday in the dow jones industrial average, they looked very similar because they were both down days. the market falters for day two and the main reason on friday, it was that jobs report sparking concerns that interest rates may be on the rise and of course the fed meets tuesday, likely seeing the fed ratcheting up interest rates to 3.5%. surging oil prices coupled with concerns about interest rates, renewed concerns about inflation, as well, and that jobs report sent treasuries lower and treasury yields now at their highest since mid april. so, in today’s session, keying in on interest rates, causing many interest rate sensitive areas of the market to be lower, like real estate and utilities, the worst performers of the 24 industry groups in the s&p 500. if you look at utilities, in fact, these are the second best performing batch of stocks so far this year. energy, of course, the best performers, up 27% and utilities behind them, up 14%. they were among some of the biggest drags on the day. also among the biggest drags, interest-rate-sensitive stocks like real estate, also homebuilders. toll brothers had the downgrade from wachovia. also mortgage lenders very tied to interest rateso with the concern that interest rates may go higher not only next week but also in the future, mortgage lenders lower, as well. you also saw financial stocks, and banks, they were also lower on concern over interest rates. auto stocks like delphi -- delphi, the biggest drag in the s&p 500 after it began to borrow $1.5 billion from a $1.8 billion credit line as it discusses restructuring options with the united auto workers. i’m deborah kostroun at the new york stock exchange for bloomberg news.
>> and the nasdaq had its first weekly drop in six weeks. robert gray has more from the nasdaq marketsite.
>> investors and traders concerned the fed will continue raising rates through the end of the year and not pause, as many believed earlier, sending the stock market lower, the nasdaq to its first decline in the past six weeks after touching a four-year high earlier in the week. we saw interest-rate-sensitive stocks and groups leading the way lower, including biotechs and companies that rely on borrowing money to fund operations. financials and banks moving lower. computer-related shares the strongest group, but still moving lower on the session. also today, some of the movers, retail stocks again weak, sears holdings, one of the decliners within retail. gilead sciences, a weak stock within the biotech group. network appliance falling on its preliminary earnings statement, disappointing investors, falling as much as two cents below its own estimate back in may. google owning 2.6% share in the i.p.o., baidu.com, china’s largest search engine, often called the chinese google. the shares surging up moreer than 350% in their debut. microsoft shares moving higher with one of its best weeks in a year. microsoft, on thursday evening, announcing that it hired kevin turner has chief operating officer. turner was once wal-mart’s youngest ever executive, investors saying that will free up steve ballmer to spend more time on new products. at the nasdaq, i’m robert gray.
>> regulators have changed phone rules, the federal communications committee voting to let baby bells raise the price they charge for competitors that may help phone companies.
>> the order we adopt today is a momentous one, ending the regulatory inecities that currently exist between cable and telephone companies in the provision of broadband internet services. as i have said, leveling the playing field between these providers has been one of my hirt priorities.
>> consumer groups criticize the decision, saying it will reduce consumer choices and result in higher prices. take a quick break and when we return we’ll look at the labor picture and preview next week’s meeting of the federal reserve.
