Evening Market Update

Stocks Move Higher Ahead of Tomorrow’s Jobs Report

The US equity markets managed to keep alive the upward momentum gained from yesterday’s solid advance, as traders anxiously await the release of the August jobs report tomorrow. Economic reports released today painted an optimistic picture, as US jobless claims declined and pending home sales unexpectedly rose, overshadowing a smaller-than-forecasted increase in factory orders and a larger-than-previously reported decline in 2Q nonfarm productivity. The equity front was highlighted by numerous same-store sales reports, showing the nation’s retailers exceeded sales forecasts in August. M&A news was also in focus, with Burger King Holdings Inc. reaching an agreement to be acquired by private equity firm 3G Capital for about $4 billion in cash, while Dow member Hewlett-Packard Co beat out Dell Inc in the battle to acquire 3PAR Inc, and Avis Budget Group Inc raised the cash portion of its takeover offer for Dollar Thrifty Automotive Group Inc. Treasuries were mostly lower on the day.

The Dow Jones Industrial Average moved 51 points (0.5%) higher to 10,320, the S&P 500 Index gained 10 points (0.9%) to 1,090, while the Nasdaq Composite advanced 23 points (1.1%) to 2,200. In light volume, 958 million shares were traded on the NYSE and 1.7 billion shares were traded on the Nasdaq. Crude oil added $1.12 to $75.03 per barrel, wholesale gasoline gained $0.03 to $1.92 per gallon, and the Bloomberg gold spot price gained $6.65 to $1,250.95 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was flat at 82.43.

The nation’s retailers are reporting August same-store sales—sales at stores open at least a year—headlined by Target Corp. (TGT $53), which posted a 1.8% increase in sales year-over-year (y/y), just shy of the 2.0% gain that analysts were expecting. August is a key month for back-to-school sales and TGT said it is pleased with its “strong performance” in this category, as well as apparel and food. The company added that guest traffic trends remained healthy throughout the month. Shares of TGT were higher.

Meanwhile, Costco Wholesale Corp. (COST $59) reported that its August same-store sales rose 7% y/y including fuel and the impact of foreign exchange, compared to the 4.2% increase that the Street expected. Excluding the favorable impacts of gas and currency, sales at the wholesale retailer rose 5%, compared to the 3.6% increase that was forecast. COST traded slightly higher.

Elsewhere, department store Macy’s Inc. (M $21) announced that it achieved a 4.3% increase in its August same-store sales, topping the 4.0% growth that was anticipated. The company said its back-to-school business through the month has been strong, led by great performances by Material Girl, the exclusive juniors brand by Madonna, as well as American Rag, its largest private brand in juniors and young men’s. M added that it is particularly encouraged by the response from its customers to new fall fashion. The company’s shares were modestly higher.

Moreover, fellow department store chains, J.C. Penney Co. Inc. (JCP $21), Kohl’s Corp. (KSS $49) and Nordstrom Inc. (JWN $33) all achieved better-than-forecasted August same-store sales growth. JCP posted 2.3% growth—and said sales were robust in back-to-school categories—above the 1.6% increase that was expected, KSS reported 4.5% higher sales, exceeding the 2.6% forecast, and JWN recording a 6.3% gain in sales, topping the 5.9% estimate. Shares of all three firms finished higher.

Inside the mall, Gap Inc. (GPS $17), Limited Brands Inc. (LTD $26), and Abercrombie & Fitch Co. (ANF $35) all posted same-store sales that bested the Street’s forecasts and GPS and LTD were higher, while ANF shares moved lower.

Outside of the retail sales front, Burger King Holdings Inc. (BKC $24) moved sharply higher again after the fast-food chain announced that it has agreed to be acquired by private-equity firm 3G Capital for $24 per share in cash or about $4 billion, which represents a 46% premium to the Tuesday closing price of BKC.

In other M&A news, Dow member Hewlett-Packard Co. (HPQ $40) announced that it has increased its tender offer to acquire all of the outstanding shares of 3PAR Inc. (PAR $33) to $33 per share in cash, from its previous offer of $30 per share. PAR confirmed that it has received that offer from HPQ and it reiterated that HPQ’s revised proposal constitutes a “superior proposal” to Dell Inc’s (DELL $12) upwardly revised $32 per share offer. PAR said it has notified DELL of its intention to terminate its merger agreement with DELL immediately, and PAR will pay DELL a termination fee of $72 million. DELL said it will not increase its most recent proposal to acquire PAR and it has ended its discussions regarding a potential acquisition. Shares of all three firms were higher.

Rounding out the M&A action, Avis Budget Group Inc. (CAR $10) raised the cash portion of its takeover offer for Dollar Thrifty Automotive Group Inc. (DTG $48) by 3.8%, as it continues to battle rival Hertz Global Holdings Inc. (HTZ $9) for control of DTG. Avis Budget’s revised offer is now $40.75 per share, up from $39.25 per share, while the stock portion remains at 0.6543 shares of CAR stock, and compared to Hertz’ all-cash offer of $41 per share. Shares of all three firms finished higher.

Jobless claims decline, productivity falls, factory orders softer than expected

Weekly initial jobless claims fell by 6,000 to 472,000, versus last week's figure which was upwardly revised by 5,000 to 478,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to come in at 475,000. The four-week moving average, considered a smoother look at the trend in claims, declined by 2,500 to 485,500, while continuing claims fell by 23,000 to 4,456,000, compared to the 4,450,000 that was anticipated by economists.

Meanwhile, the final reading on 2Q nonfarm productivity was revised to a 1.8% decline on an annual basis, compared to the Bloomberg forecast of a 1.9% decrease, and following the 0.9% decrease seen in preliminary report. Unit labor costs were revised to a 1.1% increase, versus a gain of 1.2% that was estimated, and the initial 0.2% gain that was reported last month.

Also, factory orders inched higher, rising by 0.1% m/m in July, just below the increase of 0.2% that economists had expected, but June’s drop was revised favorably, from a 1.2% decline to a 0.6% fall. July durable goods orders—reported last week—were slightly upwardly revised from a 0.3% increase to a 0.4% gain. Nondefense capital goods ex-aircraft, considered a good proxy for business spending, fell 7.2%, following the 3.6% jump that was seen in June.

Finally, pending home sales unexpectedly rose, jumping 5.2% m/m in July, compared to the drop of 1.0% that economists were anticipating. Compared to last year pending home sales are down 19.1%. But, the 2.6% drop in the gauge of the pipeline of existing home sales that was seen in June was revised to a 2.8% fall.

Treasuries were mostly lower, holding onto a majority of losses that followed the jobless claims and productivity readings, and yields on the mid-to-long end of the curve are extending their recent swing upward, rebounding off of the near record lows. The yield on the two-year note was flat at 0.50%, the yield on the 10-year note rose 5 bps to 2.62%, and the 30-year bond yield advanced 6 bps to 3.71%.

ECB rate decision highlights busy day on the international economic front

In international economic news, the European Central Bank kept its benchmark interest rate unchanged at 1.0%, as expected, but traders paid the closest attention to the customary press conference conducted by ECB President Jean-Claude Trichet, which followed the announcement. The ECB, as expected, maintained its emergency liquidity measures that were put in place during the financial crisis until at least mid-January, which was suggested in August by ECB council member Axel Weber, as he said the central bank should help banks through end-of-year liquidity tensions before determining in the first quarter when to withdraw these emergency lending measures. Also, the ECB boosted its growth forecasts for 2010 and 2011, but Trichet provided some cautious sentiment, saying the ECB has to remain “cautious and prudent,” and “monetary policy will do all that is needed to maintain price stability.”

Moreover, there were plenty of other economic reports from the European economic docket that are worth mentioning, headlined by euro-zone 2Q GDP being kept unrevised at 1.0% growth on a quarter-over-quarter (q/q) basis, while compared to the same period last year, output in the region grew 1.9%, compared to the initial 1.7% growth reading, which was the growth rate economists expected the figure to remain. Additional data showed euro-zone producer prices rose by a smaller-than-expected amount on a m/m basis in July, while the y/y rate of 4.0% matched expectations. Other reports rounding out the heavy economic calendar included: UK home prices falling much more than anticipated m/m in August, Switzerland’s 2Q GDP expanding by a larger amount than expected, and France’s unemployment falling solidly to help the unemployment rate in the nation improve. In other central bank news, Sweden’s central bank increased its benchmark interest rate by 25 basis points to 0.75% as expected.

Critical jobs report on tap for tomorrow

The pinnacle of the week’s economic calendar will come on the final day before the long Labor Day holiday weekend, beginning with the ISM Non-Manufacturing Index, expected to show growth in economic activity outside of the manufacturing sector slowed to 53.2 in August from 54.3 in July, but that non-manufacturing activity expanded—measured by a reading above 50—for the eighth-straight month. Key components of the index that will likely garner some attention include new orders, which is a gauge of demand and showed accelerated growth in July, and employment, which has oscillated around the 50 mark in recent months. The employment component has posted only two readings of expansion since December 2007, both in July and May of this year, and if the August reading posts the third month of growth in the past four reports, this could help soothe some of the concerns about the still weak jobs market.

However, any reading of employment from the non-manufacturing sector may fall on deaf ears as the Street’s attention on the labor market will likely be squarely on tomorrow’s nonfarm payroll report. Economists expect 103,000 jobs were shed from payrolls in August, but given the clouding effect of the government’s Census hiring and firing, the change in private sector payrolls, forecasted to increase by 40,000 after the disappointing gain of 71,000 that was seen in July, will probably garner the most attention. Also, the unemployment rate is forecasted to tick higher from 9.5% to 9.6%, but recent readings have been skewed by changes to the labor force.

Tomorrow’s international economic calendar will include services PMI reports out of the euro-zone, Italy, France, Germany and the UK, euro-zone retail sales, Japanese capital spending, Chinese non-manufacturing and services PMIs, and Brazil releases 2Q GDP.