Evening Market Update

Labor Report Helps Fuel Rally Ahead of Labor Day Weekend

The US equity markets continued their bullish rally today, fueled by a better-than-expected US labor report that showed private sector payrolls gained 67,000 jobs in August. The report overshadowed a disappointing reading of the ISM Non-Manufacturing Index that indicated growth in service-sector activity slowed. The jobs report sent Treasuries lower, although some of those losses were pared following the ISM report. In equity news, Campbell Soup Co beat analysts' EPS expectations, but missed on the revenue front and offered a cautious 2011 outlook, while H&R Block Inc posted a smaller-than-expected loss in 1Q. Moreover, Take-Two Interactive Software Inc posted an unexpected 3Q profit and Finisar Corp beat the Street's expectations and gave upbeat guidance for 2Q, Please note, in observance of the Labor Day holiday, all US markets will be closed on Monday, September 6th.

The Dow Jones Industrial Average moved 128 points (1.2%) higher to 10,448, the S&P 500 Index gained 14 points (1.3%) to 1,105, while the Nasdaq Composite advanced 34 points (1.5%) to 2,234. In light volume, 944 million shares were traded on the NYSE and 1.6 billion shares were traded on the Nasdaq. Crude oil fell $0.74 to $74.28 per barrel, wholesale gasoline declined $0.01 to $1.91 per gallon, and the Bloomberg gold spot price lost $4.18 to $1,246.78 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was 0.4% lower at 82.04. For the week, including dividends, the DJIA increased 2.9%, the S&P 500 Index gained 3.8%, and the Nasdaq Composite rose 3.7%.

Campbell Soup Co. (CPB $36) reported fiscal 4Q EPS ex-items of $0.33, three cents above the Reuters estimate, but revenues declined 1% year-over-year (y/y) to $1.5 billion, just below the $1.6 billion that analysts were expecting. The company said US beverage sales jumped 12% y/y, but US soup sales decreased 5%. CPB said it expects fiscal 2011 sales and earnings growth to be slightly below the company's long-term growth targets, reflecting the challenging economic and consumer conditions in the marketplace. Shares of CPB finished lower.

H&R Block Inc. (HRB $13) posted a smaller-than-expected fiscal 1Q loss ex-items of $0.36 per share, compared to the shortfall of $0.41 that the Street expected, with revenues coming in flat y/y at $274.5 million, exceeding the $268.5 million that was forecasted by analysts. The tax preparation firm said its quarterly results reflect the progress it has made in reducing embedded costs and it is "working diligently" to reverse the early-season client losses it has experienced in each of the past two years. HRB was solidly higher.

Take-Two Interactive Software Inc. (TTWO $10) traded sharply higher after the video-game software maker posted an unexpected profit in fiscal 3Q, with EPS ex-items of $0.28, compared to the $0.06 per share loss that was forecasted on the Street. Revenues surged to $354 million, from $95 million in the same period a year ago, as a result of the "strong performance" of its Red Dead Redemption video game, which sold more than 6.9 million units worldwide since its launch in May 2009. TTWO's Grand Theft Auto franchise and sales of NBA 2K10 also aided results. The company also increased its 4Q and full-year guidance.

Finisar Corp. (FNSR $16) was up over 14% after the fiber optic communications equipment firm reported EPS ex-items of $0.31, eight pennies above the consensus estimate, with revenues jumping over 60% to $208 million, topping the $202 million that the Street was looking for. FNSR said it achieved company records for revenues, gross margin and EPS, as the demand environment continued to be "very strong," particularly for its higher data rate transceivers and its ROADM traffic-switching products. FNSR issued 2Q revenue outlook that exceeded expectations.

Private sector payrolls rise more that expected, service sector read on the horizon

Nonfarm payrolls fell by 54,000 jobs in August, a smaller drop than the consensus estimate of economists surveyed by Bloomberg, which forecasted a 105,000 decline. Additionally, excluding government hiring, private sector payrolls increased by 67,000, versus the forecast of a gain of 40,000, after expanding by an upwardly revised 107,000-from an initially reported 71,000 gain-in July. The unemployment rate rose to 9.6% from 9.5% the previous month, matching expectations. Average hourly earnings increased by 0.3% month-over-month (m/m) versus the Street's forecast of a 0.1% increase, and average weekly hours remained at 34.2, as expected. Government payrolls fell by 121,000 as Census employment dropped by 114,000 temporary workers.

The bulls are finding their herd expand today as the larger-than-forecasted increase in private sector jobs-and the upward revision to July's figure-was met with a favorable revisions to the past two previous months' headline readings. Moreover, average hourly earnings tripled expectations, the workweek remained unchanged, and the amount of temporary hiring by companies moved higher, which is a good sign as this is the typically the first area of growth that suggests businesses may be looking to ramp up hiring. However, the bears are quickly pointing out that job growth remains anemic, while workers employed part time for economic reasons-individuals working part time because of reduced hours or they can't find full-time work-were up over 300,000 m/m, and discouraged workers-persons not currently looking for work because they believe no jobs are available-are at 1.1 million, up about 350,000 versus the same period last year. All in all, the data suggests that the labor market has a long road ahead to reach the level of job growth that is typical in a cycle of meaningful economic prosperity.

However, some of the luster from the labor report's shine was tarnished by the larger-than-anticipated decline in the ISM Non-Manufacturing Index, which fell from 54.3 in July to 51.5 in August, compared to the slight deterioration to 53.2 that economists forecasted. The gauge of economic activity in the non-manufacturing sector showed business activity mainly in the service sector slowed by three percentage points, negatively impacted by a drop in new orders from 56.7 in July to 52.4 in August and a plunge in new export orders from 52.0 to 46.5. Also, the employment component of the index, which has flirted with the 50 level that denotes expansion in recent months-posting the first two readings of growth since December 2007 in May and July-fell from 50.9 to 48.2, to dampen sentiment toward the health of the job market that ramped up on today's labor report.

Treasuries finished lower after falling on the labor data, but managed to pare some losses following the disappointing ISM Non-Manufacturing report. The yield on the two-year note was 2 bps higher at 0.51%, the yield on the 10-year note rose 9 bps to 2.71%, and the 30-year bond yield advanced 7 bps to 3.79%. Please note, all US markets will be closed on Monday, September 6th, in observance of the Labor Day holiday.

European services activity mixed, Brazil's GDP comes in hotter than expected

European economic news was highlighted by multiple services PMI reports, including releases out of Italy, France, and the euro-zone showing better-than-expected growth, while growth in services activity out of the UK, Spain, and Germany-Europe's largest economy-decelerated and came in below economists' forecasts. Moreover, euro-zone retail sales rose 0.1% m/m in July, below the 0.2% increase that was forecasted, while June's flat reading was revised to a 0.2% gain. In other economic news in the region, Spain's consumer confidence improved in August, and consumer prices in Switzerland came in flat in August as expected.

In Asia/Pacific, a Finance Ministry report showed that Japanese capital spending fell 1.5% on an annualized basis in 2Q, much less than previously forecasted. The new figure will be used to calculate revised 2Q GDP, due to be released on September 10th, and now forecasted to expand 1.5%, compared to a preliminary reading of 0.4%. Elsewhere in the region, South Korea released the final read on the nation’s 2Q GDP, which showed 1.4% expansion in output quarter-over-quarter (q/q), a slightly smaller rate of growth than the initial 1.5% pace of expansion that was reported in July. Moreover, Chinese non-manufacturing activity grew in August, growth in the PMI in Hong Kong increased, the pace of growth in service sector activity in India slowed in August and a report showed y/y wholesale prices in the nation rose at a higher rate compared to the previous period, while Australian services activity improved.

Elsewhere in the Americas, Brazil's 2Q GDP grew 1.2%, compared to economists' expectation of 0.7% growth, and lower than the 2.7% expansion seen in 1Q. The growth was aided by a record jump in investment, which was partially offset by a 38.8% y/y increase in imports, while industrial output fell from 1Q and vehicle sales declined 21.5% due to the expiration of a tax break. The Brazilian central bank released a statement saying that 2Q growth puts the county on a growth path "more compatible with long-term equilibrium." Senior Market Analyst, Michelle Gibley, CFA notes in her latest article, Country Focus: Time to Consider Brazil?, the Brazilian central bank began to slow the rate of interest rate hikes in July, as growth moderated and inflation risks subsided. At a meeting this week, the central bank voted to hold the benchmark interest rate unchanged at 10.75%. However, today's higher-than-expected growth rate may put pressure on the central bank to resume interest rate hikes in 2011.

Double-dip rhetoric slips, sending stocks on upward trip

After an early week release of the Federal Reserve's minutes from its August 10th monetary policy meeting, which revealed that while policymakers believed growth would continue, some members saw increased downside risks, the equity markets seemed destined to post red numbers for the week. The minutes also showed policymakers may be just as economically confused as most market pundits with larger signs of dissention appearing despite Hoenig being the only formal dissenting vote, which may have added to the market-hampering uncertain economic sentiment. The weakness to begin the week helped stocks post the worst performance for the month of August since 2001.

However, as the calendar turned to September-which has historically been a lackluster period of the year-the bulls found some pastures of sustenance from a plethora of upbeat global economic news. The tide changed for the bulls with Manufacturing PMI readings in China showing growth, joined by the US ISM Manufacturing Index, which showed expansion in the overall economy for the sixteenth-straight month, and Australia’s 2Q GDP expanded much more than economists had expected. Other US reports that arrested some of the negative economic sentiment and soothed double-dip concerns included: larger-than-forecasted personal spending, a better-than-expected S&P/Case-Shiller Home Price Index reading, an unexpected jump in pending home sales, a higher-than-anticipated consumer confidence report, and a second-consecutive weekly drop in initial jobless claims. Meanwhile, the equity front joined in to prod the bulls down the recovery path, as M&A activity continued to ramp up to suggest that confidence in the corporate sector is improving. Dow member Hewlett-Packard Co. (HPQ $40) appears to have won the competition over Dell Inc (DELL $13) to acquire 3PAR Inc. (PAR $33), fellow Dow component Intel Corp. (INTC $18) reached an agreement to acquire the wireless solutions business of German chipmaker Infineon Technologies AG (IFNNY $6), and Burger King Holdings Inc. (BKC $24) agreed to be acquired by private-equity firm 3G Capital. Moreover, major US retailers reported mostly better-than-forecasted same-store sales-sales open at least a year-and Target Corp. (TGT $53), Macy's Inc. (M $21), and J.C. Penney Co. Inc. (JCP $22) noted that back-to-school sale were relatively strong.

Fed Beige Book will highlight holiday-shortened week

After a busy week of economic releases, the US economic calendar will be on the lighter side next week. The highlight will come on Wednesday with the release of the Federal Reserve 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 September 21st. The last report, issued July 28th, indicated that two districts, Cleveland and Kansas City, changed their assessment to “steady” from increasing, and two districts, Atlanta and Chicago, said the pace of activity slowed.

Other US reports due out next week include: MBA mortgage applications, weekly initial jobless claims, consumer credit, trade balance, and wholesale inventories.

Elsewhere in the Americas, Canada releases housing starts and its unemployment rate, while Brazil releases vehicle sales and IBGE inflation.

In Europe, releases include German trade balance, factory orders, industrial production and CPI, UK industrial and manufacturing production, housing prices and PPI, and the French trade balance, non-farm payrolls and manufacturing production.

In Asia/Pacific, Japan is slated to announce machine orders, trade balance, consumer confidence and 2Q GDP, while Australia will report its unemployment rate. Additionally, India will announce industrial production and China releases its trade balance.

In central bank action, Canada, Japan and the UK will all announce target interest rate decisions.