Morning Update

Modest Gains as Productivity and Jobless Claims Improve

Stocks are slightly higher in morning action as sentiment was sweetened somewhat by a larger-than-expected revision to 1Q productivity and a drop in jobless claims, which also showed that continuing claims failed to post another record level and eased modestly. Retailers are dominating the equity news as the Street is digesting a slew of May same-store sales reports, absent a report from the world's largest retailer Wal-Mart, which separately announced a job growth forecast. Overseas, yesterday's economic uneasiness that weighed on US sentiment pressured stocks in Asia, and gains in Europe have been relinquished following the European Central Bank's and the Bank of England's interest rate decisions.

As of 8:49 a.m. ET, the June S&P 500 Index Globex futures contract is 3 points above fair value, the Nasdaq 100 Index is 4 points above fair value, and the DJIA is 28 points above fair value. Crude oil is up $1.68 at $67.80 per barrel, and gold is up $5.60 at $971.20 per ounce.
Target (TGT $41) reported May same-store sales—stores open at least a year—dropped 6.1%, well below the decline of 4.3% that the Reuters estimate called for. TGT said sales for the month of May were somewhat below its expectations.

Costco Wholesale (COST $48) reported May same-store sales fell 7%, which came in larger than the Reuters 6.4% drop that was expected. Total sales for the month, fell 5% to $5.5 billion.

Although the major retailers reported sales results for May, the world's largest retailer and Dow member Wal-Mart (WMT $51) will not be announcing results as it has ceased providing monthly sales figures and will report on a quarterly basis. Separately, the company said it plans to create more than 22,000 jobs in 2009 to staff new or expanded stores in the US. WMT will hold its annual shareholder meeting tomorrow.

The major department stores weighed in with their results and they were relatively better than expected, as Kohl's Corp (KSS $47) posted May same-store sales which fell 0.4%, versus the Street's estimate of a 3.8% decline. JC Penney (JCP $30) announced its comparable sales for May fell 8.2%, better than the 9.6% drop that was anticipated, while Macy's (M $13) reported same-store sales fell 9.1%, smaller than the analysts' estimates of -9.3%.

Jobless claims slip, while productivity and labor costs increase

Weekly initial jobless claims fell by 4,000 to 621,000, versus last week's figure that was upwardly revised by 2,000 to 625,000. The Bloomberg consensus called for claims to reach 620,000. The four-week moving average rose by 4,000 to 631,250, and continuing claims unexpectedly eased modestly from a record level, falling 15,000 to 6,735,000, versus the forecast of 6,855,000.

Final nonfarm productivity rose at a 1.6% annual rate in 1Q, higher than the Bloomberg forecast of 1.2%. Output fell 4.0% versus the same period a year ago. Unit labor costs rose 3.0%, versus a 2.9% estimate, and the number of hours worked declined 5.8% versus last year.

Treasuries remained lower following the productivity and employment data, as yields continue to ramp up causing concerns about inflation to resurface. However, inflation is still not a near-term risk due to excess capacity, constrained labor costs, and the weak lending environment. While the recent rise in Treasury yields and fall in the dollar brings angst about recovery, to some degree, this is a welcome development and one we’ve been anticipating, as it reflects signs of economic recovery and reduced risk aversion by investors, as they move away from the safety of Treasuries to asset classes further out the risk spectrum.

Europe gives up gains as traders pour over rate decisions

Stocks in Europe were slightly higher in afternoon action, led by strength in health care issues and oil and gas stocks on higher energy prices, but gains have been relinquished and the markets are lower after key central banks in the eurozone announced their interest rate decisions. The Bank of England left its key interest rate unchanged at 0.5% and maintained its intentions to purchase bonds to try to help mend the financial markets and lead an economic recovery. The move by the BoE was widely expected and the central bank reiterated its plan to buy 125 billion pounds ($205 billion) of government and corporate bonds. Gains across the pond were mostly erased after the European Central Bank kept its main lending rate at 1.0% and traders are waiting for the press conference by ECB President Jean-Claude Trichet later today for any comments on measures regarding deploying nonconventional monetary policy efforts—quantitative easing—which it announced at its last meeting, and any adjustments to its economic and inflation outlooks. Elsewhere, the Russian central bank lowered its key interest rate from 12.0% to 11.5%. In other economic news, a report showed UK home prices unexpectedly rose by 2.6% in May, versus the consensus of economists surveyed by Bloomberg, which called for a 1.0% decline.

Disappointing economic data drives Asia lower

Stocks in Asia were lower across the board as the disappointing economic sentiment that pressured the US yesterday carried over, exacerbated by a couple of lackluster reports on the health of the economy in the Asia/Pacific region. Commodity-related issues were the biggest losers amid the resurfacing economic uneasiness, as Australia's S&P/ASX 200 Index fell over 2% as the aforementioned slump in commodity stocks weighed on trading in the resource-rich nation, while a report that showed Australia's trade balance unexpectedly turned into a deficit in April—on an 11% drop in exports as prices for coal and iron ore were lower. South Korea's Kospi Index also came under solid pressure, falling 2.6% after the government cautioned against being too optimistic about the economic outlook. Japan's Nikkei 225 index fell 0.8%, as sentiment in the world's second-largest economy was stymied by the fastest drop in capital spending in 54 years, according to Bloomberg.