The April employment report and Thursday's late news on bank stress tests will steer Friday's markets.
Stocks sold off in Thursday's session as interest rates climbed, and the yield on the 30-year hit a six-month high. The market also awaited formal word from the government on the bank stress tests, and once that news broke, stock futures moved higher after the bell.
From 'Fast Money':
In a late day announcement, the much-anticipated test resultsshowed that 10 of the 19 banksneed to increase their capital by a total $74.6 billion to buffer them against more adverse economic conditions. Bank of America needs $33.9 billion, and Citigroup needs $5.5 billion. Losses at the 19 banks could total $600 billion in 2009 and 2010, under the government's scenario of a worsening economy.
Some banks that didn't need new capital were already announcing plans to repay the government's Troubled Asset Relief Program. Goldman Sachs, American Express and Bank of New York all said they were in a position to pay back the money.
Even before results of the tests were announced, banks were already moving forward with capital raising plans. Wells Fargo, which needs $13.7 billion, will be selling $6 billion in stock Friday. Morgan Stanley will offer $2 billion in common stock and $3 billion in non-government guaranteed debt.
Citi said it would expand its previously disclosed public exchange offers by $5.5 billion and that it will seek nothing further from the government. Bank of America CEO Ken Lewis will appear on "Squawk Box" Friday to discuss his bank's test results. Bank of America said it would sell new common or convert some outstanding preferred into common.
The big test now moves to the stock market where investors will grade winners and losers. Most bank stocks moved higher though Wells Fargo and Morgan were lower in late trading.
"There's really no major surprises on who has to raise capital from the regional banks. Key Corp was a name everybody anticipated was going to raise capital, as was Regions, Fifth Third and Sun Trust. The amounts were in line but slightly on the high side," said Gerard Cassidy, bank analyst with RBC, on "Fast Money."
Cassidy said the capital raising should not be a problem. "I would say that many of these institutions do have different channels to raise the capital. They can convert some of their existing private preferreds that they have on their books," he said. Cassidy said they can also convert the TARP funds or tap the equities market like Wells Fargo. "They have three different ways to go. We don't expect them to have trouble raising the capital."
Taking A Pause
A weak 30-year auction added to the downward pressure on stocks in the early afternoon Thursday. The Treasury sold $14 billion in 30-year bonds to yield 4.288 percent, a stunning move above the pre auction yield of 4.19 percent. Treasurys had been selling off after the latest weekly jobless claims report showed a slowing in new claims. The 10-year's yield rose as high as 3.30 percent after the auction.
More From CNBC.com
- Get After-the-Bell Dow 30 Quotes
- Futures and Pre-Market Data
- Currency Data
The Dow Thursday lost 102 to 8409, and the S&P 500 was off 12 at 907. But the big loser was Nasdaq, down 2.4 percent, or 42 points, to 1716, on a sell off in technology shares. The S&P financial sector was the worst performer, losing 5.6 percent, but it is still up more than 13 percent for the week.
Stocks, after an initial opening surge, had sold off even as some retailers reported better than expected sales results for April.
"This is a healthy pause, if anything," said Peter McCorry, who trades bank stocks at Keefe, Bruyette. "I think there were a couple of days of double digit percentage gains, and you have what has been a quite volatile employment number tomorrow, so I think you take a little off. It's a conservative consolidation. I think it's healthy."
Jobs, Jobs, Jobs
In a market that has been hanging on every "green shoot" of economic progress, the jobs report is one of the key pieces of monthly data.
ADP's better-then-expected report Wednesday of 490,000 private sector job losses for April inspired some traders to believe that the government's report may not be as bad as anticipated. The consensus is for a loss of 600,000 non farm payrolls in April and an unemployment rate of 8.9 percent. The jobs data is released at 8:30 a.m. and wholesale trade is reported at 10 a.m.
Joseph LaVorgna, chief U.S. economist at Deutsche Bank, said he expects the nonfarm payrolls to come in at negative 650,000. He also believes that unemployment could come in greater than 9 percent.
"I just don't think this quarter is going to be such a boom," he said. He said he expects GDP for the second quarter to come in at -2.8 percent. "People are making a major mistake in believing the sharp decline in activity that we saw in Q4 and Q1 is going to give way to a normal cyclical upswing. This was never the normal cyclical downswing," he said.
"I think the factory work week is probably very key tomorrow. It has a nice fit to trends in inventories. If the factory work week goes down, it will say there's more inventory liquidation this quarter," he said.
Economists have been watching the draw down in inventories for signs of a bottoming, which would mean production could pick up.
LaVorgna said Thursday's better-than-expected unemployment claims report is probably not going to be the start of a new trend. The employment picture in the next couple of weeks will be impacted by the shut down of production at Chrysler and General Motors. "You're going to see these claims numbers back up significantly between now and the end of July," he said.
Rates Rising
Rates on long dated Treasurys have been creeping higher, and on Thursday, rates on both the 10-year and 30-year crossed above key levels traders have been watching.
"Bottom line, it is certainly a negative event — the fact we are behind 4.25, which is a psychological level for the 30-year, and the fact we're behind (3.25) in the 10-year as well. 3.25 (on the 10-year) is a the bench mark level. It needs to be paid attention to," said David Ader, head of interest rate strategy at RBC. "To me, it means we need to go to the next trigger to really determine things and that could be the nonfarm payrolls."
"Yields are where they are not because of these 'green shoots' and not because of the stock market but because of supply," said Ader. "The economy still is quite dicey ... maybe we're turning out too many Treasurys for the market to sate itself on." The 30-year auction was the final of three auctions this week.
Some believe the spike in yields reflects the view that the economy is improving and that the flight-to-safety move into Treasurys is being reversed. Corporate bonds, equities and other investments have become more attractive.
Ader says, however, it is a confusing time for the market, and it is a good time to rely on technicals. "Let's say 3.25 proves to be an important technical area and that means the next target is the 3.50 area. Will the improvement in credit spreads which have been coming down, mortgages have been coming down — would that continue?" he said. He said a backup in rates would be a problem for the Fed, the economy and for the improvement in the credit markets.
What Else to Watch
Toyota reports earnings overnight, and McDonald's releases April sales data Friday ahead of the open. Streetaccount says estimates are for a global sales increase of 5 percent, and a U.S. increase of 4.9 percent.
Besides the stress test reaction, investors will be also watching Goldman Sachs as it holds its annual meeting Friday morning.
Separately, Stephen Friedman resigned late Thursday as chairman of the New York Fed, effective immediately. Friedman was the topic of a recent Wall Street Journal report that pointed out he sat on the Goldman Sachs board and held Goldman stock while the Fed was giving Goldman fast track approval to become a bank holding company. That was a violation of Fed policy, for which a waiver was being sought. During that time, Friedman also bought Goldman stock. His resignation comes as law makers have been criticizing the New York Fed for being too cozy with Wall Street. Friedman says he was not in conflict.
Questions? Comments?