Evening Market Update

Stocks Weigh Strong Jobs With Euro-zone Worries

Stocks ended a volatile week in the green on Friday, and while the day started off on a solid footing due to a positive US jobs release, midday reports of a meeting by European Finance Ministers and worries about Greece weighed on trading. While initial reports from a German newspaper that indicated Greece may exit the euro region were denied by Greece and Germany, the existence of the meeting amid talks that an extension of Greece’s bailout package was possible weighed on the euro and lifted the US dollar, and stocks reacted nervously to the situation. In other economic news, consumer credit grew more than expected, while Treasuries were mixed on the day’s events. On the earnings front, Dow member Kraft Foods Inc, along with Visa Inc, Priceline.com, and American International Group beat the Street.

The Dow Jones Industrial Average gained 55 points (0.4%) to 12,639, the S&P 500 Index rose 5 points (0.4%) to 1,340, and the Nasdaq Composite advanced 13 points (0.5%) to 2,828. In moderate volume, 1.0 billion shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil lost $2.62 to $97.18 per barrel, wholesale gasoline fell $0.01 to $3.09 per gallon, while the Bloomberg gold spot price gained $18.25 to $1,492.55 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was 0.9% higher at 74.76. For the week, including dividends, the DJIA lost 1.3%, the S&P 500 Index fell 1.7% and the Nasdaq Composite declined 1.6%.

Dow member  Kraft Foods Inc. (KFT $34) announced 1Q earnings ex-items of $0.52 per share, above the $0.47 consensus estimate of analysts surveyed by Reuters, with revenues increasing 11.1% year-over-year (y/y) to $12.6 billion, versus the $12.3 billion that the Street had forecasted. The food company said pricing was higher in each geographic region and it cut costs to offset commodities increases. However, KFT said, "raw material costs continue to escalate and the economic environment remains unsettled," and it expects to post full-year EPS of "at least" $2.20, as analysts were expecting the company to report $2.22 per share in earnings for the year. Shares were higher.

Visa Inc. (V $79) reported fiscal 2Q EPS of $1.23, three cents above the Street's expectations, with revenues growing 15% y/y to $2.2 billion, roughly inline with analysts' estimates, as payments volume growth and total processed transactions were 13% y/y. The credit card transaction processor also announced a new $1 billion share repurchase program, while reaffirming its full-year outlook. Shares moved to the upside.

Priceline.com Inc. (PCLN $519) posted 1Q profits ex-items of $2.66 per share, above the $2.46 that analysts expected, with revenues rising 38.5% y/y to $809 million, compared to the $779 million that the Street had forecasted. The travel website said gross travel bookings jumped 57.3% y/y, led by a surge in international bookings and a sharp increase in room nights booked, and it issued 2Q guidance that topped expectations. Shares were lower, possibly due to some profit taking as the company's stock has more than doubled over the last year.

American International Group Inc. (AIG $31) said its 1Q operating earnings were $1.30 per share, including $1.7 billion of pre-tax catastrophe losses related to the Japan earthquake and tsunami, the New Zealand earthquake, and Australian floods, offset by valuation gains on securities and its interest in Maiden Lane III assets. The Street was expecting the insurer to post a loss of $0.15 per share, but it was unclear if the aforementioned items were fully factored in by analysts. Shares rose.

April job growth exceeds expectations, consumer credit report due out later today

Nonfarm payrolls rose by 244,000 jobs month-over-month (m/m) in April, compared to the consensus estimate of economists surveyed by Bloomberg, which forecasted a 185,000 increase, and March's initial 216,000 gain was revised to a growth of 221,000 jobs. Excluding government hiring and firing, private sector payrolls increased by 268,000 in April, versus the forecast of a gain of 200,000, after expanding by a favorably revised 231,000-from an initially reported 230,000 gain-in March. The unemployment rate moved higher, rising from 8.8% to 9.0%, compared to expectations for the rate to remain unchanged. Average hourly earnings gained 0.1% versus the Street's forecast of a 0.2% increase, while average weekly hours remained at an unrevised 34.3, matching expectations. Average hourly earnings have gained 1.9% over the past 12 months.

The higher-than-expected job growth was a welcome respite from a week that brought disappointing reports ranging from initial jobless claims, the ADP report and employment components within the ISM reports. However, there were some less positive aspects of the report, including a slight decline in the number of temporary jobs, which can be a leading indicator of future full-time jobs, and the 57,100 increase in retail jobs may have been related to Easter sales and hiring by McDonald’s, skewing the data. Additionally, the household survey indicated a decline in employment during the month, and combined with little change in the size of the labor force, resulted in the increase in the unemployment rate.

Consumer credit was released in the final hour of trading, showing that consumer borrowing rose by $6.0 billion during March above the $5.0 billion expected by economists surveyed by Bloomberg. January's figure was revised slightly downward to a $7.55 billion increase from an initially-reported $7.62 billion gain. Revolving debt, which includes credit cards, increased by $1.9 billion, the second increase in four months, while non-revolving debt, which includes loans for cars and mobile homes, rose $4.1 billion. The increase in non-revolving debt was led by an unadjusted $6.2 gain in federal government lending for education according to Bloomberg.

Treasuries were mixed on the day's data as well as the rise in the dollar. The yield on the 2-year note was down 2 bps to 0.55%, while the yield on the 10-year note was flat at 3.15%, and the 30-year bond yield gained 3 bps to 4.29%.

Renewed euro-zone concerns arise

Markets continued to be influenced by yesterday's actions, where the euro declined and the US dollar rose in reaction to comments from European Central Bank (ECB) President Jean-Claude Trichet, where he dampened expectations of another rate hike in the near term. The euro added to yesterday's losses, exacerbated by a report that Greece was contemplating leaving the euro-zone. However, Greece denied the report and a German spokesperson said, "This isn’t on the table and hasn’t been on the table for the German government and isn't a topic at the European level," per Bloomberg. Meanwhile, the Wall Street Journal reported that a small group of euro-zone finance ministers were meeting in Luxembourg late Friday, which was described as a regular consultation by senior officials, despite reports that it was unscheduled. The WSJ said that the meeting was to discuss a possible maturity extension for Greece ahead of a week-long analysis of Greece’s financial situation in preparation for the next quarterly disbursement of bailout funds. Additional items on the agenda are Portugal’s bailout and succession plans for the ECB. The WSJ cited people familiar with the matter in the report.

Meanwhile, European economic releases were mixed, with industrial production in Germany-Europe's largest economy-increasing more than expected in March, while UK producer prices came in hotter than expected. Asia/Pacific economic news was highlighted by the Reserve Bank of Australia increasing its forecast for inflation and noting that a rate-hike may be needed "at some point." In news from the Americas, Canada reported a gain in jobs that was nearly three times the Street’s forecast and the unemployment rate fell more than expected.

Global economic uncertainties resurface to stymie stocks

With earnings season winding down, traders began to focus on what lies ahead for the global economy, and sentiment took a bearish tone this week, as attention was paid to signs of slowing global economic growth, the ongoing European debt crisis, and the fiscal elephant in the room on Capitol Hill. The equity markets finished lower, despite continued M&A announcements and Friday's rebound on the stronger-than-expected labor report, as employment data earlier in the week fostered some concerns about the nascent recovery in the labor market, while the ISM Non-Manufacturing Index showed service sector activity slowed much more than economists forecasted. However, the biggest news for the week came from across the pond, as the European Central Bank (ECB) surprised most by indicating that a highly-anticipated rate hike in June was most likely off the table. The euro fell sharply and the US dollar rebounded as ECB President Jean-Claude Trichet sounded a less-hawkish tone, refraining from using his "strong vigilance," phrase that traders look for regarding the ECB's lone mandate of fighting inflation in determining if a rate hike is imminent in the next meeting. The spike in the dollar led to a sharp sell-off in WTI crude oil prices, which fell over 9% in Thursday’s session to below $100 per barrel, leading a broad-based decline in commodities, which took a toll on the equity markets.

Consumer in focus next week

Major US economic releases next week will include Thursday's advance retail sales, forecasted to rise 0.6% month-over-month (m/m) in April, after gaining 0.4% in March, while sales ex-autos are also estimated to grow 0.6%, after increasing 0.8% the prior month. Same-store sales results-sales at stores open at least a year-reported by retailers were mixed, despite the positive effect of the Easter shift. The retail sales report includes spending at supermarkets and gas stations.

Inflation readings will also be reported, starting with Thursday's Producer Price Index (PPI), expected to show prices at the wholesale level rose 0.6% m/m in April, while the core rate, which excludes food and energy, is expected to increase 0.2%. The release precedes Friday's Consumer Price Index (CPI) report, forecasted to show a 0.4% m/m increase, while ex-food and energy it is expected to rise 0.2%.

Other releases on the US economic calendar include import prices, wholesale inventories, MBA Mortgage Applications, the trade balance, initial jobless claims, business inventories, and the preliminary University of Michigan Consumer Sentiment Index reading for May. Other reports in the Americas include Canada’s housing starts and home prices, Mexico’s consumer prices and industrial production, as well as Brazil's retail sales.

Other international releases include euro-zone industrial production and GDP, German trade balance, CPI, and GDP, UK housing prices and trade balance, French industrial production and employment, Japan’s trade balance and machine tool orders, and Australia’s trade balance, employment change, and business confidence. China will release its trade balance, PPI, CPI, retail sales, industrial production and fixed asset investment, which includes housing and infrastructure spending. The central banks of Norway and South Korea are expected to raise rates 25 bps each at their meetings next week.