Evening Market Update

Weak Job Growth Sustains Negative Stock Momentum

Stocks ended a fifth-straight week in negative fashion, as traders digested disappointing jobs growth and continued to weigh the implications of slowing economic growth on company profits. Treasuries were modestly higher on the slow pace of hiring, but were off the best levels of the day after a stronger-than-expected increase in a measure of activity in the service sector. Meanwhile, confirmation of funds available for Greece buoyed the euro to the detriment of the dollar. In equity news, Newell Rubbermaid Inc lowered its outlook, Dow member Wal-Mart Stores Inc announced a new $15 billion share buyback and VeriFone Systems beat the Street.

The Dow Jones Industrial Average dropped 97 points (0.8%) to 12,151, the S&P 500 Index lost 13 points (1.0%) to 1,300, and the Nasdaq Composite declined 41 points (1.5%) to 2,733. In moderate volume, 972 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.18 to $100.46 per barrel, while wholesale gasoline rose $0.02 to $2.99 per gallon, and the Bloomberg gold spot price gained $7.85 to $1,541.50 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was 0.8% lower at 73.75. For the week, including dividends, the DJIA, the S&P 500 Index and the Nasdaq Composite all declined 2.3%.

Newell Rubbermaid Inc. (NWL $15) was down over 10% after the consumer and commercial product maker said, "Persistent softness in the US economy and increased inflationary pressure have caused us to revise our outlook for the balance of the year." NWL said it is adopting a more conservative 2011 sales and earnings outlook and it believes that 2Q EPS could be as much as "15% lower" than analysts' current expectations.

Dow member Wal-Mart Stores Inc. (WMT $54) reported that its Board of Directors has approved a new $15 billion share repurchase plan, replacing a previous $15 billion plan, which had $2 billion remaining. The world's largest retailer said this announcement and its annual dividend indicates its commitment to returning value to shareholders. Shares were slightly higher.

VeriFone Systems Inc. (PAY $46) reported fiscal 2Q EPS ex-items of $0.46, three cents above that consensus estimate of analysts surveyed by Reuters, with revenues increasing 21% year-over-year (y/y) to $292 million, topping the $285 million that the Street had forecasted. The electronic payment solutions company said margins continued to expand, highlighting the strength of its services-driven strategy. PAY issued 3Q guidance that was above analysts' estimates and it raised its full-year outlook. Shares were lower despite the report.

May job growth disappoints, but read on service sector activity exceeds expectations

Nonfarm payrolls rose by 54,000 jobs in May, compared to the 165,000 increase expected by a Bloomberg survey of economists, and downward revisions were made to April to 232,000 from an initial 244,000 gain, and March was adjusted to an increase of 194,000 from the last reported 221,000 rise. Excluding government hiring and firing, private sector payrolls increased by 83,000 in May, versus the forecast of a gain of 170,000, after expanding by a downwardly revised 251,000-from an initially reported 268,000 gain-in April. The unemployment rate unexpectedly moved higher to 9.1% from 9.0%, compared to expectations for the rate to dip to 8.9%. However, average hourly earnings were 0.3% higher month-over-month (m/m), versus the Street's forecast of a 0.2% increase, while average weekly hours came in unchanged at 34.4, following a 0.1 upward revision to April’s figure, versus expectations of a 34.3 reading.

Despite downward revisions to estimates over the past two days, the report was even lower than expected. Additionally, in contrast to today's improvement in the ISM Non-Manufacturing Index, several services sectors were among those reporting declines in payrolls, including leisure and hospitality, retail, temporary services, and information-related industries. Additionally, factory jobs fell 5,000 in May, the first decline in seven months, with motor vehicles and parts payrolls falling 3,400, but aided by declines in food manufacturing, paper and printing. Similar to the improvement in consumers' assessment of the job market in sentiment surveys, fewer jobseekers listed themselves as "discouraged" about job prospects and more people returned to the labor force during the month. The rise in the unemployment rate came as the labor force rose by 272,000, the biggest rise since last August.

Despite a decline in the ISM Manufacturing Index earlier this week, the  ISM Non-Manufacturing Index showed a better-than-expected increase to 54.6 from 52.8, while the forecast was for a reading of 54.0. A reading of 50 separates expansion from contraction. The increase came as new orders rose to 56.8 from 52.7, led by an increase in export orders, while import orders fell to 50.5 from 57.0. The employment component rose to 54.0 from 51.9 and prices paid declined to 69.6 from 70.1.

Treasuries were modestly higher as gains that followed the employment data were pared by the service sector report, with the yield on the 2-year note 3 bps lower to 0.43%, the 10-year note falling 4 bps to 2.99%, and the 30-year bond yield declining 2 bps to 4.22%.

Greece completes austerity review

News overseas was highlighted by European Union (EU), International Monetary Fund (IMF), and European Central Bank (ECB) officials indicating they had completed the austerity plan review with Greece, and that Greece promised to proceed with new measures to narrow the budget deficit over the next five years, plans to sell state-owned assets and "structural reforms to restore growth and competitiveness." Greece's Finance Ministry said it will present the plans to its Parliament in the coming days. The EU and IMF are expected to provide the next tranche of aid in early July, with discussions on new "financing modalities" to be forthcoming in the next few weeks. The head of the eurozone finance ministers, Jean-Claude Juncker said, "I expect the Eurogroup to agree to additional financing to be provided to Greece under strict conditionality", per Dow Jones Newswires. Juncker added that the conditions will include private-sector involvement on a voluntary basis. Finally, he said that under these conditions and on that basis, "Greece will be able to fully honor its obligations." The euro spiked on the news, and finished the European trading session solidly higher. Elsewhere, utility companies were under some pressure following a report by Bloomberg that the sector could see drops of about $5 billion in annual revenues as Germany moves to shut down nuclear power plants, citing calculations made by the Financial Times Deutschland.

In other economic news, the eurozone PMI Services Index was unexpectedly revised higher for May, led by an upward revision to the German component of the index, but sector activity readings out of Italy and the UK came in below expectations. In Asia, the Hong Kong Purchasing Managers Index decelerated, while separate readings on China’s service PMI showed a mixed message, with the government's reading falling, while the HSBC reading rose. In Latin American news, Brazil's GDP grew 1.3% quarter-over-quarter and 4.2% y/y, inline with estimates, while Mexico consumer confidence unexpectedly fell.

Bears use data to help show the bulls the door

The US equity markets finished out the holiday-shortened week with solid downward moves across the board as a plethora of disappointing economic data intensified the growing drumbeat of concerns about the sustainability of the global recovery. Reports on the housing front continued to evoke double-dip worries, with the S&P/Case-Shiller Home Price Index showing home prices hit a new post-recession low, while manufacturing activity continued to slow, with the ISM Manufacturing Index decelerating to the lowest level in the past 12 months and factory orders falling more than estimated. However, the biggest alarm to the bulls was the data on the employment front. Weekly initial jobless claims failed to come down as much as forecasted, and the ADP Employment Change Report showed private sector payrolls severely missed expectations, while the week culminated with Friday's labor report that fueled skepticism regarding the effectiveness of the Federal Reserve's stimulus efforts and amplified the growing fiscal problems in Washington.

Next week will be dominated by global central bank talk

The only major release on the US economic calendar next week is Wednesday's midday Federal Reserve Beige Book, wherein Fed staffers summarize anecdotal economic data from all twelve Federal Reserve districts in preparation for the next Federal Open Market Committee (FOMC) meeting scheduled for June 21-22. At the April meeting, the Fed downgraded its view on the economy, but noted that the slowdown and increase in inflation were expected to be transitory, or temporary.

Since the last FOMC meeting, a string of data indicates the US economy has slowed even further, possibly keeping the Fed on hold for a longer period, and there is little political will for new monetary or fiscal stimulus amid concerns about the efficacy of QE2 and the need to reduce fiscal spending. At the other end of the spectrum, the European Central Bank (ECB) started its tightening cycle by raising rates in April in order to keep inflation expectations contained, as inflation readings even at the core level continued to surprise to the upside earlier this year. As such, traders will be paying close attention to ECB President Trichet's comments at the press conference after next week's ECB meeting, to see if he mentions a "strong vigilance" stance towards inflation that most ECB watchers see as a precursor to an imminent increase in rates.

Other US releases include consumer credit, MBA Mortgage Applications, initial jobless claims, the trade balance, wholesale inventories, and the import price index. Other reports in the Americas include Canada's Ivey Purchasing Managers Index, building permits, housing starts, new home prices, and employment, Mexico’s consumer prices, and Brazil’s retail sales.

Releases in Europe include euro-zone investor confidence, PPI, retail sales, and 1Q GDP, German factory orders, trade balance and industrial production, as well as UK home prices, industrial and manufacturing production, and PPI. Asia/Pacific reports will include Japan's LEI, 1Q GDP, machine tool orders, Australia's consumer confidence and employment, and China's trade balance. In central bank action, no change to policy is expected at the European Central Bank, Bank of England and Reserve Bank of Australia meetings, but increases in rates are expected in both South Korea and Brazil, and traders will monitor the ECB press conference as mentioned earlier.