Evening Market Update

Techs Advance but Data Keeps Enthusiasm in Check

The equity markets eked out a modest gain, with the exception of the Nasdaq Composite, which moved solidly higher on strength in technology issues, amid volatility on a mixed bag of data and ahead of tomorrow’s labor report. The equity markets pared some gains and spent a sizeable portion of the day below the flatline following an unexpected flat reading in the ISM Non-Manufacturing Index and a smaller-than-forecasted increase in factory orders. Moreover, a plethora of retail same-store sales reports and some key employment data were mixed, keeping gains limited. Treasuries were lower but pared losses on the aforementioned data. In other equity news, Dow member JP Morgan Chase was fined in the UK for failing to separate client money from the firm’s futures and options business, Dell Inc’s CEO was reported as saying he has considered taking he company private, Whirlpool Corp announced a recall, and Hovnanian Enterprises Inc disappointed the Street with its revenues and drop in contracts. Overseas, the Japanese yen continued to find pressure on political uncertainty in the wake of its Prime Minister’s resignation.

The Dow Jones Industrial Average gained 6 points (0.1%) to close at 10,255, the S&P 500 Index rose 4 points (0.4%) to finish at 1,103, and the Nasdaq Composite increased 22 points (1.0%) to 2,303. In moderate volume, 1.2 billion shares were traded on the NYSE and 2.2 billion shares were traded on the Nasdaq. Crude oil gained $1.75 to $74.61 per barrel, wholesale gasoline rose $0.05 to $2.08 per gallon, and the Bloomberg gold spot price declined $18.00 to $1,205.45 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.6% to 87.21.

Dow member JP Morgan Chase (JPM $39) was fined $48.9 million by the UK Financial Services Authority, which said the fine was the biggest in the FSA’s history. The fine was for failing to separate client money from the firm’s futures and options business during the period from November 2002 to July 2009. JPM was lower.

Dell Inc. (DELL $14) moved higher in late-day trading after the company’s CEO and founder Michael Dell said the he has considered taking the PC maker private. Bloomberg also quoted Dell at a conference in New York, saying that he has every intention to keep running the company.

Whirlpool Corp’s (WHR $101) Maytag division said that it is recalling 1.7 million dishwashers to fix a faulty heating element that can ignite a fire according to the Consumer Product Safety Commission. The agency said that consumers should stop using the dishwashers immediately and disconnect the power source. WHR finished lower.

Homebuilder Hovnanian Enterprises Inc. (HOV $5) was sharply lower after reporting revenues that fell 20% year-over-year (y/y) to $318.6 million in fiscal 2Q, below the $357 million that analysts were expecting. Also, the company reported that net contracts, excluding unconsolidated joint ventures, fell 17% compared to the same period a year ago. However, the company did post a smaller-than-expected loss of $0.36 per share, compared to the loss of $0.70 that the Street was forecasting. HOV said the homebuyer tax credit aided its sales results.

The nation’s retailers reported mixed May same-store sales—sales at stores open at least a year— with Target Corp. (TGT $54) posting a 1.3% increase y/y, compared to the 1.2% increase that analysts surveyed by Reuters estimated. TGT said that it sees continued volatility in the pace of economic recovery and the May result was “somewhat below our expectation.” The company announced that beginning this fall, Target REDcard cardholders would receive an additional 5% off purchases. Shares pared an early advance and finished slightly higher.

Elsewhere, Costco Wholesale Corp. (COST $58) reported May same-store sales grew 11% y/y, including the impact of fuel, while the holiday shift of Memorial Day into the month of May for 2010 from June’s results the prior year positively impacted results by approximately 2%, while analyst estimates were for an increase of 9.7%. Excluding changes in gas prices and foreign currencies, sales were up 5%. Shares traded lower, suggesting analysts may not have expected such a large impact of the holiday shift.

Macy’s Inc. (M $22) announced a 1.4% y/y increase in its April same-store sales, while excluding the holiday shift sales were up 5%, and the Reuter’s estimate was for a 0.9% increase. The department store said its business trend strengthened toward the end of the month as the weather turned warmer and the Memorial Day holiday approached. Other department store results included JC Penney Co. Inc. (JCP $27) posting a 1.8% y/y decrease in sales, versus the decline of 0.6% that analysts were forecasting, Nordstrom Inc. (JWN $39) reported a 3.7% gain in sales, missing the 4.8% increase that the Street was expecting, and Kohl’s Corp. (KSS $52) announced a 3.5% increase in sales, versus the 1.5% rise that was anticipated. M and KSS were both higher, but JWN and JCP finished lower.

Meanwhile, pharmacy retailer Walgreen Co. (WAG $32) reported that its same-store sales decreased 0.2% y/y in May, compared to the 1.5% gain that analysts were expecting, citing the negative impact from generic drug introductions in the last twelve months and lower incidence of flu. Shares traded solidly lower

Mixed jobs and services data in economic news

The ISM Non-Manufacturing Index registered 55.4 in May, below the forecasted 55.6, remaining at the same level as both April and March. The reading marks the seventh month in the past nine months above the 50.0 level that separates expansion from contraction. The report is generally considered a measure of economic strength in the service sector and is the companion to the ISM Manufacturing Index, which was released on Tuesday and posted a decline to 59.7 in May, indicating a slowing rate of growth.

Underlying components of today’s report were mixed, as new orders fell 1.1 points to 57.1, while employment posted the first reading in expansion territory in 28 months, to 50.4, mirroring the increase in the manufacturing employment component reported earlier this week. The services sector has lagged manufacturing, which has posted six employment readings in expansion territory, as the higher cyclicality of the manufacturing sector leads changes in the overall economy. As businesses reacted to the recession by allowing inventories to plunge by record amounts and slashing jobs, an increase in demand and employee productivity has resulted in the need to hire.

A series of job data was released today, starting with weekly initial jobless claims, which declined 10,000 to 453,000, versus last week's figure which was upwardly revised by 3,000 to 463,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to decline to 455,000. The four-week moving average, considered a smoother look at the trend in claims, rose 1,750 to 459,000, and continuing claims increased by 31,000 to 4,666,000, compared to the increase to 4,610,000 that was anticipated.

While the ADP Employment Change Report showed private sector payrolls rose by 55,000 jobs in May, compared to the forecast of economists surveyed by Bloomberg, which called for a 70,000 increase, the miss was offset by an upward revision to April’s figure to 65,000 from 32,000.

Elsewhere, the final reading on 1Q nonfarm productivity rose at a 2.8% annual rate, below the Bloomberg forecast of a downward revision to 3.4% from the initially reported 3.6% increase. Unit labor costs fell 1.3%, versus a drop of 1.4% that was estimated.

Factory orders gained 1.2% m/m in April, compared to the increase of 1.8% that economists had expected, marking the eighth-straight monthly increase, and March’s increase was revised nicely higher, from a 1.3% gain to a 1.7% advance. April durable goods orders—reported last week—were revised slightly lower from a 2.9% gain to a 2.8% increase. Nondefense capital goods ex-aircraft, considered a good proxy for business spending, declined 2.6%, from the initial report of a 2.4% decrease.

Treasuries finished lower but pared some early losses amid the mixed bag of economic data and as the equity markets showed some volatility. The yield on the 2-year note was up 1 bps to 0.81%, the yield on the 10-year note gained 3 bps to 3.37%, and the 30-year bond yield increased 4 bps to 4.28%.

Yen continues to be pressured by political uncertainty

The Japanese yen continued to weaken against the US dollar and other major currencies amid lingering political uncertainty after the nation’s Prime Minister Hatoyama resigned yesterday amid a decline in confidence among voters and his own party. The announcement comes ahead of mid-term elections next month for the upper chamber of parliament and Hatoyama’s Democratic Party of Japan will choose a new leader tomorrow.

In other international economic news, April euro-zone retail sales fell 1.2% m/m, while the forecast was for a 0.1% gain, and the final reading on May’s euro-zone services PMI was revised slightly upward. In the UK, house prices rose more than expected m/m, while the PMI services index rose less than anticipated. Elsewhere, the unemployment rate in France was unchanged in 1Q, versus the expectation that the rate would increase.

Strong job gains anticipated, heavily influenced by Census hiring

Tomorrow’s headline economic release is nonfarm payrolls, expected to increase by 533,000 in May, after increasing 290,000 in April, while excluding government hiring, private sector payrolls are expected to increase 178,000, after expanding by 231,000 in April, due to the outsized impact of temporary hiring for the Census on the headline number. The unemployment rate is estimated to decrease to 9.8% after increasing by 0.2% to 9.9% in April, as individuals re-entered the labor force, possibly reflecting increased confidence in the employment outlook.

There are no other major reports slated for release on tomorrow’s US economic calendar, but the international calendar will yield another report on UK home prices, a second look at 1Q euro-zone GDP, and the employment change and rate in Canada.