Morning Update

Labor Data Spurs the Bulls

Stocks are solidly higher in morning action after the labor report showed a dramatically lower-than-expected drop in nonfarm payrolls, which is putting pressure on Treasuries. The upbeat report is overshadowing the fact that the jobs reports revealed a larger increase in the unemployment rate than the Street had anticipated. The equity front is taking a back seat to economic data, with the Wall Street Journal reporting that the Federal Deposit Insurance Corp. (FDIC) is aiming to shake up Citigroup's management, and apparel maker Guess Inc. reporting 1Q EPS that beat the Street's estimates. Overseas, markets are higher amid a large M&A announcement in the mining sector, while the jump in stocks in the US is helping amplify the advance in Europe.

As of 8:45 a.m. ET, the June S&P 500 Index Globex futures contract is 11 points above fair value, the Nasdaq 100 Index is 14 points above fair value, and the DJIA is 88 points above fair value. Crude oil is up $0.95 at $69.76 per barrel, and gold is down $11.90 at $970.40 per ounce.

The Wall Street Journal is reporting that according to people familiar with the matter, the FDIC is pushing for a shake-up of former Dow member Citigroup's (C $4) management, including the ousting of Chief Executive Vikram Pandit. The FDIC did not comment on the report, but Citigroup's chairman Richard Parsons said in a statement emailed to the Wall Street Journal, "We went through a rigorous stress test process, the results of which were agreed to by appropriate regulatory agencies and clearly reflect the significant progress made by this management team over the last 15 months to turn Citi around." Parsons added that Citigroup has reduced its "riskier" assets by over 50% and is on track to be "among the best-capitalized banks in the world."
The stimulus plans continue to work their way through the economy, but there's a growing sentiment among investors that the government may have overreached, resulting in concerns about increasing growth-stifling regulation and growing debt levels. We've supported some government intervention in order to stem the collapse in the financial system that seemed imminent. However, we now believe that the amount of intervention-from managing banking operations, pushing them to seek immediate TARP paybacks, to rearranging the capital seniority of automakers in order to pacify unions and facilitate massive restructurings-is threatening to short-circuit an economic recovery and increasing the risk of a "double-dip" recession.

Guess Inc. (GES $27) reported 1Q EPS tumbled 30% to $0.35, but came in six cents ahead of the Reuters estimate, and revenues declined 9.8% to $441 million. The apparel maker said its results exceeded its expectations as it managed its business effectively, reducing inventory levels and capital spending, while aggressively cut costs. Looking ahead, the company said it expects the challenging economic conditions to persist for some time. Nonetheless, it issued 2Q EPS guidance that topped the Street's forecast.

Labor report provides favorable surprise

Nonfarm payrolls fell 345,000 in May, much less than the Bloomberg estimate that called for a 520,000 decline. April was favorably revised to -504,000 from -539,000, and March was revised from -699,000 to -652,000. The unemployment rate rose from 8.9% to 9.4%, above the consensus forecast of the jobless rate to rise to 9.2%. Average hourly earnings rose 0.1%, in line with the Street's forecast. Treasuries are much lower following the upbeat labor report.

The surge in equities after the much lower-than-expected job loss is overshadowing the larger-than-expected increase in the unemployment rate. However, the unemployment rate is a lagging indicator, typically peaking seven months after a recession ends, on average. Additionally, the stock market is forward-looking, typically bottoming before the recession ends.The Lehman collapse last September, and the related devastating chain reaction in employment and production may now be reversing. At least for a period, cyclical, shorter-term forces trump secular, longer-term forces, and there's an 80% correlation between the depth of the recession and the first year of growth. However, Liz Ann cautions that while the recession may be ending, the process is likely to be bumpy. Also, there remains a risk of a W-shaped cycle (a "double dip"), due to the impact of consumer deleveraging, and the risk of a rise in commodity prices and/or longer-term Treasury yields. Read more of her article and Schwab's market perspective at www.schwab.com/marketinsight.

Consumer credit will also be released later in the afternoon, forecasted to show a decline of $6.0 billion in April, after falling $11.1 billion in March.

Resources fuel advance in Europe, US labor report adds support

Stocks in Europe are higher in afternoon action, led by solid gains in the basic resource sector as commodities continue to rally and following a key announcement from the world's third-largest mining company. Rio Tinto (RTP $183) is sharply higher after it announced a $15.2 billion rights issue after walking away from a $19.5 billion investment from the Aluminum Corp. of China (ACH $26), also known as Chinalco, while also agreeing to a joint venture deal with rival BHP Billiton (BHP $57). After BHP agreed to pay RTP $5.8 billion to create a 50-50 iron ore venture, RTP will have raised about $21 billion and will help it reduce the $38.9 billion in debt that the company is carrying. Chinalco said it was very disappointed with the outcome, and RTP, which will pay a $195 million break-up fee to Chinalco, said it has long recognized the natural fit of RTP's and BHP's iron ore businesses and the industrial logic of bringing them together. BHP's CEO said it is comfortable that deal-which will require European Commission regulatory approval-is achievable. Early gains are being boosted by the much better-than-expected US jobs data.

Mining news boosts Asia

Stocks in Asia were mostly higher, led by strength in mining firms on the news that Rio Tinto has scrapped its investment agreement with Chinalco in favor of a joint venture with BHP Billiton. Sharp gains in fellow mining outfit Fortescue Metals Group (FSUMY $12) helped provide additional support to the group and the Asian advance after it signed an accord with BC Iron (BIRNF $0.41) to jointly develop an iron-ore project in Western Australia. Not surprisingly, the jump in the mining sector helped Australia's S&P/ASX 200 Index gain ground to trade among the best performers in the Asia/Pacific region. Japan's Nikkei 225 Index rose about 1% to help the cause, as weakness in the yen versus the dollar helped boost optimism for profit growth in companies that rely heavily on sales in the US. However, China's Shanghai Composite Index failed to participate in the advance, falling 0.5% as traders took the opportunity to book profits.