Evening Market Update

Markets Jump Back on the Winning Bandwagon

Encouraging economic data and strong sales figures from the nation’s retailers helped spark an impressive rally on Wall Street today. Traders were pleased by an unexpected drop in jobless claims ahead of tomorrow’s critical labor report, while sentiment also improved on a surprising improvement in service-sector activity and higher-than-anticipated 4Q productivity. Additionally, oil prices moved lower after spiking yesterday, as hopes emerge that the conflict in Libya might be resolved by international mediation. In equity news outside of the promising same-store sales figures, H.J. Heinz posted better-than-expected 3Q earnings, while shares of Amylin Pharmaceuticals and Alkermes Inc. fell after their diabetes treatment failed in a comparison trial. On the international front, the European Central Bank left its benchmark interest rate unchanged, but signaled a potential rate hike at the next policy meeting. Treasuries moved lower on the day.

The Dow Jones Industrial Average rose 191 points (1.6%) to 12,258, the S&P 500 Index gained 23 points (1.7%) to 1,331, and the Nasdaq Composite advanced 51 points (1.8%) to 2,799. In moderate volume, 1.1 billion shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. Crude oil fell $0.36 to $101.87 per barrel, wholesale gasoline was flat at $3.02 per gallon, while the Bloomberg gold spot price fell $18.00 to $1,416.50 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies— was 0.3% lower at 76.47.

The nation’s retailers reported February same-store sales results—sales at stores open at least a year—headlined by Target Corp. (TGT $52), which announced a 1.8% increase year-over-year (y/y) in sales, compared to the 2.2% increase that analysts surveyed by Reuters had anticipated. TGT said February sales were inline with its expectations, while its REDcard Rewards and remodeling programs continue to drive meaningful incremental sales and traffic in its stores. Shares traded lower.

However, most retailers’ results were better than forecasted, highlighted by department stores, as Macy’s Inc. (M $24) achieved 5.8% y/y growth in same-store sales for February, well above the 3.7% gain that analysts had anticipated. The company said its online sales were up 30.9% and consumer reaction to new spring merchandise has been “encouraging.” Moreover, Kohl’s Corp. (KSS $54) reported 5.0% growth in sales, exceeding the 4.1% estimate, J.C. Penney Co. Inc. (JCP $34) announced that sales rose 6.4%, topping the 4.2% expectation, and Saks Inc’s (SKS $12) sales surged 15.3%, trouncing the 4.9% increase that the Street had projected. However, these stocks were mixed, with JCP lower, while M, KSS, and SKS finished higher.

Elsewhere, other reports mostly bested forecasts, with Limited Brands Inc. (LTD $32) posting a 12% increase, above the 8.5% estimate, and Hot Topic Inc. (HOTT $6) announcing a smaller-than-expected decrease, as sales contracted 1.4%, compared to the decline of 5.0% that was estimated. However, Gap Inc. (GPS $22) disappointed the Street, reporting a 3.0% decline in sales, versus the 0.9% decrease that was anticipated. Shares of GPS moved lower, while LTD and HOTT traded higher.

In earnings news, H.J. Heinz Co. (HNZ $50) reported fiscal 3Q EPS of $0.84, above the $0.82 that the Street forecasted, with revenues increasing 1.5% y/y to $2.7 billion, matching expectations. HNZ said sales were driven by volume growth of 0.5% and it also announced that it will acquire an 80% stake in a Brazilian manufacturer of the Quero brand of tomato-based sauces and condiments. HNZ finished modestly higher.

On a negative note, shares of Amylin Pharmaceuticals Inc. (AMLN $11) fell over 25%, and Alkermes Inc. (ALKS $13) was down over 10%, after their diabetes treatment failed to prove to be as effective to another diabetes treatment in a comparison drug trial. However, Eli Lilly & Co. (LLY $34), which is a co-developer of the drug, traded higher.

Service-sector activity unexpectedly improves and jobless claims surprisingly fall

The ISM Non-Manufacturing Index (chart) unexpectedly improved in February to 59.7 from 59.4, compared to the slight decline to 59.3 that economists surveyed by Bloomberg forecasted. A reading of 50 separates expansion from contraction. The measure of economic strength in the service sector remains at the highest level since August 2005, complimenting the companion ISM Manufacturing Index, which matched the highest rate of expansion since May 2004 on Tuesday. The index suggested that activity in the service sector expanded for the fifteenth-straight month as business activity/production increased from 64.6 to 66.9, the highest since January 2004. Also, the employment component rose from 54.5 to 55.6, the largest level of expansion since April 2006, fostering some optimism ahead of Friday’s Labor Report (economic calendar). However, the prices paid component moved further above the 70 mark, rising to 73.3, from 72.1, the highest since September 2008, exacerbating recently increased inflationary concerns that threaten corporate profits and the purchasing power of consumers—the heartbeat of the economy. Also, new orders slipped slightly, declining from 64.9 to 64.4.

The inflation data may be dampening some of the enthusiasm from today’s data as inflation concerns are gaining momentum with the global economy recovering, exacerbated by the spike in oil prices amid the unrest in the Middle East. The Fed is only likely to react to rising inflationary concerns by raising rates if job growth improves meaningfully and rising wages suggest a filtering of high oil prices through to generalized price increases.

Meanwhile, weekly initial jobless claims (chart) fell by 20,000 to 368,000, versus last week's figure which was downwardly revised by 3,000 to 388,000, and below the 395,000 level that economists surveyed by Bloomberg had expected. The four-week moving average, considered a smoother look at the trend in claims, dropped by 12,750 to 388,500, and continuing claims fell by 59,000 to 3,774,000, below the forecast of economists, which called for continuing claims to come in at 3,815,000.

Elsewhere, the final reading on 4Q nonfarm productivity (chart) showed a 2.6% increase on an annual basis, unrevised from the initial report, and compared to the 2.3% gain that economists expected. Unit labor costs were 0.6% lower, inline with the preliminary reading, versus a decline of 0.5% that was estimated.

Treasuries moved lower following the data and eased concerns toward the Middle East and North Africa. The yield on the two-year note rose 8 bps to 0.77%, the yield on the 10-year note increased 10 bps to 3.57%, and the 30-year bond yield gained 6 bps to 4.63%.

European Central Bank signals rate hike

The European Central Bank (ECB) left its benchmark interest rate unchanged at 1.0%, as expected, while comments from ECB President Jean-Claude Trichet at his customary press conference following the announcement signaled the ECB may tighten monetary policy at its next policy meeting on April 7. Trichet noted that the ECB must exercise “strong vigilance” as inflation risks have moved to the “upside,” and “an increase of interest rates in the next meeting is possible,” per Bloomberg. The euro moved solidly higher following the comments, suggesting the possible rate-hike time-table was sooner than most anticipated. Moreover, there was a plethora of economic data for traders to digest, with German retail sales rising much more than economists expected, euro-zone 4Q GDP expanding at a rate that matched expectations, while service-sector activity reports from Germany, France, the UK, and euro-zone all showed growth in the sector was below expectations. However, Italy’s service sector read was stronger than forecasted.

In Asia/Pacific, South Korea’s industrial production increased by more than twice the expectation of economists, while retail sales in Hong Kong surged 28.2% y/y in January. The economic calendar in China showed a slowing in non-manufacturing activity, with one of the two separate reports released on the sector depicting a contraction. Elsewhere, Australia’s trade surplus narrowed by a much smaller amount than expected, while a separate report showed Australian building approvals fell sharply.

Back in the Americas, Mexico’s manufacturing index grew to reading of 52.9 in February, up from 50.4 in January and above expectations. Elsewhere, the Central Bank of Brazil voted to increase its target interest rate to 11.75% from 11.25%, in a move that was widely expected by economists. However, a subsequent report showed Brazil’s 4Q GDP expanded 5.0% y/y, compared to a 6.7% growth rate in the third quarter. The pace of growth is the slowest in a year, and slightly lower than the 5.2% rate expected by economists, leading many economists to believe that the central bank will pause interest rate hikes in the near future.

Market looking for improvement in tomorrow’s labor report

All eyes will be on tomorrow’s release of nonfarm payrolls, expected to grow 197,000 in February after disappointing for the past three months, including a paltry 36,000 gain in January, although the dramatic decline in the unemployment rate to 9.0% in January is estimated to increase slightly to 9.1%, as prior declines were due in part to smaller size of the workforce as people stopped searching for work.

While the payrolls report has been disappointing, other measures of employment such as initial jobless claims and private payrolls from ADP have been better than expected, and last month’s labor report was brushed off as an incomplete read on the state of the job market. Initial jobless claims, considered a leading indicator of employment, is at a 2 ½ year low, and the employment components of the ISM surveys show a multi-decade high reading for the rate of change in manufacturing employment and highest level since January 2004 for services. However, actual hiring has lagged, potentially because of a skills mismatch between job seekers, where job openings in technology and health care science and practice remain unfilled, while sectors such as construction suffered steep drops in employment during the recession. Additionally, employers have been slow to fill vacancies amid an uncertain demand and regulatory environment.

The other release on the US economic calendar is factory orders, expected to increase to 2.0% in January following a 0.2% rise in December.

International releases scheduled for tomorrow include UK house prices, Canada’s Ivey Purchasing Managers Index and Mexico’s consumer confidence, and Mexico’s central bank meets to discuss monetary policy, wherein rates are expected to remain unchanged at 4.50%.