Morning Market Update

Modestly Higher After Yesterday’s Tumble

The US equity markets are slightly to the upside in early trading on the heels of yesterday’s data-induced sell-off, as traders are digesting a dip in weekly initial jobless claims and an upward revision to 1Q productivity. Treasuries are lower following the data, ahead of a report on factory orders. Meanwhile, the nation’s retailers are reporting May same-store sales results, which are mixed, as Target Corp missed expectations, while Costco Wholesale Corp topped that Street’s forecasts. Overseas, Asia finished broadly lower following the steep losses posted in the US, while European equities are under pressure again on persistent eurozone debt concerns, after Moody’s Investors Service downgraded the sovereign credit rating of Greece.

As of 8:49 a.m. ET, the June S&P 500 Index Globex future is 2 points above fair value, the Nasdaq 100 Index is 5 points above fair value, and the DJIA is 10 points above fair value. WTI crude oil is $0.08 higher at $100.37 per barrel, and the Bloomberg gold spot price is down $0.47 at $1,539.35 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.6% to 74.40.

The nation’s retailers are reporting May same-store sales results—sales at stores open at least a year—headlined by Target Corp. (TGT $49), which announced a 2.8% increase year-over-year (y/y), compared to the 3.5% gain that analysts surveyed by Reuters had anticipated. TGT said May sales were “near the low end” of its expectations.

Meanwhile, Costco Wholesale Corp. (COST $80) 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.

Elsewhere, Limited Brands Inc. (LTD $39) achieved a 6.0% y/y gain in May same-store sales, but below the 7.0% increase that the Street had anticipated, while Gap Inc. (GPS $19) reported a May sales decline of 4.0% y/y, compared to the 1.0% decrease that analysts had forecasted.

Jobless claims dip, productivity revised higher, factory orders on the morning horizon

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 1Q 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.

Treasuries are lower in morning action following the labor data, with the yield on the 2-year note up 2 bps to 0.45%, the yield on the 10-year note 4 bps higher at 2.98%, and the 30-year bond gaining 5 bps to 4.19%.

The yield on the 10-year note fell below 3.0% for the first time since December 2010 as May employment and manufacturing data added to the growing list of signals that the global economy is slowing, fostering a recent bout of risk aversion among traders. 

Later this morning, the economic calendar will bring the release of factory orders, forecasted to decline 1.0% month-over-month (m/m) in April, after increasing 3.0% m/m in March.

Pressure in Europe continues

The equity markets in Europe are lower in afternoon action, as materials and oil & gas issues are leading the way amid the increasing uneasiness regarding the health of the global recovery, exacerbated by yesterday’s disappointing manufacturing and employment data out the US and Europe. Meanwhile, euro-area debt concerns are also weighing on sentiment today, with Moody’s Investors Service downgrading debt-laden Greece’s sovereign credit rating further, while raising the risk of a default to 50%, per Bloomberg. Expectations have been growing that a second bailout for Greece could be on the horizon as policymakers discuss the situation, boosted by Tuesday’s report from the Wall Street Journal that Germany—a key eurozone nation that has expressed opposition to further assistance for Greece—softened its stance on providing further assistance. However, the euro is nicely higher in afternoon trading despite the festering debt concerns as European Central Bank (ECB) President Jean-Claude Trichet said eurozone 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, while shares of UK home improvement retailer Kingfisher Plc. (KGFHF $5) are solidly lower after the company posted retail profits that missed expectations and offered a cautious outlook.

The UK FTSE 100 Index is down 0.8%, France’s CAC-40 Index is 1.2% lower, and Germany’s DAX Index is declining 1.0%. Meanwhile, Greece’s Athex Composite Index is falling 1.4%.

Asia broadly lower following sell-off in US and Europe

Stocks in Asia finished solidly lower across the board on the heels of the steep declines registered in the US and Europe yesterday that came courtesy of disappointing manufacturing and employment data. Australia’s S&P/ASX 200 Index led the decline, falling 2.3%, as yesterday’s global sell-off induced a pullback in risk-taking and weakness in commodity prices, which more than offset a report that showed the nation’s retail sales rose by nearly three times the estimate of economists. A separate report showing Australia’s trade surplus unexpectedly narrowed did little calm sentiment in the region. Meanwhile, Japan’s Nikkei 225 Index dropped 1.7% as the global economic concerns were exacerbated by political uncertainty in the nation, as 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. Elsewhere, South Korea’s Kospi Index decreased 1.3%, while the equity markets in China moved solidly to the downside, with the Hong Kong Hang Seng Index falling 1.6% and the Shanghai Composite Index declining 1.4%.