Evening Update

Job Losses Cause Renewed Anxiety For Investors

Markets are suffering losses of more than 2% after this morning’s labor report caused traders some alarm and led to creeping doubts as to whether a rapid recovery in the economy is still possible. A separate release showing that continuing jobless claims are declining was not enough to overcome the negative sentiment. Meanwhile, Treasuries are higher after the economic data and as investors prepare for the Independence Day holiday. Equity news today has been light, and is mainly focused on M&A activity as Exelon Corp has raised its hostile takeover offer for NRG Energy in an attempt to create the nation’s largest electricity generator, while Johnson & Johnson has announced it will team up with Irish drug maker Elan Corp to develop Alzheimer’s treatments. Elsewhere, Sepracor is down after negative news related to its FDA studies, and Tivo is under pressure after a judge allowed Dish Network customers to continue using their DVRs while an ongoing court case progresses. Overseas, Europe suffered heavy losses after the US jobs report and after the ECB left its easing programs unchanged.

At 12:54 p.m. ET, the Dow Jones Industrial Average is down 2.1%, the S&P 500 Index is 2.3% lower, and the Nasdaq Composite is declining 2.4%. Crude oil is $2.44 lower at $66.87 per barrel, wholesale gasoline is off $0.06 at $1.80 per gallon, and gold is down $10.82 at $929.70 per ounce.

Exelon Corp. (EXC $50) announced that it has increased its hostile takeover offer for NRG NRG Energy (NRG $25) by 12.4% per share to $7.45 billion. This new offer comes more than eight months after EXC first expressed interest in NRG, in an attempt to create the US’s largest electricity generator. Shares of both firms are lower as investors weigh the odds that the deal is accepted. The offer price is approximately 8% above yesterday’s closing price for NRG, which has advised its shareholders to take no action until management has had time to review the revised proposal.

Dow member Johnson & Johnson (JNJ $57) said that it will invest $1 billion with Irish drug maker Elan Corp. (ELN $8), representing an 18.4% stake in the company. Also, a new company will be formed, with JNJ holding a 50.1% stake that will push forward the development of ELN’s late-stage development Alzheimer drug. Elan CEO Kelly Martin said this deal comes after an exhaustive review of 30 potential partners in an attempt to maximize the value of its Alzheimer’s program. ELN is up about 15% on this announcement, while JNJ is trading lower.

Shares of Sepracor (SEPR $15) are down almost 20% after the drug company announced that a Phase II study of the efficacy and safety of a treatment of a major depressive disorder did not meet the primary efficacy endpoint. Also, SEPR said the US Food & Drug Administration (FDA) has put two pediatric studies of its drug Lunesta on clinical hold due to concerns regarding non-clinical data. The FDA said this action does not impact the availability or prescribing information for Lunesta in the treatment of adults with insomnia.

Shares of Tivo (TIVO $9) are almost 15% lower after a judge granted Dish Network (DISH $16) and EchoStar Corp. (SATS $16) a stay on an injunction that would have stopped DISH and SATS customers from using their digital video recorders (DVRs). A prior ruling found that TIVO's DVR technology patents were infringed, but the appeals court ruled that DISH and SATS met their burden of proof of demonstrating that they could prevail in their appeal or that they have a substantial case and could suffer potential harm from the lower court order. TIVO said it is confident that the District Court judge's decision will be upheld.

Nonfarm payrolls shed more jobs than anticipated, jobless claims fall

Nonfarm payrolls (chart) fell 467,000 in June, more than the Bloomberg estimate that called for a 365,000 decline. May was favorably revised to -322,000 from -345,000, and April was revised from -504,000 to -519,000. The unemployment rate rose from 9.4% to 9.5%, versus the consensus forecast of the jobless rate to rise to 9.6%. Average hourly earnings were unchanged, versus the Street's forecast of a 0.1% gain. The average workweek fell to 33.0 hours from 33.1. Since the recession began in December 2007, 7.2 million jobs have been lost, and there are 14.7 million unemployed persons, of which 4.4 million have been out of work for more than 6 months. The number of people who are working part-time for economic reasons, those who would like to work full-time but are unable to, has risen by 4.4 million since the recession began. Job losses were widespread across sectors, including a 52,000 loss in government, with the only increases in jobs occurring in the healthcare and education categories. The auto industry continues to add to job losses, losing 27,000 in June and 335,000 since the recession began.

The combination of the historic financial crisis and bruised consumers could imply the risk of a W-shaped recovery. The lack of strength in average hourly earnings and average workweek, as well as involuntary part-time workers, implies continued strain on consumer spending. As we go forward, wages could come under pressure, and combined with the historically low level of capacity utilization, signify that deflation, not inflation, remains the near-term risk. Treasuries erased losses following the unfavorable labor data and are now higher. Please note that all US markets will be closed tomorrow in observance of the Independence Day holiday, with bond markets having a regular close today.

Meanwhile, weekly initial jobless claims declined by 16,000 to 614,000, versus last week's figure that was upwardly revised by 3,000 to 630,000. The Bloomberg consensus called for claims to reach 615,000. The four-week moving average declined by 2,750 to 615,250, and continuing claims fell, dropping 53,000 to 6,702,000, versus the forecast of 6,740,000.

In other economic news, factory orders (chart) for the month of May were released and showed orders gained 1.2%, topping the consensus of economists surveyed by Bloomberg, which called for an increase of 0.9%. April's 0.7% advance was downwardly revised to 0.5%. Excluding transportation, orders rose 0.8%. Nondefense capital goods orders ex-aircraft, considered a good indicator of business spending, rose 4.7% after falling 3.5% in April. May's durable goods orders—reported last week—were left unchanged at a 1.8% advance.

Europe in the red as autos lose tread, ECB leaves rates unchanged

Stocks in Europe were down as weakness in automakers following yesterday's disappointing US sales data was exacerbated by a downgrade of European auto stocks by Credit Suisse. Basic materials were also under pressure with traders booking profits as a result of lingering uncertainty regarding whether the recent economic data supports a sustainable recovery in the global economy. The soured sentiment across the pond was aggravated by the disappointing labor data in the US. In equity news, shares of Clariant (CLZNY $6) were down sharply after the chemical maker said it plans to sell 225 million Swiss francs of convertible bonds.

On the economic front, the European Central Bank, as widely expected, left its key interest rate unchanged at 1.0%. ECB President Jean-Claude Trichet noted that the bank’s plan to purchase bonds will go ahead as planned, while giving few other details to the unorthodox measures being used in addition to interest rate cuts in an attempt to improve lending conditions in the region. The bond purchase program will begin on July 6 and will be implemented gradually, with the ECB eventually purchasing as much as 8% of the total covered bonds outstanding, according to Trichet.

On the economy, Trichet said recent data provide further indications that economic activity over the remainder of this year is likely to remain weak but should decline less strongly than was the case in 1Q 2009. He noted that after a phase of stabilization, a gradual recovery with positive quarterly growth rates is expected by mid-2010.

Separately, other economic reports showed eurozone producer prices unexpectedly fell in May and eurozone unemployment rose more than expected to 9.5%.