Weekend Market Update

Down But Not Out...Payrolls Offer a Glimmer of Hope

The nonfarm payrolls report, while not devoid of negative indicators, did exceed economists' expectations, triggering a mixed response in equity markets today. While investors digested the payroll report and remained homed in on developments from the ongoing eurozone debt crisis, markets swung wildly from positive to negative, before finally landing much where they started. Domestically, news was generally upbeat, as consumer spending posted its largest increase in four years and 2Q earnings remained strong, with Procter & Gamble, Viacom and Priceline all beating expectations.

The Dow Jones Industrial Average gained 61 points (0.5%) to 11,445, the S&P 500 Index fell 1 point (4.8%) to 1,199, and the Nasdaq Composite shed 24 points (0.9%) to 2,532. In heavy volume, 2.3 billion shares were traded on the NYSE and 3.7 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.44 to $87.07 per barrel, wholesale gasoline gained $0.07 to $2.81 per gallon, and the Bloomberg gold spot price picked up $13.73 to $1,660.25 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was 1.1% lower at 74.49. For the week, including dividends, the DJIA lost 5.8%, the S&P 500 Index shed 7.2%, and the Nasdaq Composite was down 8.1%.

Dow component Procter & Gamble (PG $61) reported 4Q EPS of $0.84, beating the Street estimate of $0.82 per share on revenues of $20.86 billion, that also bested estimates. Organic sales - which exclude the impact of currency, acquisitions and divestitures - rose 5% year-over-year (y/y), with higher prices and volume both adding 3%, respectively. While the CEO said that they have not seen any dramatic changes in consumer behavior over the last few months, retailers made advance purchases trying to get ahead of price increases, which added 1% to organic growth. The company gave a forecast for next fiscal year organic growth of 3-6%, "generally inline with prior estimates," as pricing is expected to add 3-4% and currency to contribute 2-3%, while "unfavorable product and geographic mix will reduce sales by 1-2%." The company offered 1Q guidance that was below analyst estimates. Shares closed higher.

Viacom Inc (VIA.B $45) reported 3Q earnings of $0.97 per share on revenue growth of 15% y/y to $3.77 billion, higher than the Street’s estimates of $0.86 EPS and $3.52 billion in sales. The company noted strong performance in its networks division for the performance. After a mid-day slump, shares recovered to finish higher.

Priceline.com Inc (PCLN $528) shares were nicely higher after beating the Street by posting 2Q EPS of $5.02 on revenue growth of 44% y/y to $1.1 billion. The company said that gross bookings, the value of all travel services purchased online, jumped a better-than-expected 70%, while international bookings surged 98%, the best rate of growth in at least two and a half years with currency adding to the gain, while domestic bookings grew 13%. Additionally, the company gave a bullish forecast, calling for 3Q earnings of $9.10-9.30 per share, higher than analyst EPS estimates of $7.98.

July job growth a positive surprise, consumer credit gains most in four years 

Nonfarm payrolls rose by 117,000 month-over-month (m/m) in July, compared to the consensus estimate of economists surveyed by Bloomberg, which forecasted an 85,000 increase. Additionally, the figures for June and May were upwardly revised, with June's initial 18,000 gain revised to growth of 46,000 jobs, and May’s 25,000 increase was adjusted higher to a rise of 53,000. Excluding government hiring and firing, private sector payrolls increased by 154,000 in July, versus the forecast of a gain of 113,000, after expanding by an upwardly adjusted 80,000-from an initially reported 57,000 gain-in June. The unemployment rate unexpectedly fell to 9.1%, compared to expectations for the rate to remain at 9.2%, but was primarily due to a smaller number of people counting themselves in the labor force. Additionally, average hourly earnings rose 0.4% versus the Street's forecast of a 0.2% increase, while average weekly hours came in unchanged at 34.3, matching expectations.

Adding to the day's positive economic news, data released this afternoon showed US consumer credit in June increased by $15.5 billion, the largest jump in four years, far exceeding economists’ expectations of a $5 billion increase. Non-revolving debt rose by $10.3 billion and revolving debt saw its largest gain since March 2008, expanding $5.2 billion.

Treasuries extended losses posted after the employment data, with the yield on the two-year note up 3 bps to 0.28%, the yield on the 10-year note was 16 bps higher at 2.57%, and the 30-year bond yield rose by 18 bps to 3.85%.

Eurozone debt issues remain the focus of global markets

In an effort to quell concerns over the fiscal stability of Italy, the nation’s policymakers pledged to adopt a constitutional amendment requiring a balanced budget and to eliminate current deficits by 2013. The European Central Bank (ECB) restarted its Securities Markets Program yesterday by purchasing Portuguese and Irish debt, and was reported to be adding to those positions again today, but the failure to buy Spanish or Italian debt was seen as a disappointment. However, after European markets closed, Reuters reported that the ECB is ready to buy Italian and Spanish debt if Italy’s Prime Minister Berlusconi commits to making reforms. Shortly after the report, Italy unveiled its accelerated austerity measures, though, as of yet, there has been no word from the ECB on Italian bond purchases.

Adding to the debt worries were fresh economic data showing continued sluggish growth after Germany's industrial production in June fell 1.1% despite forecasts for a modest rise, Italian factory output unexpectedly dropped 0.6% in June, and Italy reported 2Q GDP of 0.3% that matched estimates. Elsewhere, producer prices in the UK rose at the fastest pace since 2008 in July, although the figure was only slightly higher than expected.

News from the Asia/Pacific region offered little aid to sentiment as the Reserve Bank of Australia lowered its growth forecast for the nation to 2% from its previous estimate of 3.25%, while also raising its outlook for inflation to 3.5% from 3.25%. South Korea's Kospi Index dropped 3.7%, prompting South Korean officials to hold an emergency meeting on August 7th to discuss the global economy and market turmoil. The lone bright spot in the region was the Bank of Japan upgrading its assessment of Japan's economy for the third time in a row.

Not to be left out of the negative news, Canada reported a smaller-than-expected gain in employment and a much larger decline in its Ivey purchasing manager index than forecasts, The purchasing manager index fell to a seasonally adjusted 46.8, below the decline to 61.0 that was expected by economists.

Markets refocus on weak economic data and eurozone worries despite US debt deal

Stock markets were under considerable pressure this week despite a deal in the US to raise the debt ceiling, as markets refocused on data that signified a slowdown in global economic growth as well as continued worries about sovereign debt in the eurozone. The bearish data began last Friday with the GDP report that showed weak growth for the first half of 2011 in the US and downward revisions that shows an economy still in recovery rather than in expansion. Meanwhile, future growth expectations were likely further pressured this week after a read on personal spending in June showed the first monthly decline in nearly two years. However, not all the data was negative, as initial jobless claims fell and payrolls grew more than expected. Additionally, positive earnings reports from Mastercard Inc (MA $327), General Motors Co (GM $26), Kraft Foods Inc (KFT $35) and Clorox (CLX $67) seemed to take a backseat to the economic data and events overseas.

Eurozone debt worries crept back into headlines after yields on Spanish and Italian government debt rose to new post-euro records, as the revised bailout measures agreed to in July are still awaiting passage by national parliaments, and the European Central Bank (ECB) renewed buying debt under its Securities Markets Program but failed to include Spanish and Italian debt in its purchases. Meanwhile, other central banks appeared to take action to stem pressures on their economies, with the Swiss National Bank announcing an interest rate cut ahead of increasing the supply of Swiss francs in the market intended on weakening the franc, and the Bank of Japan announced increased funds available for purchasing financial assets and intervened in the currency market with the aim of reducing the value of the yen.

Eyes on the Fed next week

Next week's economic data kicks into gear Tuesday with what will likely be the headlining event, the conclusion of the Federal Open Market Committee's (FOMC) monetary policy meeting. No major changes to the Fed’s stance are expected and the statement will be released at its new time of 12:30 p.m. EST, followed by the post-statement news conference and Q&A session led by Fed Chair Ben Bernanke beginning at 2:15 p.m. EST. In light of the dramatic events in the market this week, traders will be looking for any signs on whether the recent string of soft data and decline in confidence will evoke a response hinting to a new round of quantitative easing (QE3). 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." Nonetheless, 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.

Meanwhile, advance retail sales, set for release on Friday, will be the other major economic reading on the US economic docket, forecasted to rise 0.5% month-over-month (m/m) during July, after gaining 0.1% in June, while sales ex-autos and ex-autos and gas are both estimated to grow 0.2% m/m. Same-store sales results for July from the nation’s retailers reported this week were generally better than expected.

Other releases on the US economic calendar include the NFIB Small Business Optimism Index, MBA Mortgage Applications, business inventories, weekly initial jobless claims, wholesale inventories, non-farm productivity and unit labor costs, the trade balance, and the preliminary University of Michigan Consumer Sentiment Index reading for August. Other reports in the Americas include Canada's housing starts and new home prices, Brazilian CPI, trade balance and retail sales, while Mexico will report CPI, and industrial and vehicle production.

Other international releases include industrial production from the UK, eurozone and France, Spain's trade balance and 2Q GDP, CPI and trade balance figures from Italy and Germany, while France will also report 2Q GDP and CPI. Further east, Japan will release machine orders, machine tool orders, consumer confidence, the Tertiary industry index and industrial production, and Australia will provide business and consumer confidence. China will release its trade balance, new yuan loans, retail sales, industrial production and fixed asset investment, which includes housing and infrastructure spending. The central bank of South Korea will meet and is expected raise its 7-day repo rate slightly to 3.37%.