Evening Market Update

Labor Pains Thwart Gains, Hungary Suppresses Risk Appetites

The global equity markets posted steep losses to finish out a holiday-shortened week, as Hungary emerged as new European debt crisis casualty candidate to get the selling ball rolling, picked up by a disappointing US labor report, which showed private sector payrolls rose by a much smaller amount than forecasted. The euro traded at a fresh four-year low versus the dollar, helping the Dollar Index moved to a new yearly high. Treasuries received a boost after a spokesperson for the new Hungarian Prime Minister said that it too distorted its economic statistics and may need assistance to avoid a default. In equity news, Dow member Wal-Mart Stores Inc announced a new stock buyback program and fellow Dow member Cisco Systems Inc issued upbeat commentary about its hiring and growth outlook, while government IT services provider SAIC reported mixed results but said its orders improved.

The Dow Jones Industrial Average lost 323 points (3.2%) to close at 9,932, the S&P 500 Index fell 38 points (3.4%) to finish at 1,065, and the Nasdaq Composite dropped 84 points (3.6%) to 2,219. In solid volume, 1.6 billion shares were traded on the NYSE and 2.4 billion shares were traded on the Nasdaq. Crude oil lost $3.10 to $71.51 per barrel, wholesale gasoline fell $0.08 to $2.00 per gallon, and the Bloomberg gold spot price gained $12.70 to $1,219.35 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-rose 1.2% to 88.29. For the week, including dividends, the DJIA lost 2.0%, while the S&P 500 Index fell 2.2%, and the Nasdaq Composite dropped 1.7%.

Dow member Wal-Mart Stores Inc (WMT $51) held a shareholder meeting today, at which it announced its Board approved a new share repurchase program for $15 billion, which replaces the previous $15 billion program, which had approximately $4.7 billion remaining. The world's largest retailer also announced that, "Just over the next five years, we'll create 500,000 jobs around the world," as it outlined its strategy to become a more global company. Shares were lower amid the broad-based sell-off in the equity markets.

Meanwhile, fellow Dow component Cisco Systems Inc. (CSCO $23) made some comments on its hiring plans at an investor conference in New York as the company’s CEO said it is hiring about 1,500 workers this quarter and plans to hire about that level next quarter. The company's chief also said the company is on solid ground with its long-term revenue growth forecast of 12-17%, and expects to post 25-28% growth in the fiscal 4Q, per Dow Jones Newswires. Shares finished lower.

Government technology services provider SAIC Inc (SAI $18) reported 1Q EPS of $0.32, ahead of the Street's $0.31 estimate, but revenues of $2.69 billion came in short of the forecast of $2.75 billion. The company said that they improved their book-to-bill ratio considerably to 1.2, after winning several significant contracts in the areas of cybersecurity and logistics, and left its full year outlook unchanged. Shares moved below the flatline in late-day trading.

Jobs gains were primarily Census-related

Nonfarm payrolls rose by 431,000 jobs in May, short of the Bloomberg estimate of a 536,000 increase in jobs, and April and March were revised 22,000 lower, while excluding government hiring, private sector payrolls grew by a mere 41,000, versus the forecast of a gain of 180,000, and after expanding by a downwardly revised 218,000 in April. The unemployment rate fell to 9.7% from 9.9%, as the labor force contracted by 322,000 in the month after expanding in April, while the expectation was for it to come in at 9.8%. Average hourly earnings rose 0.3% versus the Street's forecast of a 0.1% increase, while average weekly hours ticked higher to 34.2, versus the forecast to remain flat at 34.1. Government payrolls rose as Census hiring added 411,000 temporary workers, while state and local governments subtracted jobs. Treasuries continued their march higher during the day on the jobs report and European debt fears, which sparked another round of flight-to-safety buying. The yield on the 2-year note was down 10 bps to 0.72%, the yield on the 10-year note lost 17 bps to 3.20%, and the 30-year bond yield declined 14 bps to 4.13%.

Within the report, there were some positive aspects, with a decline of 322,000 in the number of involuntary part-time workers (workers who want full-time work, but are working part-time), temporary help services added 31,000, for a gain of 362,000 since September 2009, as well as an increase in hourly earnings and the average workweek. These factors can be leading indicators of future job growth, as businesses often try to do more with current employees, including moving workers from part-time to full time, and also add temporary positions, before committing to permanent additions to payrolls.

The number of long-term unemployed (>27 weeks) increased to 6.76 million in May, a new high, and accounted for 46% of all unemployed. It will take quite some time before all 8 million of unemployed since the beginning of the recession find jobs, with positions in some industries, such as construction and finance, likely never returning.

New European debt concerns emerge to dampen sentiment

The global equity markets got off to a shaky start amid news that a new debt-hamstrung nation may be having troubles as a spokesperson for the new Hungarian Prime Minister Orban said the country was in a grave situation and that the prior government lied about the state of the economy, adding that it is no exaggeration to talk about a default. A fact-finding panel will probably present preliminary economic figures this weekend. Hungary previously reported a deficit of 7% of GDP and received a 20 billion euro ($24 billion) bailout in 2008. Adding to pressure on the euro, there was talk that the Swiss central bank is no longer buying the euro to offset the appreciation of the Swiss franc, and the euro hit an all-time low versus the Swiss franc.

In other economic news, euro-zone 1Q gross domestic product (GDP) was revised slightly upward, Canada reported higher-than-expected job gains in the month of May-the fifth month in a row of growth-and former Japanese Finance Minister Kan was named the new Prime Minister, as widely expected, after Hatoyama resigned two days ago amid a crisis in confidence.

Labor pains and new European debt crisis claim thwarts early gains

After beginning the week following the Memorial Day holiday with a late-day slide-depicting the recent elevated volatility and uneasiness of sentiment in the markets-equities rebounded and seemed poised for a positive abbreviated week. Some favorable US economic data provided the fodder for the rebound, as the ISM Manufacturing Index showed business activity slowed at a smaller rate than forecasted-posting the tenth-consecutive month in expansion territory-construction spending unexpectedly increased, and major automakers posted strong sales in the US for May. However, the biggest lift on the week came from a surge in pending home sales as traders seemed to overlook that fact that sales were boosted by the homebuyer tax credit, which expired in April. The mid week jump in the equity markets and ramped up expectations about another strong increase in US jobs on Friday helped diminish the impact of some disappointing data, such as an unexpected flat reading in the ISM Non-Manufacturing Index and a smaller-than-forecasted increase in factory orders.

However, Friday's labor report quickly reversed any hope for a positive week, as the disappointing private sector job growth clouded the employment picture, exacerbating some early uneasiness that came from a smaller-than-expected drop in weekly initial jobless claims and fewer gains in jobs posted by the ADP Employment Change Report. The weakness in the euro on the news of a new European debt-related crisis, out of Hungary, further stymied sentiment and the bulls were stalled, with the major equity markets relinquishing weekly gains and moving lower for the shortened week.

Upcoming economics data include retail sales and Fed Beige Book

The US economic calendar picks up on Wednesday with the mid-day release of the Beige Book, wherein Fed staffers summarize anecdotal economic data from all twelve Federal Reserve districts in preparation for the next Federal Open Market Committee (FOMC) meeting scheduled for June 22-23, and is used as an input to the Fed's decision on whether to make any changes in monetary policy. The prior report showed a broadening of economic recovery, with bright spots in retail and vehicle sales and tourism, while the overall services sector was seen as mixed. Manufacturing was noted on the rebound, and housing activity had increased. Meanwhile, commercial real estate and banking were seen as weak sectors.

Advance retail sales for May will also be released on Friday, forecasted to advance by 0.2% month-over-month (m/m), after growing 0.4% in April, while sales ex-autos are estimated to increase 0.1% in May, on the heels of a rise of 0.4% in April. Same-store sales results-sales at stores open at least a year-reported by retailers were hampered by weather, while a shift of the Memorial Day holiday into May distorted results. The retail sales report includes spending at supermarkets and gas stations.

Excluding the volatility from auto spending, retail sales have not declined on a m/m basis since July 2009, demonstrating the continued benefit from pent-up demand as consumers pulled back during the first months of the recession due to uncertainty about job security and as their net worth fell in terms of both the stock and housing markets.

Other releases on the US economic calendar include consumer credit, wholesale inventories, MBA Mortgage Applications, initial jobless claims, business inventories and the University of Michigan consumer sentiment survey.

The international economic calendar in Europe includes German factory orders, German and French industrial production, and consumer and wholesale prices, as well as UK PPI and industrial production. In the Americas, Canada is scheduled to report housing starts.

In Asia/Pacific, Japan is slated to announce money supply and lending, the leading index, machine orders, the final reading on 1Q GDP, and consumer confidence, and Australia will report unemployment as well as consumer and business confidence. Elsewhere, China will be announcing housing prices, money supply, new loans, the trade balance, CPI and PPI, retail sales, industrial production and fixed asset investment.

In central bank action, the Central Bank of Brazil, Bank of England and European Central Bank meet to discuss monetary policy.