Evening Market Update

Stocks Struggle for Direction Ahead of Jobs Report

US equities finished mixed in a choppy day of trading following yesterday’s selloff, as more weak domestic economic data and a soft reading in May retail same-store sales stymied investor sentiment. Weekly initial jobless claims declined by a smaller amount than economists expected, ahead of tomorrow’s critical nonfarm payrolls report, while factory orders fell more than forecasted in April. Treasuries were lower on the day, which also included an upward revision to 1Q nonfarm productivity and a warning from Moody’s of a possible US credit rating downgrade if a resolution to the debt ceiling is not reached quickly. In equity news outside of the sales reports, for-profit education firms welcomed a favorable “gainful employment” rule by the US Department of Education, Goldman Sachs received a subpoena relating to its activities during the financial crisis, and Orbitz Worldwide benefited from a ruling that ordered American Airlines to reinstate its fares on the company’s travel website. The markets did receive some support from news out of the euro-zone, as Reuters is reporting that EU officials have agreed to a new 3-year bailout program for Greece.

The Dow Jones Industrial Average fell 42 points (0.3%) to 12,249, the S&P 500 Index lost 2 points (0.1%) to 1,313, while the Nasdaq Composite advanced 4 points (0.2%) to 2,773. In moderate volume, 1.0 billion shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.39 to $100.68 per barrel, wholesale gasoline fell $0.02 to $2.97 per gallon, while the Bloomberg gold spot price declined $5.42 to $1,534.40 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.7% lower at 74.30.

The nation’s retailers reported May same-store sales results—sales at stores open at least a year—headlined by  Target Corp. (TGT $48), which announced a 2.8% increase year-over-year (y/y), compared to the 3.5% gain that analysts surveyed by Reuters had anticipated. Meanwhile, Costco Wholesale Corp. (COST $79) posted 13.0% y/y growth in May same-store sales, including inflation in gasoline prices and strengthening foreign currencies, above the 11.2% increase that was anticipated. Excluding the impact of fuel inflation and currency fluctuations, sales were 7.0% higher. Shares of both companies finished lower.

Elsewhere, J.C. Penney Co. Inc. (JCP $33) reported a 1.0% y/y decline in May same-store sales, compared to the 3.3% increase that was forecasted, Limited Brands Inc. (LTD $38) achieved a 6.0% y/y gain in sales, below the 7.0% increase that the Street had anticipated, and Gap Inc. (GPS $18) reported a May sales decline of 4.0% y/y, compared to the 1.0% decrease that analysts had forecasted. Shares of all three firms were solidly lower. However, Saks Inc. (SKS $11) moved higher after the luxury retailer posted a 20.2% y/y jump in May sales, trouncing the 6.5% gain that analysts had projected.

Outside the retail sector, for-profit education firms received a boost, after the US Department of Education released its final version of its “gainful employment” rule that is less severe than originally drafted last summer. The rule, which is aimed at ensuring graduates from career-training programs with large debt are prepared to find meaningful jobs, allows institutions more time than initially proposed to comply with guidelines to be eligible to receive federal financial student aid.  Corinthian Colleges Inc. (COCO $5) was up over 25%, ITT Educational Services Inc. (ESI $86) and Education Management Corp. (EDMC $25) surged over 20%, and Apollo Group Inc. (APOL $47) gained over 10%, to lead broad-based gains in the group

Elsewhere, Orbitz Worldwide Inc. (OWW $3) gained over 25% after a judge ordered American Airlines to put its full schedule of flights back on the company’s travel site after the aircarrier pulled its fares in late December. OWW said the reinstatement is a win for transparency, consumer choice and for all of our mutual customers. AMR Corp. (AMR $6)—the parent company of American Airlines—said, “We want to underscore that this is the exact opposite conclusion than that of the judge who heard the evidence,” adding that it will comply with the judge’s order, but it is evaluating its options, per Dow Jones Newswires. AMR finished modestly lower.

Finally, Goldman Sachs Group Inc. (GS $134) were under pressure after Bloomberg reported that the financial firm received a subpoena from the Manhattan District Attorney’s office requesting information related to its activities leading into the financial crisis, according to people familiar with the matter. Goldman Sachs and the Manhattan DA have declined to comment on the report.

Jobless claims dip, productivity revised higher, and factory orders decline

Weekly initial jobless claims declined by 6,000 to 422,000, versus last week's figure which was upwardly revised by 4,000 to 428,000, compared to the decline to 417,000 that economists surveyed by Bloomberg had expected. However, the four-week moving average, considered a smoother look at the trend in claims, fell by 14,000 to 425,500, while continuing claims dipped by 1,000 to 3,711,000, above the forecast of economists, which called for continuing claims to come in at 3,675,000.

Meanwhile, the final reading on nonfarm productivity  showed an upward revision to a 1.8% increase on an annual basis, from the initial reading of a 1.6% rise, and compared to the 1.7% gain that economists expected. In 4Q, productivity increased 2.6%. Unit labor costs were adjusted to a 0.7% increase, versus a gain of 1.0% that was originally reported, and compared to the 0.8% rise that was estimated.

In other economic news,  factory orders fell more than expected, declining 1.2% month-over-month (m/m) in April, compared to the decrease of 1.0% that economists had expected, but March’s initial 3.0% increase was revised to a 3.8% gain. April durable goods orders—reported last week—were left unrevised at a 3.6% decline.

Finally, WTI crude oil prices are solidly lower after falling in the wake of the US Department of Energy’s inventory report, which showed oil stockpiles unexpectedly rose, increasing 2.88 million barrels last week, compared to the drop of 1.6 million barrels that economists had anticipated.

Treasuries moved lower in response to the economic data, and after Moody’s Investors Service said that if there is no progress on increasing the debt ceiling in the coming weeks, it expects to place the U.S. government’s Aaa credit rating under review for a possible downgrade. Standard & Poor’s said in April that the U.S. risks losing its AAA credit rating unless the government agrees on a plan by 2013 to reduce budget deficits and the national debt. The yield on the 2-year note rose 3 bps to 0.46%, the yield on the 10-year note increased 9 bps to 3.03%, and the 30-year bond gained 11 bps to 4.25%.

Reports suggest agreement on new Greek bailout plan

In European economic news, Reuters is reporting that senior euro-zone officials have agreed in principle to a new three-year adjustment program for Greece that will supersede the 110 billion euro bailout agreed to in May of 2010, according to a source close to the negotiations. Exact figures have not been report, but the new plan, which would run until mid-2014, would reportedly include some participation from the private sector. The agreement comes one day after Moody’s Investors Service downgraded debt-laden Greece’s sovereign credit rating further into junk territory, while raising the risk of a default to 50%, per Bloomberg. However, the euro was nicely higher on the new bailout reports, and after European Central Bank (ECB) President Jean-Claude Trichet said euro-zone governments should consider setting up a finance ministry for the euro-area to help fight the debt-crisis. In other news across the pond, the UK PMI Construction Index improved more than expected in May

In Asia/Pacific, Australia’s retail sales rose by nearly three times the estimate of economists, while a separate report showed Australia’s trade surplus unexpectedly narrowed in April. Meanwhile, Japanese Prime Minister Naoto Kan announced that he would resign after the country contains its crisis stemming from the March massive earthquake and tsunami. Kan’s pledge to step down allowed him to avoid a parliamentary no-confidence vote, but did not alleviate the political uncertainty facing the nation.

Low expectations 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 the ISM Manufacturing Index fell, expectations and estimates have been declining for tomorrow’s release of nonfarm payrolls. The expectation is for payrolls to grow 165,000 in May according to the Bloomberg survey of economists, down from the 185,000 forecast earlier this week and after increasing 244,000 in April. Excluding government hiring, May private sector payrolls are expected to increase 178,000, down from the 209,000 expectation earlier this week, and after expanding by 268,000 in April. The Bloomberg survey shows no change to the consensus forecast of a decline in the unemployment rate to 8.9% from 9.0% as a result of this week’s data.

The other major report on the US economic calendar tomorrow is the ISM Non-Manufacturing Index, anticipated to increase to 54.0 from 52.8. A reading of 50 separates expansion from contraction. The forecast for this report has not been changed over the past week, despite the sharp decline in yesterday’s ISM Manufacturing reading.

International releases scheduled for tomorrow include the service PMI reports from the euro-zone, the UK, China and Hong Kong, and consumer confidence in Mexico.