Evening Market Update

Small Drop Despite Anemic Jobs Report

Despite a dour report that showed many fewer jobs were created than expected, stocks managed to close off the lows of the day on Friday and ended the week with a slight gain, adding to the advance last week that was the best gain in over two years. Treasuries rose on the jobs data, while showing little reaction to a bigger gain in wholesale inventories and consumer credit. Eurozone debt continued in the news, with worries shifting to Italy. In light equity news. Dow member Caterpillar received approval from the Chinese government for its purchase of Bucyrus International, and a group of drugmakers announced positive results for a new diabetes drug.

Friday, the Dow Jones Industrial Average lost 62 points (0.5%) to 12,657, the S&P 500 Index fell 9 points (0.7%) to 1,344, while the Nasdaq Composite declined 13 points (0.5%) to 2,860. In light volume, 771 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil fell $2.47 to $96.20 per barrel, wholesale gasoline lost $0.04 to $3.09 per gallon, and the Bloomberg gold spot price advanced $10.92 to $1,543.28 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was 0.3% higher at 75.16. For the week, including dividends, the DJIA gained 0.7% and the S&P 500 Index added 0.4%, while the Nasdaq Composite increased 1.6%.

Dow member  Caterpillar Inc. (CAT $110) received formal approval from the Ministry of Commerce of the People's Republic of China to complete its acquisition of Bucyrus International, Inc. (BUCY $92). The approval is the last major regulatory requirement needed to complete the nearly $8.8 billion deal, which just recently received clearance from the US Department of Justice. Shares of CAT were lower, while BUCY rose.

Drug makers  Amylin Pharmaceuticals Inc. (AMLN $14), Alkermes Inc. (ALKS $20), and Eli Lilly & Co. (LLY $38) announced that tests conducted on the diabetes drug Bydureon were positive, as the treatment didn’t slow patients' heart rate. The U.S. Food and Drug Administration (FDA) requested the study back in October, substantially delaying a widely expected approval. The companies plan to submit the results to the FDA this quarter, while European regulators approved the treatment last month. Shares of AMLN and ALKS were higher, while LLY traded lower.

June job growth disappoints, wholesale inventories rise, consumer credit gains

Nonfarm payrolls rose by 18,000 jobs in June, compared to the consensus estimate of economists surveyed by Bloomberg, which forecasted a 105,000 increase. Additionally, May was revised downward to a gain of 25,000 jobs, and the combined revision to May and April was 44,000 lower than initially reported. Excluding government hiring and firing, private sector payrolls increased by 57,000 in June, versus the forecast of a gain of 132,000 and after expanding by a downwardly revised 73,000-from an initially reported 83,000 gain-in May. The unemployment rate increased to 9.2%, while economists were looking for an unchanged rate of 9.1%. Lastly, average hourly earnings were unchanged month-over-month (m/m), versus the Street's forecast of a 0.2% increase, and average weekly hours came in slightly lower at 34.3, versus expectations of an unchanged 34.4 reading.

The report was decidedly negative, as employment has been virtually flat for the past two months, and June's gain was the weakest since September 2010. Temporary jobs, viewed as a leading indicator because temp jobs can lead to full-time employment in the future, fell 12,000, and the unemployment rate rose despite a 272,000 decrease in the labor force as people stopped looking for work. The U-6 rate, which measures unemployed including those who can work but aren't actively looking as well as those unemployed on a part-time basis but that would like full-time work, disappointingly jumped to 16.2% from 15.8% and disrupted the trend of being somewhat stable in 2011.

Meanwhile, wholesale inventories rose 1.8% m/m in May, compared to the 0.7% increase that was forecasted by economists, while April's 0.8% gain was revised to a 1.1% increase. Durable goods inventories increased 1.8% m/m, while inventories of nondurable goods were up 1.7%. Meanwhile, sales fell 0.2%, with nondurable goods falling 0.1% m/m, accompanied by a 0.7% decrease in durable goods sales. The inventory-to-sales ratio-the amount of time it would take to deplete inventories at the current sales pace-increased slightly to 1.16 in May from April's 1.15 rate.

Consumer credit was released in the final hour of trading, showing that consumer borrowing rose by $5.08 billion during May, more than the $4.0 billion expected by economists surveyed by Bloomberg, and gaining for the eighth-consecutive month. April's figure was revised downward to a $5.67 billion increase from an initially-reported $6.25 billion gain. Revolving debt, which includes credit cards, gained $3.37 billion, the largest increase since June 2008, while non-revolving debt, which includes student loans and loans for cars and mobile homes, rose $1.71 billion.

Treasuries moved higher on the employment data, with the yield on the two-year note down 8 bps to 0.39%, the yield on the 10-year note 12 bps lower at 3.02%, and the 30-year bond yield declining 8 bps to 4.29%.

Eurozone debt worries spread to Italy, while Germany reports strong exports

Eurozone government debt remained in focus, with reports that the International Monetary Fund (IMF) executive board will approve the disbursement of over 3 billion euros for Greece today, in time to help the struggling country pay debts due this month. Meanwhile, European regulators received heavy criticism over the banking stress tests that are due to be announced next Friday. Many banks are upset that they were forced to rerun the stress scenarios with tougher standards than originally suggested when preparations for the tests began back in March, while other banks are upset that the tests have been standardized too much in the name of consistency. The changes are leading some to predict that nearly a dozen banks may fail the tests, mainly in Spain, Germany and Greece. Elsewhere, the threat of contagion to Italy was also weighed, as yields of Italian government debt have been moving higher this week ahead of a large amount of debt rolling over in coming months, and on comments from Prime Minister Berlusconi about Economy Minister Tremonti and changes to an austerity program, which raised doubts about the commitment to austerity.

In economic news overseas, the highlight was stronger-than-expected exports out of Germany, while industrial production in Italy came in lower than expected. Elsewhere, producer prices in the UK increased in June at the slowest pace since last September, matching the expectation of economists. The report helped justify yesterday’s decision by the Bank of England (BoE) to leave its target benchmark interest rate unchanged at 0.5%, even as current inflation rates are more than double its 2% target level. Asian economic news was relatively quiet, with the main report coming from Japan, where its current account surplus narrowed less than expected in May.

Strong retail sales, weak US jobs and debt worries overseas

Markets finished with a small gain in a light equity news week, focusing on strong June same-store sales results by retailers, weak jobs in the US and continued worries about government debt overseas. Strong same-store sales in a month that typically has little demand and is characterized by discounting amid a change in seasons was a positive sign that consumers may be more resilient than thought, despite gains in gasoline prices this year. However, despite signs of job growth in Thursday's ADP report, and a bigger decline than expected in jobless claims, Friday’s poor labor report renewed doubts about the ongoing strength of the recovery.

Overseas, eurozone debt worries continued to make headlines, expanding beyond Greece this week. Portugal's sovereign credit rating was cut four notches to junk territory by Moody’s and concerns about Italy's high debt load damaged sentiment as did concerns about next week's eurozone bank stress test results. Elsewhere, the ECB raised rates as expected, and loosened the minimum credit rating rules for Portuguese bonds, allowing banks to continue to post the bonds as collateral when borrowing from the ECB. Meanwhile, Moody's also raised concerns about Chinese bank debt and the nation raised rates for the third time this year.

Will micro news from companies outweigh macroeconomic news next week?

A week full of economic data kicks into gear midday Tuesday with the release of the minutes from the June Federal Open Market Committee (FOMC) meeting. The Fed downgraded its assessment of the economy at the last meeting, citing some temporary factors, but in the press conference following the meeting, Fed Chair Bernanke said some of the headwinds such as weakness in the financial sector and housing market "may be stronger and more persistent than we thought." The meeting was the last before the end of QE2 and Bernanke quelled ideas about a potential QE3 by saying that differences from last fall included improvement in the job market and the mitigated risk of deflation. Traders will be keying in on commentary about how much of the economic slowdown is due to temporary factors in the report and during Bernanke's semi-annual Congressional testimony, which begins on Wednesday.

Meanwhile Thursday's advance retail sales is forecasted to be unchanged month-over-month (m/m) in June, after falling 0.2% in May, while sales ex-autos and ex-autos and gas are estimated to grow 0.1% and 0.4%, respectively. Due to the impact on consumer spending and corporate profits, inflation readings will also be in focus, starting with Thursday’s Producer Price Index (PPI), expected to show prices at the wholesale level were down 0.2% in June after gaining 0.2% in May, while the core rate, which excludes food and energy, is anticipated to remain at a 0.2% rate. The release precedes Friday's Consumer Price Index (CPI) report, forecasted to show a 0.1% m/m decrease after rising 0.2% in May, while ex-food and energy it is expected to rise 0.2%. Friday also brings the industrial production report, expected to advance 0.3% m/m in June after gaining 0.1% in May, while capacity utilization is forecasted to increase to 77.0% from 76.7%.

While macroeconomic data has been mixed, markets will get a chance to hear from companies as earnings season unofficially kicks off after the close of trading on Monday with Alcoa Inc's (AA $16) report. Other releases on the US economic calendar include MBA Mortgage Applications, import prices, the Empire Manufacturing Index, initial jobless claims, business inventories, and the preliminary University of Michigan Consumer Sentiment Index reading for July. Other reports in the Americas include Canada's housing starts, and Mexico’s industrial and vehicle production.

Other international releases include euro-zone industrial production and CPI, UK housing prices, CPI, and retail price index, Japan's machine tool orders and industrial production, and Australia’s business and consumer confidence. China will release 2Q GDP, PPI, CPI, retail sales, industrial production and fixed asset investment, which includes housing and infrastructure spending. The central banks of Japan and South Korea meet and are expected to keep rates unchanged.