Morning Market Update

Weak Jobs Data Continues to Promote Economic Pessimism

The US equity markets have turned solidly lower in early action on the heels of a much smaller-than-forecasted increase in May nonfarm payrolls and an unexpected increase in the unemployment rate. Treasuries are higher in the wake of the disappointing jobs data as the report exacerbated growing economic recovery uncertainty, ahead of a read on US service sector activity for May. In equity news, AvalonBay Communities Inc increased its full-year profit outlook, and VeriFone Systems Inc reported better-than-anticipated earnings and revenues. Overseas, Asian stocks finished mostly lower in cautious trading ahead of the US labor report, which is pressuring European equities in afternoon action, ahead of an austerity report from Greece.

As of 8:50 a.m. ET, the June S&P 500 Index Globex future is 15 points below fair value, the Nasdaq 100 Index is 26 points below fair value, and the DJIA is 142 points below fair value. WTI crude oil is $1.77 lower at $98.63 per barrel, and the Bloomberg gold spot price is down $0.74 at $1,532.91 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is flat at 74.32.

AvalonBay Communities Inc. (AVB $129) announced that it increased its full-year profitability outlook to a level that exceeded analysts’ expectations, due to better-than-expected operating trends that emerged earlier this year. The real estate investment trust (REIT), which builds apartments, said job creation during 1Q was concentrated in the 20-34 years old age demographic that historically demonstrates a high propensity to rent, which it believes is resulting in higher demand for rental housing. Also, declining home prices and lingering uncertainty regarding the economic outlook are contributing to a reduction in demand in the for-sale housing market that, in turn, is benefiting rental housing.

VeriFone Systems Inc. (PAY $47) 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 that $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.

May job growth disappoints, read on service sector activity due out later this morning

Nonfarm payrolls rose by 54,000 jobs in May, compared to the consensus estimate of economists surveyed by Bloomberg, which forecasted a 165,000 increase, and the initial 244,000 gain seen in April was revised to a growth of 232,000 jobs. Additionally, 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, increasing from 9.0% to 9.1%, 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.

Treasuries moved higher following the employment data, with the yield on the two-year note down 4 bps to 0.42%, the yield on the 10-year note 8 bps lower at 2.95%, and the 30-year bond yield declining 4 bps to 4.21%.

Later this morning, the economic calendar will yield the release of the ISM Non-Manufacturing Index, anticipated to increase to 54.0 in May from 52.8 in April. A reading of 50 separates expansion from contraction.

Europe lower following US jobs report and ahead of austerity report out of Greece

The equity markets are lower in afternoon action, as traders digest the disappointing US jobs data, while waiting for Greece’s Prime Minister Papandreou to discuss the results of the review by European Union (EU) and International Monetary Fund (IMF) officials of the debt-laden nation’s austerity plan. The EU and IMF are trying to construct a second bailout for Greece in order to avoid a default of the peripheral eurozone nation and the austerity measures that Greece plans to implement are key for it to gain approval for the second wave of financial aid. Meanwhile, utility companies are under some pressure in the region following a report by the Financial Times that the sector could have lower revenues as Germany moves to shut down nuclear power plants.

In 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. However, respective service sector activity readings out of Italy and the UK came in below expectations.

The UK FTSE 100 Index is down 0.5%, France’s CAC-40 Index is 0.8% lower, and Germany’s DAX Index is declining 0.4%, while Greece’s Athex Composite Index is gaining 1.9%.

Asia mostly lower ahead of US jobs data

Stocks in Asia finished mostly to the downside amid some caution ahead today’s release of the US nonfarm payroll report, with Japan’s Nikkei 225 Index declining 0.7%, as continued political uncertainty after yesterday’s announcement that Prime Minister Kan will resign exacerbated the pressure on the equity markets. Elsewhere, the recent string of disappointing global economic data that has fostered concerns about the sustainability of the recovery continued to pressure commodity issues and Australia’s S&P/ASX 200 Index deceased 0.4%. However, gains down under were limited by a solid advance in shares of Foster’s Group Ltd. (FBRWY $5) amid reports that Molson Coors Brewing Co. (TAP $44) and Mexico’s Grupo Modelo SAB de CV (GPMCY $61) are considering a joint bid for the company. Foster’s said it had nothing to disclose in regard to the report, while Molson Coors and Grupo Modelo did not comment. Meanwhile, stocks in China were mixed, with the Shanghai Composite Index rising 0.8%, while the Hang Seng Index declined 1.3%, following a report that showed the Hong Kong Purchasing Managers Index decelerated. Finally, South Korea’s Kospi Index finished flat as strength in shipbuilders were offset by a solid downward move in shares of LG Electronics Inc in reaction to yesterday’s warning that its mobile-phone business won’t turn a profit in 2Q, per Bloomberg.