Evening Market Update

Big Moves in Oil, Dollar and Jobless Claims Sink Stocks

The US equity markets tumbled in the final hours of trading to finish solidly lower, as traders were spooked by a broad selloff in commodities and more disappointing news from the jobs front. The US dollar moved sharply higher and crude oil prices plunged below $100 per barrel, as the European Central Bank left its benchmark interest rate unchanged, while taking a less-hawkish tone that lowered expectations of further rate hikes in the near-future. In domestic economic news, an unexpected increase in weekly initial jobless claims casted doubt on tomorrow’s broader nonfarm payrolls report, while a separate report showed that 1Q nonfarm productivity slowed and employment costs rebounded from a 4Q decline. The equity front was highlighted by mostly positive April same-store sales results from the nation’s retailers, which were boosted by the late Easter holiday. Meanwhile, corporate earnings reports continued to pour in, headlined by better-than-expected results from Whole Foods, JDS Uniphase, General Motors, and DIRECTV. Treasuries moved higher on the selloff in equities. 

The Dow Jones Industrial Average was 139 points (1.1%) lower at 12,584, the S&P 500 Index declined 12 points (0.9%) to 1,335, and the Nasdaq Composite fell 14 points (0.5%) to 2,815. In moderately strong volume, 1.1 billion shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil tumbled $10.21 to $99.03 per barrel, wholesale gasoline lost $0.24 to $3.08 per gallon, and the Bloomberg gold spot price fell $43.32 to $1,472.90 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies— was 1.4% higher at 74.14.

The nation’s retailers reported April same-store sales results—sales at stores open at least a year—headlined by Target Corp. (TGT $50), which announced a 13.1% increase year-over-year (y/y), compared to the 13.2% gain that analysts surveyed by Reuters had anticipated. TGT said April sales were “somewhat below” its expectations, as customers continued to be “very cautious” leading up to Easter, which came later this year to help results in the sector. TGT is traded higher.

Costco Wholesale Corp. (COST $80) posted a 12% y/y jump in April same-store sales, including inflation in gasoline prices and strengthening foreign currencies, above the 8.9% increase that was anticipated. Excluding the impact of fuel inflation and currency fluctuations, sales were 7% higher. COST finished lower.

Department store chain, Macy’s Inc. (M $26), achieved 10.8% y/y growth in same-store sales for April, versus the 8.1% increase that analysts had anticipated, while J.C. Penney Co. Inc. (JCP $38) posted a 6.4% y/y increase in sales, missing the gain of 8.5% that analysts projected and Kohl’s Corp. (KSS $53) announced y/y growth of 10.2%, versus the 15.1% that the Street expected. Meanwhile, inside the mall,  Gap Inc. (GPS $23) reported an 8% y/y increase in sales, compared to the 0.8% decline that was expected, but the company issued a 1Q profit warning and announced that a company executive is leaving, effective immediately. Macy’s traded nicely higher, while KSS, GPS, and JCP were all lower.

In earnings news, General Motors Co. (GM $33) reported 1Q EPS ex-items of $0.95, exceeding the $0.91 Street forecast, with revenues increasing by $4.7 billion quarter-over-quarter (q/q) to $36.2 billion, versus the $35.7 billion that analysts were looking for. However, shares finished lower, suggesting traders had expected more robust results, while analysts are concerned about higher costs the company may face for the remainder of the year that could impact profits.

DIRECTV (DTV $49) announced 1Q earnings of $0.85 per share, versus the $0.71 that was estimated by analysts, as revenues grew 13% y/y to $6.3 billion, compared to the $6.2 billion that the Street expected. Shares were modestly lower.

Whole Foods Market Inc. (WFMI $60) posted fiscal 2Q profits of $0.51 per share, above the $0.46 analyst forecast, as revenues increased 12% y/y to $2.4 billion, mostly inline with expectations, and same-store sales for the quarter rose 7.8% y/y despite a negative impact from a later Easter holiday. WFMI raised its full-year EPS outlook. Shares traded higher, but off the best levels of the day.

JDS Uniphase Corp . (JDSU $21) was sharply higher after the communications test and measurement solution provider reported fiscal 3Q EPS of $0.22, two cents above analysts’ forecasts, as revenues grew 37% y/y to $455 million, compared to the $448 million that the Street estimated.

Jobless claims jump again, productivity and unit labor costs rise

Weekly initial jobless claims rose by 43,000 to 474,000, versus last week's figure which was upwardly revised by 2,000 to 431,000, compared to the decline to 410,000 that economists surveyed by Bloomberg had expected. The four-week moving average, considered a smoother look at the trend in claims, increased by 22,250 to 431,250, and continuing claims rose by 74,000 to 3,733,000, above the forecast of economists, which called for continuing claims to come in at 3,649,000. However, the sharp rise was attributed to spring break holiday layoffs in New York State, a new emergency benefits program in Oregon, and shutdowns in the auto sector as result of the tragedy in Japan.

Meanwhile, the preliminary reading on  1Q nonfarm productivity showed a 1.6% increase on an annual basis, compared to the 1.1% gain that economists expected, after 4Q’s increase of 2.6%. Unit labor costs were 1.0% higher, versus a gain of 0.8% that was estimated, after falling by a downwardly revised 1.0% in 4Q.

Treasuries moved higher on the employment and productivity data, as the yield on the 2-year note fell 3 bps to 0.57%, the yield on the 10-year note was 6 bps lower at 3.16%, and the 30-year bond yield declined 5 bps to 4.27%.

Europe central banks report rate decisions 

In economic news across the pond, the Bank of England (BoE) and European Central Bank (ECB) both decided to leave their benchmark interest rates unchanged at 0.50% and 1.25%, respectively, as expected, but traders paid close attention to the customary press conference that followed the ECB’s announcement, led by President Jean-Claude Trichet. The focus of the press conference was on whether the ECB would indicate if further rate hikes—the central bank increased its rate at its meeting in April—are on the near horizon to try to fulfill its lone mandate of price stability. However, the euro fell sharply after Trichet sounded less-hawkish than some expected in his opening remarks, saying the ECB will monitor upside inflation risks “very closely,” refraining from using his “strong vigilance,” phrase that traders look for in determining if a rate hike is imminent in the next meeting, suggesting further hikes could come after June, later than some expected. Meanwhile, the BoE also left its bond-purchase program at 200 billion pounds, as policy makers still appear to be split over the impact of a slowdown in growth and an increase in inflation that is double the central bank’s 2.0% target.

Outside of central bank action, sentiment was stymied by some disappointing economic reports, as the UK Services PMI Index decelerated by a larger amount than economists expected, while factory orders in Germany—Europe’s largest economy—unexpectedly fell by 4.0% month-over-month (m/m) in March, versus the 0.4% increase that was anticipated.

In Asia/Pacific economic news, Australia’s retail sales unexpectedly declined in March, while a separate report showed building approvals rose much more than economists expected. Meanwhile, New Zealand reported a larger-than-forecasted increase in 1Q employment and a coinciding decline in its unemployment rate.

Back in the Americas, Canadian building permits increased 17.2% m/m in March, to a level not seen since June 2007. Meanwhile, a separate report showed the Ivey Purchasing Managers’ Index dropped to 57.8, its lowest level since January.

Hopes for tomorrow’s labor report

After disappointing news on the jobs front this week, as the ADP employment report and initial jobless claims both came in worse than forecast and the employment component of both ISM indexes fell, all eyes will be on tomorrow’s release of nonfarm payrolls, expected to grow 185,000 in April, after increasing 216,000 in March. The unemployment rate is estimated to remain flat at 8.8% after declining four-straight months.

While job growth thus far has been slow, and while the Fed upgraded its forecast for the job market in conjunction with its April 27 meeting, the rate is still well off the level considered to be consistent with a “natural” rate of unemployment. Additionally, nonexistent wage growth contributes to the reason the Fed doesn’t believe a near-term spike in inflation is likely, and the Fed has remained on hold. 

The other release on the US economic calendar is consumer credit, expected to increase to $5.0 billion in March, after rising $7.6 billion in February.

International releases scheduled for tomorrow include the French trade balance, UK PPI, German industrial production, and Canada’s employment report.