Evening Market Update

Wild Week Comes to an End, Leaves Stocks in Red for the Year

Stocks finished another wildly volatile day to the downside, closing out a week of solid losses that have brought all three major indexes into the red for the year. Traders were jittery from the opening bell, after yesterday’s sharp decline due to turmoil in Europe that included rioting in Greece, after the Greek parliament passed a vote to approve austerity measures that include wage cuts and tax increases to gain access to aid.

The continued focus on Europe overshadowed a better-than-expected increase in nonfarm payrolls today, while the unemployment rate unexpectedly increased to 9.9% due to a large increase in the labor force. In other economic news, consumer credit posted a surprise increase in March. Treasuries were also volatile on the day, finishing lower after a steep climb yesterday. In equity news, the technology sector led the decline, aided by the filing of a patent complaint by Nokia against rival Apple Inc. In M&A news, Simon Property Group Inc withdrew its upwardly revised bid to acquire General Growth Properties Inc, after GGP received approval to exit bankruptcy under the support of Brookfield Asset Management. Rounding out the equity news were PG&E and Kraft Foods Inc., which both topped analysts’ earnings forecasts.

The Dow Jones Industrial Average fell 141 points (1.3%) to close at 10,380, while the S&P 500 Index lost 17 points (1.5%) to 1,111, and the Nasdaq Composite declined 54 points (2.3%) at 2,266. In heavy volume, 2.4 billion shares were traded on the NYSE and 4.2 billion shares were traded on the Nasdaq. Crude oil fell $1.87 to $75.24 per barrel, wholesale gasoline was $0.03 lower at $2.13 per gallon, and the Bloomberg gold spot price lost $1.43 to $1,207.15 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.1% to 84.45. For the week, the DJIA lost 5.7%, the S&P 500 Index fell 6.4%, and the Nasdaq Composite declined 7.9%.

Apple Inc. (AAPL $236) ended the day solidly lower after Nokia Corp. (NOK $11) filed a complaint against AAPL with the Federal District Court in Wisconsin, alleging that AAPL’s iPhone and iPad 3G products infringe on five important NOK patents. The patents relate to technologies for enhanced speech and data transmission. AAPL has not commented on the complaint. NOK overcame early losses to end the day higher.

Simon Property Group Inc. (SPG $86) withdrew its takeover bid to acquire General Growth Properties Inc. (GGP $14), after raising its bid early in the day from a total value of about $32.8 billion to $33.5 billion. The decision came after the GGP board received approval from a judge to exit bankruptcy under a $6.5 billion recapitalization offer from Brookfield Asset Management Inc. SPG’s revised proposition included an offer of $20 per share, $6.5 billion, for GGP equity, with $7 billion to eliminate GGP’s debt and the assumption of about $20 billion of mortgages on GGP’s mall properties. SPG’s CEO said GGP’s decision to move forward with the Brookfield-sponsored option, without giving due consideration to SPG’s revised proposal, “is a truly unfortunate result for all GGP stakeholders”. GGP traded lower, while SPG was higher.

PG&E Corp. (PCG $43) reported 1Q EPS ex-items of $0.79, above the $0.72 consensus forecast of Wall Street analysts, with revenues increasing 1% year-over-year (y/y) to $3.5 billion, just above the $3.4 billion that the Street expected. PCG reaffirmed its full-year EPS outlook. PCG finished the day lower.

Kraft Foods Inc. (KFT $30) announced 1Q EPS ex-items of $0.49, four pennies higher than the $0.45 consensus estimate. The company recently completed a $19 billion hostile takeover of U.K. confectioner Cadbury and said the acquisition significantly contributed to the 26% increase in revenue for the quarter, as revenues on an organic basis, which excludes acquisitions, only grew by 3.9%. KFT noted strong sales of brands such as Trident gum and Dairy Milk chocolate and said its beverage business was the best performing unit for the quarter, while it also continued to see growth in developing markets. Shares of KFT were higher.

Jobs increase more than expected

Nonfarm payrolls rose by 290,000 jobs in April, compared to the Bloomberg estimate, which called for a 190,000 increase in jobs, while March’s figure was revised higher to 230,000 from 162,000, and the 14,000 decline in February’s report was revised to a 39,000 increase. The unemployment rate rose to 9.9%, above expectations calling for it to remain at 9.7%. Average hourly earnings were flat, versus the Street's forecast of a 0.1% increase, while average weekly hours ticked higher to 34.1, matching the forecast of economists. Government payrolls rose as Census hiring added 66,000 temporary workers.

At first glance at the headline figures, investors may have been unnerved by the unexpected increase in the unemployment rate, but there are a few of points to consider regarding the figure. The unemployment rate typically lags the recovery so a sticky number should not be too surprising. Moreover, the rate was impacted by a solid increase in the labor force, which grew by 805,000, and showed 195,000 unemployed people reentered the labor force, possibly a sign that the employment outlook may be starting to improve. Also, the disparity between the nonfarm payroll figure and the unemployment rate is not that unlikely as the numbers are derived from two separate surveys, with corporations giving the jobs change number, while the unemployment rate comes from a survey of households.

There were other some encouraging signs in today’s release, such as the favorable revisions to the previous two months, which makes gains in five out of the past six months in nonfarm payrolls. Also, considering the expectations that Census hiring could contribute to a large portion of April’s gain, the fact that over 200,000—excluding the Federal Government hiring—private sector jobs were added should help the outlook for the labor market. Finally, the construction sector, which for obvious reasons has suffered amid the recession, showed the second-straight month of job increases.

However, although a positive trend may be forming, it will take a massive amount of monthly gains to restore the employment markets to normal levels. Also, the exacerbated debt crisis in the euro-zone is taking some of the focus off of the improving conditions in the US, as it poses a threat to the global economic prosperity and to some of the forces that are supporting the improving employment picture.

In other North American employment news, Canada reported that its change in employment surged by 108,700 in April, well above the 25,000 increase that had been forecasted by economists, and its unemployment rate unexpectedly dipped, declining to 8.1% from 8.2%. The Canadian dollar is higher versus the US dollar, extending early gains following the Canadian jobs data, but has pared some of the advance amid the volatility in the currency markets.

In other North American employment news, Canada reported that its change in employment surged by 108,700 in April, well above the 25,000 increase that had been forecasted by economists, and its unemployment rate unexpectedly dipped, declining to 8.1% from 8.2%.

Consumer credit unexpectedly rose in March by $2.0 billion, compared to expectations of a $3.7 billion decline, while last month’s initially-reported $11.5 billion decrease was revised to a $6.2 billion decline. Within the report, revolving debt, such as credit cards, fell $3.2 billion, while non-revolving debt such as auto and mobile-home loans rose by $5.1 billion. The Fed’s report doesn’t cover lending secured by residential real estate.

Treasuries finished the day in negative territory, as the equity markets fluctuated furiously between gains and losses and some of the flight-to-quality buying dissipated somewhat late in the day. The yield on the 2-year note was up 2 bps to 0.81%, the yield on the 10-year note gained 3 bps to 3.42%, and the 30-year bond yield was 7 bps higher at 4.27%.

Europe continues to feel pressure

A cloud of uncertainty continues to hover over Europe, amid continued euro-zone debt fears and following official results of the UK election, which resulted in a “hung Parliament. The Conservative Party—which received the most votes—failed to get enough votes to gain an overall majority, which could possibly hamstring the fiscal policy making process. Overall, the Conservatives won 36.1% of the popular vote, compared to 29% for the Labour Party and 23% for the Liberal Democrats. Meanwhile, Greek debt concerns remained even after Greece’s Parliament approved the austerity measures yesterday—that includes wage cuts and tax hikes and have resulted in Greek protests—in order to gain control of the 110 billion euro bailout package, and today’s approval from several euro-zone nations of the debt-riddled country to take control of the funds. Both houses of Parliament in Germany—Europe’s largest economy, which is considered a pivotal aspect of the approval process—voted in favor of the bill to provide the aid to Greece, along with France, Spain and Portugal. Yesterday’s failure by the European Central Bank to broach the subject of asset purchases to try to stabilize the deteriorating confidence in the euro-zone also dampened sentiment and preserved contagion fears.

On the international economic front, German industrial production rose a solid 4% month-over-month (m/m) in March, more than double the 1.5% increase that economists had expected, while UK housing prices unexpectedly dipped m/m in April and its PPI input prices rose by a smaller amount than forecasted, while its PPI output prices rose more than expected.

Yearly gains lost in Greece fire

Traders looking for a meaningful pull-back from the recent rally in the equity markets got what they had hoped this week as the major markets such as the S&P 500 and the Dow Jones Industrials both posted losses of about 6% and the Nasdaq Composite Index, which has been driven by strength in technology issues, fell about 8%. The steep losses this week all but wiped away the solid yearly gains that had accumulated as the festering euro-debt concerns came to a boil, taking the focus off of the continued favorable economic signals out of the US.

Entering the week, the approval of the 110 billion euro Greek bailout package, the announcement of the creation of the world’s largest airline as UAL Corp. (UAUA $18), the parent of United Airlines, and Continental Airlines Inc. (CAL $19) agreed to a merger of equals, and the ninth-consecutive month of expansion in the ISM Manufacturing Index all appeared to pick the bulls off of the mat after last week’s losses on financial sector fears amid the Goldman Sachs Group Inc. (GS $143) fraud charge fallout. However, deadly riots in Greece on the austerity measures, including tax hikes and wage cuts, spurred uncertainty whether the nation would be able to implement the measures that were demanded by the EU and IMF in order to gain access to the funds. Moreover, fears of a contagion to other euro-zone nations, such as Spain and Portugal, also ravaged sentiment and the failure of the European Central Bank to even discuss measures of support to try to stem the spreading of the debt crisis fueled a sharp bout of risk aversion and the global equity markets paid the price. Not even Friday’s favorable labor report, continued better-than-expected US corporate earnings, favorable housing data, and the ISM Non-Manufacturing Index—a measure of service sector activity and economic strength—posting the fourth-straight month of expansion were enough to keep the bulls out of the fire.

As we head into next week, the euro-zone will likely command the lion’s share of attention and any new developments should shape sentiment in the near-term, helping determine if the recent pullback is the healthy correction that traders been looking for, or if it will be a case of being careful with what you wish for.

Advance retail sales and industrial production & utilization on tap for next week

Economic activity will be fairly light next week, starting with Tuesday’s release of wholesale inventories. After rising 0.6% in February on a month-over-month (m/m) basis, the March reading is expected to increase 0.5%, according to the Bloomberg consensus.

Advance retail sales will headline the week on Friday, with the Bloomberg survey of economists forecasting a 0.2% m/m increase for April, after a jump of 1.6% was seen in March. In last month’s report, a rise was seen in eleven of thirteen categories, led by a 6.7% increase in autos, and building materials gained 3.1%, the most since November 2007.

Friday will also bring the April reading of industrial production and capacity utilization, which are both expected to improve, after lackluster increases in March. Economists are looking for industrial production to climb 0.6%, versus a 0.1% increase last month, which was mainly due to a 0.2% decline in output for consumer goods and a 6.4% fall in utilities production. Meanwhile, capacity utilization is expected to come in at 73.7%, up from a previous reading of 73.2%.

Other releases on next week’s US economic calendar include MBA mortgage applications, initial jobless claims, and the University of Michigan consumer confidence report.

The international economic calendar will be heavy next week, including euro-zone GDP, industrial and manufacturing production readings from the UK, Germany, Italy and France, UK jobless claims and consumer confidence, German import/exports and CPI, French CPI and GDP, and Italian GDP and CPI. In the Americas, Canada releases its new housing price index, as well as new vehicle and manufacturing sales, while Brazil announces retail sales for March.

In the Asia/Pacific region, announcements include the release of the Bank of Japan’s monetary policy meeting minutes, China’s housing prices, PPI, CPI, retail sales and industrial production, India’s industrial production, and the employment rate in Australia.