Evening Update

Stocks Move Higher, View Glass Half-Full

While stocks rose on the day, markets continue to search for direction in low volume trading, as the sustainability of the economic recovery is not clear cut with data showing mixed messages. Ahead of tomorrow’s key US labor report, today’s data showed a bullish larger-than-expected drop in weekly initial jobless claims, while an upward revision to nonfarm productivity, despite being positive for corporate profits, could mean companies are holding off on hiring. Meanwhile, retail sales for February were better-than-expected, despite worries that weather would hamper results. In other economic news, factory orders rose less than expected and pending home sales unexpectedly fell. Government debt remained in focus, with Greece pricing a bond offering ahead of key meetings with German officials tomorrow, while the European Central Bank and Bank of England kept rates unchanged. In US equity news, Wal-Mart Stores Inc increased its dividend, PetSmart beat estimates and Ciena fell short of analyst expectations. Treasuries were mixed.

The Dow Jones Industrial Average rose 47 points (0.5%) to close at 10,444, the S&P 500 Index was higher by 4 points (0.4%) at 1,123, and the Nasdaq Composite advanced by 12 points (0.5%) to 2,292. In light volume, 961 million shares were traded on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil was $0.66 lower at $80.21 per barrel, wholesale gasoline fell $0.02 to $2.23 per gallon, and the Bloomberg gold spot price decreased $7.95 to $1,131.95 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—rose 0.7% to 80.52.

Dow member Wal-Mart Stores Inc. (WMT $54) increased its annual dividend by 11% to $1.21 per share, saying that its underlying operations remain strong, and with its free cash flow it has the capacity to fund returns to shareholders. Wal-Mart no longer reports monthly same-store sales-sales at stores open at least a year, but fellow discounter Target (TGT $53) reported February same-store sales increased 2.4% year-over-year (y/y), compared to the Reuters estimate of 1.0%. TGT said that it continues to experience y/y increases in traffic at its stores, partly reflecting a slowly recovering economic environment. Shares of both WMT and TGT were higher.

Macy’s Inc. (M $20) highlighted the department stores’ releases, as its same-store sales rose 3.7% y/y, above the 1.4% increase that analysts’ had expected, while noting that sales would have gained approximately 5% but winter storms during the month hampered results during key periods. Elsewhere, J.C. Penney Co. (JCP $29) posted a 1.2% y/y increase in sales, versus an expected decline of 1.3%, Nordstrom Inc. (JWN $38) announced a 10.3% y/y gain in sales, much higher than the 6.2% increase that was forecasted, while Kohl’s (KSS $54) achieved a 3.7% y/y advance in sales, which missed the 4.1% gain that analysts were anticipating. Shares of all these retailers gained ground.

Inside the mall, Gap Inc. (GPS $22) reported that its same-store sales increased 3% y/y, above the 1.8% that the Street was forecasting. Limited Brands Inc. (LTD $23) announced that its February sales grew by 10% y/y, just above the 9.7% increase that was anticipated. However, Abercrombie & Fitch (ANF $42) was a bright spot, as its shares were sharply higher as the company posted a 5% y/y advance in sales, compared to the 6.9% decline that the Street was expecting. GPS and LTD were also in the green.

On the earnings front, PetSmart (PETM $30) reported 4Q EPS of $0.61, five cents above the consensus estimate of analysts, with revenues growing 3.4% y/y to $1.4 billion, matching expectations. The pet retailer said improvements in traffic and a strong holiday performance led to the better-than-expected results. PETM was up solidly after it issued 1Q and full-year EPS guidance better than what analysts had expected.

However, Ciena Corp. (CIEN $14) was under pressure after the communications networking equipment maker posted a 1Q loss of $0.12 per share, doubling the Street’s forecasts, and revenues of $176 million, compared to the $183 million that analysts were anticipating. The company said that it had difficulty getting products certified by customers, forcing a delay in recognizing sales, adding that the problem is common with new equipment, which tends to take longer to certify. Management added that orders and demand continue to remain strong.

Jobless claims and pending home sales fall, productivity higher, but factory orders miss

Treasuries were mixed on the day, with the yield on the 2-year note up 4 bps to 0.86%, while the yield on the 10-year note decreased 1 bp to 3.61%, and the yield on the 30-year bond fell 3 bps to 4.56%.

Weekly initial jobless claims fell by 29,000 to 469,000, versus last week's figure which was revised upward by 2,000 to 498,000, and compared to the consensus, which called for claims to decline to 470,000. The four-week moving average, considered a smoother look at the trend in claims, declined by 3,500 to 470,750, and continuing claims dropped by 134,000 to 4,500,000, compared to the 4,600,000 forecast.

Meanwhile, nonfarm productivity rose at a 6.9% annual rate in 4Q, above the Bloomberg forecast of 6.3%, and the preliminary report of a 6.2% gain. Unit labor costs fell 5.9%, versus a drop of 4.5% that was estimated, and the 4.4% decline that was initially reported.

In other economic news, pending home sales expectedly fell in January, dropping 7.6% month-over-month (m/m), compared with the forecast of economists, which called for a 1.0% increase, and following the downwardly revised 0.8% m/m gain recorded in December. Compared to last year, sales are up 8.8%. The report is considered a good proxy for the pipeline of existing homes sales. The drop may be unnerving, but the National Association of Realtors (NAR) cited prolonged winter weather as a factor, which “hampered shopping activity.” However, declines in the West were the steepest, at 13.2%, while the Northeast fell 8.7%, the Midwest dropped 8.9% and the South slipped 2.1%.

Elsewhere, factory orders rose 1.7% m/m in January, just shy of the 1.8% forecasted rise, the fifth-straight monthly increase, while December’s increase was revised higher from 1.0% to 1.5%. January durable goods orders—reported last week—were revised lower as part of the report to a gain of 2.6% versus the initial report of a 3.0% increase. Nondefense capital goods ex-aircraft, considered a good proxy for business spending, fell 4.1%, from the initial report of a 2.9% decline.

Greece prices debt, central banks meet in Europe, China to begin new political year

Ahead of a meeting with officials in Germany tomorrow, and after Greece’s latest deficit reduction plan announced yesterday, at 4.8 billion euros ($6.5 billion), or 2% of GDP, Greece conducted a 10-year euro-denominated bond auction today, and while seeking to raise 5 billion euros, attracted 14.5 billion ($19.86 billion) in demand, pricing at a yield of 6.3%. Greece has the task of convincing investors and euro-zone members that it is making progress toward reducing its budget deficit from 12.7% in 2009 to 8.7% for 2010 ahead of nearly 23 billion euro in debt obligations set to roll over in late April and May.

Meanwhile, major central bank announcements were also in focus, with the Bank of England keeping its benchmark interest rate unchanged at a record low of 0.5%, while keeping its bond purchase program on hold. Also, the European Central Bank (ECB) left its key lending rate unchanged at 1.0%, as expected. ECB President Jean-Claude Trichet said that current key interest rates remain appropriate, inflation is expected to remain subdued, and the economic recovery in the euro-zone is on track, although it is likely to remain uneven. Trichet added that the central bank will continue to provide euro-zone banks with as much liquidity as they need as it will conduct its weekly financing operations at least until October 12th, quelling some fears that liquidity in the region may be constricted, which could stall the recovery. Yesterday, Greek Prime Minister Papandreou said that if the new measures failed to win support of the European Union and markets, his country would have to turn to the International Monetary Fund for support, but today ECB President Trichet said it would be inappropriate for the IMF come to the aid of Greece.

In international economic reports, euro-zone 4Q GDP remained at a 0.1% quarter-over-quarter gain unannualized, matching economists expectations, and a gauge of UK housing prices unexpectedly fell 1.5% m/m in February. France’s unemployment rate increased more than anticipated, rising from 9.5% to 10.0% in 4Q, compared to the increase to 9.8% that was forecasted. Japan announced that capital spending fell by 17.3%, smaller than economists’ forecasts of a 18.4% decline. Elsewhere, Canadian building permits unexpectedly fell and the country’s PMI improved by a much smaller amount than forecasted.

Markets in China were nervous ahead of a key speech tomorrow to be given by the Chinese Premier to the National People’s Congress, the equivalent of a State of the Union address in the US, kicking off the annual legislative session where nearly 3,000 delegates meet for ten days, with discussion likely to be dominated by economic matters. In connection, Bloomberg is reporting that the Premier is set to unveil a plan to sell 200 billion yuan ($29 billion) in bonds to be used for ongoing stimulus measures with funds being channeled to local governments, who are unable to issue debt directly, but are believed to have circumvented rules by setting up their own companies to borrow from banks and keep debt off their balance sheets. The central government sold debt in 2009 to fund local governments at rates below the one-year lending rate in China. Investors are watching for any moves with regard to the housing market, lending and moves to boost domestic consumption.

Job losses anticipated, payroll estimate range is wide

Nonfarm payrolls will be the headline report for the week, with the Bloomberg survey of economists forecasting payrolls decreased by 63,000 in February. The unemployment rate is estimated to increase to 9.8% after unexpectedly declining in January to 9.7% from 10.0%. Data on the job market has been volatile lately and the trend has been hard to discern. In recent months, November saw employment gains, only to have a large decline in December, and forecasts of job gains in January were met with a small decline in payrolls of 20,000. Last month’s payroll report was also marked by large negative revisions to prior months in the annual benchmark adjustment.

On the bearish side of the ledger, last month’s report showed the number of long-term unemployed (those jobless for 6 months and longer) continued to climb, reaching 6.3 million people, an increase of 5.0 million since the start of the recession. Additionally, initial jobless claims, a leading indicator of payrolls, have been increasing, with the 4-week average up by nearly 21,000 since the beginning of the year.

Under the surface however, last month’s report had many positives, including an increase in the workweek and hourly earnings, as well as a large decline in the number of involuntary part-time workers (workers who want full-time work, but are working part-time) on a seasonally adjusted basis of nearly 850,000. Temporary help services added 52,000, for a total employment gain from the low reached in September 2009 of 247,000. While initial jobless claims are up in recent weeks, they have posted a larger decline from the peak than recent post-recession periods.

The other release on tomorrow’s US economic calendar is consumer credit, expected to have fallen by $4.5 billion in January.

The international economic calendar will yield the UK PPI report and German factory orders. Markets will also be paying attention to the aforementioned speech to be given by the Chinese Premier.

The UK FTSE 100 Index was 0.1% lower, while France’s CAC-40 and Germany’s DAX Indexes both declined 0.4%.