Morning Market Update

Favorable Employment Read Puts the Bulls to Work

The US equity markets are higher in early action after receiving a boost from a larger-than-forecasted drop in weekly initial jobless claims. The equity markets extended gains that were in place prior to the jobs data amid the backdrop of expectations that the Federal Reserve would remain accommodative with monetary policy as the minutes from the most recent Fed meeting showed policymakers are mixed on the proper plan to begin to tighten policy. Treasuries are lower following the employment report, ahead of reads on housing sales, regional manufacturing, and leading indicators. Meanwhile, in earnings news, Limited Brands Inc and PetSmart Inc both posted profits that exceeded analysts’ forecasts, while Advance Auto Parts Inc missed the Street’s bottomline expectations. Overseas, Asia was mixed as commodity issues rose, while Japanese stocks found some pressure following the second-straight quarterly contraction in the nation’s GDP, while Europe is gaining ground on strength in commodity stocks.

As of 8:49 a.m. ET, the June S&P 500 Index Globex future is 4 points above fair value, the Nasdaq 100 Index is 7 points above fair value, and the DJIA is 36 points above fair value. WTI crude oil is $0.05 lower at $100.51 per barrel, and the Bloomberg gold spot price is down $7.84 at $1,489.14 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is unchanged at 75.42.

Limited Brands Inc. (LTD $42) reported adjusted 1Q earnings of $0.40 per share, one penny above the consensus estimate of analysts surveyed by Reuters, with revenues increasing 15% year-over-year (y/y) to $2.2 billion, roughly inline with the Street’s forecast. The retailer said 1Q same-store sales—sales at stores open at least a year—jumped 15% y/y. The ranges of LTD’s 2Q and full-year EPS had midpoints that were below analysts’ expectations.

Advance Auto Parts Inc. (AAP $71) announced 1Q EPS of $1.35, three cents below the Street’s forecast, with revenues increasing 4% y/y to $1.9 billion, mostly matching analysts’ expectations, with same-store sales rising 1.4% y/y. The auto parts retailer said 1Q was “challenging” as improved merchandising, pricing, and parts availability were partially offset by increased supply chain costs. The company reaffirmed it full-year EPS outlook.

PetSmart Inc. (PETM $42) achieved 1Q profits of $0.61 per share, above the $0.55 that the Street had anticipated, as revenues rose 7% y/y to $1.5 billion, inline with analysts’ forecasts, while same-store sales increased 5% y/y. The pet retailer said it benefitted from transaction growth of 2.7% y/y and a 9% increase in services sales. PETM raised its full-year EPS outlook.

Jobless claims fall, while a flood of data due out later this morning

Weekly initial jobless claims dropped by 29,000 to 409,000, versus last week's figure which was upwardly revised by 4,000 to 438,000, and compared the decline to 420,000 that economists surveyed by Bloomberg had expected. However, the four-week moving average, considered a smoother look at the trend in claims, increased by 1,250 to 439,000, while continuing claims dropped by 81,000 to 3,711,000, below the forecast of economists, which called for continuing claims to come in at 3,728,000.

Treasuries are moved modestly lower following the employment data, with the yield on the 2-year note up 2 bps to 0.57%, while the yields on the 10-year note and the 30-year bond are gaining 4 bps to 3.22% and 4.34%, respectively.

Later this morning, the economic calendar will bring a plethora of data, with the releases of existing home sales, expected to increase 2.0% month-over-month (m/m) to an annual rate of 5.2 million units in April, as well as the Index of Leading Economic Indicators, forecasted to rise 0.1% in April. Finally, we will get a look at regional manufacturing activity, with the release of the Philly Fed Manufacturing Index, projected to improve from 18.5 in April to 20.0 in May.

Europe nicely higher on strength in commodity stocks

Stocks in Europe are solidly higher in afternoon action, led by commodity-related issues following the steep gains in the materials and energy prices yesterday, along with a successful IPO of commodity trading firm Glencore International Plc, which sold $10 billion in stock on its debut, per Bloomberg. Meanwhile, the economic front is helping sentiment, as a report showed UK retail sales rose more than economists’ forecasted for April, more than offsetting a separate report that showed the nation’s consumer confidence unexpectedly declined in April. However, shares of Pandora (PNDZY $12) are sharply lower after the jewelry maker announced that it has increased prices globally for the first time in its history, per Bloomberg, due to rising silver and gold costs. In other news, Dominique Strauss-Kahn resigned as the head of the International Monetary Fund (IMF) following his arrest over the weekend on charges of attempted rape. Strauss-Kahn was also considered to be the leading candidate for the presidency of France and he denied the charges against him.

The UK FTSE 100 Index is up 1.2%, France’s CAC-40 Index is gaining 1.5%, and Germany’s DAX Index is rising 1.4%.

Asia mixed as Japan’s economy contracts, while commodities rebound

The equity markets in Asia finished mixed as traders digested some diverging GDP data and yesterday’s rally in commodities helped support resource-related stocks. Japan’s Nikkei 225 Index declined 0.4% following the release of the nation’s 1Q GDP report, which showed the economy contracted by 0.9% quarter-over-quarter (q/q), compared to the 0.5% decline that economists expected as output was stalled by the March earthquake and tsunami. The 1Q drop in GDP followed a downwardly revised 0.8% contraction for 4Q, meeting the technical definition of a recession by posting two-consecutive quarters of GDP declines. Separate economic reports out of Japan showed March industrial production was revised to a larger drop than initially projected, and department store sales for April declined. Adding to the pressure on Japanese stocks, shares of Tokyo Electric Power Co. (TKECY $5) fell solidly after a government spokesperson said shareholders of the operator of the earthquake-damaged nuclear facility will be asked to help the company to compensate victims of the ongoing nuclear crisis, per Reuters. Moreover, Japanese power companies came under pressure as Prime Minister Kan requested discussions on possible deregulation of the nation’s power industry.

Meanwhile, there were other GDP reports released today, as Singapore’s 1Q GDP was revised lower to a 22.5% q/q rate of expansion, from a preliminary report of 23.5% growth, and compared to the downward revision to 22.0% that economists expected. The nation raised its 2011 growth outlook following the release and the FTSE Straits Times Index increased 1.0%. Also, Taiwan’s 1Q GDP was revised higher to a 6.55% y/y expansion, from 6.19%, and compared to the 6.20% that was anticipated, but Taiwan’s Taiex Index declined 0.6%. Rounding out the day’s action in Asia, Australia’s S&P/ASX 200 Index rose 1.3%, boosted by the rebound in commodities, South Korea’s Kospi Index fell 1.9% on weakness in autos and banks, while stocks in China were mixed, with the Hong Kong Hang Seng Index rising 0.7% and the Shanghai Composite Index declining 0.5%.