Buyers embrace pre-jobs surprise
Small-cap stocks pushed higher this morning, buoyed by a positive surprise on the ADP Employment Report, which heightened investor expectations for a bullish number on this Friday’s big Labor Department monthly employment release. At 9:56 a.m. ET, the Russell 2000 (NYSE:IWM) was up 5.91, or 0.83%, at 720.46.
The headline figure on the ADP report was at plus 9,000, which was well above the forecast for a decline of 58,000 non-farm payroll jobs. The ADP report used to have a fairly nice correlation to the more extensive Labor Department release, but that correlation has broken down over the last year and the ADP figure has tended to only be a good predictor when it falls near the consensus estimate. Given that the market is looking for a slide of 75,000 jobs in Friday’s employment report, most economists viewed the ADP data this morning with skepticism. Still, it did spark a bounce in the U.S. dollar and stock index futures this morning while generating a slide in Treasuries. The yield on the benchmark 10-year note was up about 1.6% this morning, suggesting money flow away from “safe-haven” products and toward stocks.
Lost in the positive glow of the ADP report was this morning’s MBA Mortgage Applications Survey, which was pegged at minus 14.1, the lowest level since December 2001. The combination of weak home sales and slumping home equity continue to take a toll on mortgage applications, despite moderating mortgage rates.
The greenback was up about 0.3% against the euro, rising to the highest point in four weeks. At the same time, crude oil prices were hovering near three-month lows and gold prices were near four-week lows, so the inflation picture was projecting a better tone this morning, and a strong dollar can attract foreign investors into U.S. assets.
Speaking of crude oil, the market was down about $1 dollar a barrel, slipping below $122, awaiting the weekly inventory data, which is expected to show a build in crude oil stocks. Rhetoric surrounding the direction of crude oil prices later this year is all over the map, with some pundits saying that crude oil could slide below $100 dollars, while some research firms are still calling for $150 dollars. Given recent stock market behavior, when prices get above $135 dollars, the stock market becomes very vulnerable.
The Federal Reserve this morning decided to extend the primary dealer credit facility through Jan. 30, which will help firms access cheap money and help combat the credit crunch. Also, President Bush signed the rescue plan for mortgage financing firms, which will support Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE), as the two firms own or guarantee nearly 50% of the country’s $12 billion in home mortgage debt. FNM was up 15% shortly after the open, while FRE was up about 12%. Regulators also extended short selling curbs through Aug. 12.
Broad market sectors on the rise this morning included personal products, thrifts and mortgage finance firms, diverse financial services, regional banks, homebuilders and investment banks. On the downside, gold and home entertainment software stocks were out of favor with investors this morning.
Individual small caps of note included Savvis (Nasdaq:SVVS), which was up 10% on earnings news, gapping up to the highest point since mid-June. Barrett Business Services Inc. (Nasdaq:BBSI) also gapped higher, gaining some 30%, also on earnings results. Another company seeing a nice earnings bump this morning was Starent Networks Corp. (Nasdaq:STAR), which was up 17% after sinking to fresh move lows earlier this week. On the downside, Ultimate Software Group Inc. (Nasdaq:ULTI) was down 27% after earnings disappointed. Online Resources Group (Nasdaq:ORCC) was down about 20%, also tied to soft quarterly results.
With the Russell 2000 pushing through 715 and 720 this morning, the next big chart test comes in at 726 — an area that thwarted rallies on the previous July bull run. If things start to wobble today as the session progresses, key support will be at 707.50.
