Evening Market Update

Retail Sales and Jobs Data Raise Sails

Investor sentiment and stocks took a step higher today, after June same-store sales from retailers and readings on the job market from ADP and initial jobless claims positively surprised. Treasuries fell on the data and the gains in the equity market, while the dollar took cues from swings in sentiment regarding the prospect of future rate hikes from the European Central Bank. In other equity news, Visa raised guidance and NYSE Euronext shareholders approved the merger with Deutsche Boerse AG.

The Dow Jones Industrial Average gained 93 points (0.7%) to 12,719, the S&P 500 Index rose 14 points (1.1%) to 1,353, while the Nasdaq Composite advanced 39 points (1.4%) to 2,873. In moderate volume, 843 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil rose $2.02 to $98.67 per barrel, wholesale gasoline gained $0.13 to $3.13 per gallon, and the Bloomberg gold spot price advanced $1.72 to $1,530.70 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.1% higher at 74.93

As a group, the nation’s retailers reported better-than-expected June same-store sales results—sales at stores open at least a year—headlined by Target Corp. (TGT $51), which announced a 4.5% increase year-over-year (y/y), compared to the 3.5% gain that analysts surveyed by Reuters had anticipated. TGT said June sales were “at the high end” of its expectations and added that it expects July same-store sales to rise in the low- to mid-single digits. TGT traded higher.

Meanwhile, Costco Wholesale Corp. (COST $82) posted 14.0% y/y growth in June same-store sales, including inflation in gasoline prices and strengthening foreign currencies, above the 12.7% increase that was anticipated. Excluding the impact of fuel inflation and currency fluctuations, sales were 8.0% higher. COST fell slightly.

Department store chain Macy’s Inc. (M $30) achieved 6.7% y/y growth in same-store sales for June, versus the 5.1% increase that analysts had anticipated, while J.C. Penny Co. Inc. (JCP $34) posted a 2% y/y increase in sales, missing the gain of 2.3% that analysts projected and Kohl’s Corp. (KSS $56) announced y/y growth of 7.5%, versus the 2.9% that the Street expected. Meanwhile, inside the mall, Gap Inc. (GPS $19) reported a 1% y/y increase in sales, compared to the 2.3% decline that was expected. Shares of M, KSS and GPS were higher, while JCP was lower.

Outside of the sales reports, Visa Inc. (V $90) said it expects revenue to grow by 11-15% this year, in its first guidance since the announcement of new rules restricting debit-card swipe fees at 21 cents, which was higher than initially proposed. Visa CEO Joseph Saunders said the new limit allows card issuers to “at least partially defray the cost of running a secure, reliable and efficient debit card program.” Shares of V rose.

Finally, NYSE Euronext (NYX $35) shareholders approved a plan to merge with German exchange operator Deutsche Boerse AG (DBOEF $78). The merger will face another hurdle next week, when DBOEF shares are due to be tendered in favor of the deal by July 13th, with only 11% of the outstanding shares having already been turned in. Shares of both companies traded to the upside.

ADP private sector payrolls jump, initial jobless claims decline

The ADP Employment Change Report showed private sector payrolls rose by 157,000 jobs in June, versus the forecast of economists surveyed by Bloomberg, which called for a 70,000 increase, and May’s 38,000 job gain was revised to a rise of 36,000 jobs. Services provided the biggest share of the gain, rising 130,000 in June, after increasing by 36,000 in May. The release, which does not include government hiring and firing, comes ahead of Friday’s broader nonfarm payrolls report, where economists expect an increase of 100,000 jobs in June, after posting a 54,000 increase in May. Excluding government hiring, June private sector payrolls are expected to increase 125,000, after expanding by 83,000 in May.

Weekly initial jobless claims fell by 14,000 to 418,000, versus last week's figure which was upwardly revised to 432,000, and compared to the 420,000 level that economists surveyed by Bloomberg had expected. Also, the four-week moving average, considered a smoother look at the trend in claims, fell by 3,000 to 424,000, while continuing claims dropped by 43,000 to 3,681,000, below the forecast of economists, which called for continuing claims to come in at 3,700,000.

Treasuries were lower on the employment data and strength in equities, as the yield on the 2-year note was up 5 bps at 0.47%, the yield on the 10-year note rose 4 bps to 3.15%, while the 30-year bond was 1 bp higher at 4.38%.

European central banks meet, Taiwan June exports disappoint

The focus overseas was on key interest rate decisions from the European Central Bank (ECB) and the Bank of England (BoE).The BoE kept its key interest rate at a record low of 0.5%, and kept in place its 200 billion pound asset purchase plan, as economists expected. Meanwhile, the ECB raised its key interest rate by 25 basis points to 1.50%, which was also widely expected by economists, as it shrugs off concerns of slow growth and debt worries in the eurozone periphery. In the press conference following the announcement, ECB President Jean-Claude Trichet changed from the “strong vigilance” language that he used at the last meeting that paved the course for today’s rate hike, to “monitor very closely” with regard to upside risks to price stability, prompting observers to conclude that a further rate increase in August is unlikely, inline with expectations. However, Trichet reiterated prior comments that peripheral debt problems are the responsibility of national governments and that the central bank takes broad eurozone needs into consideration and that monetary policy remains accommodative. Trichet added that monetary decisions contribute to keeping inflation expectations “anchored,” and that “such anchoring is a prerequisite for monetary policy to contribute to economic growth in the euro area.” Additionally, the ECB loosened minimum credit-rating rules for Portuguese bonds, allowing banks to continue to post the bonds as collateral when borrowing from the ECB.

In economic news in Europe, industrial production in the UK increased slightly less than expectations, while manufacturing production exceeded the forecast of economists. Meanwhile, industrial production in Germany--Europe’s largest economy--moved back into positive territory after declining last month, and France’s trade balance expanded slightly in May.

In the Asia/Pacific region, one of the first global June readings on trade was released from Taiwan, which showed an unexpected y/y deceleration in exports from the pace in May, as trade to the broader China region fell 12% m/m in June and exports to the US declined 4% m/m. Taiwan’s Ministry of Finance said the slowdown was mainly due to a decline in shipments of electronics. Elsewhere, Australian employment rebounded in June, as 23,400 jobs were added, which exceeded the forecast of economists, while the unemployment rate remained steady at 4.9%, and Japan’s machine orders increased 3.0%, inline with what economists were expecting.

Expectations growing for tomorrow’s labor report

In stark contrast to the pessimism entering last month’s labor report, estimates for job gains have risen for June’s figure, after both the ADP employment report and initial jobless claims beat expectations, and the employment component within both the manufacturing and service ISM indexes rose. Tomorrow’s release of nonfarm payrolls is expected to show growth of 105,000 in June according to the Bloomberg survey of economists, up from the 89,000 forecast at the end of last week, and after increasing a mere 54,000 in May. Excluding government hiring, private sector payrolls are expected to increase 132,000, up from 83,000 in May. The Bloomberg survey shows no change to the consensus forecast of the unemployment rate remaining at 9.1% after rising in May from April’s 8.9% rate.

Job growth around the 100,000 level remains too slow to make a dent in the unemployment rate, but for stocks, the trend and sentiment can be more important than the level. Sentiment works in a contrarian way – when overly optimistic, it is difficult for stocks to continue to rise, while extreme pessimism can provide a base from which stocks gain ground. 

The other reports on the US economic calendar tomorrow are wholesale inventories, expected to rise 0.6% in May after gaining 0.8% in April, and consumer credit, forecast to grow $4.0 billion in May following a $6.3 billion increase in April.

International releases scheduled for tomorrow include the German trade balance for May, UK PPI and the Canadian employment report, and the central bank of Mexico meets, where no change in rates is expected.