Morning Market Update

Mixed Retail Data and ECB Focus Have Markets Modestly Lower

Stocks have given up an early modest gain and have moved slightly below the flatline as major retailers are reporting same-store sales for April, with a disappointing report from Target Corp., which is overshadowing a favorable reading from Macy’s Inc. Meanwhile, traders are closely monitoring the press conference from the European Central Bank that followed its decision to leave interest rates unchanged at 1.0%, for any comments regarding the euro-zone debt crisis that has engulfed Greece and is feared to be spreading to other euro-area countries. Treasuries are lower, but have pared some early losses after weekly initial jobless claims dipped and 1Q nonfarm productivity rose more than expected and unit labor costs fell more than double economists’ forecasts. In other equity news, DIRECTV reported 1Q earnings that exceeded analysts’ expectations. Overseas, Asia fell solidly, while Europe is rebounding amid the focus on the ECB and after a jump in German factory orders.

As of 8:52 a.m. ET, the June S&P 500 Index Globex future is 6 points below fair value, the Nasdaq 100 Index is 14 points below fair value, and the DJIA is 34 points below fair value. Crude oil is down $0.85 at $79.12 per barrel, and the Bloomberg gold spot price is up $3.53 at $1,178.80 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.4% at 84.47.

The nation’s retailers are reporting April same-store sales—sales at stores open at least a year—and are mostly mixed, with Target Corp. (TGT $56) coming under pressure after it posted same-store sales fell 5.9% year-over-year (y/y), compared to the 2.3% decline that analysts surveyed by Reuters estimated. TGT said its April sales were somewhat below its expectations as a greater-than-expected portion of sales that otherwise would have occurred in April were pulled forward into March. But TGT said its April sales in its higher margin categories remained “particularly strong,” and both of its business segments continued to outperform their respective profit plans for 1Q. The company added that as a result, it expects 1Q EPS will meet or exceed the current First Call median estimate of $0.86.

However, Macy’s Inc. (M $23) announced an unexpected increase in its April same-store sales, rising 1.1% y/y, versus the 0.4% decline that was anticipated. The department store said its business continued to perform well, with Bloomingdale’s and all eight Macy’s regions at or above expectations for sales in April. M increased its 1Q EPS guidance.

Elsewhere, Costco Wholesale Corp. (COST $60) reported April same-store sales grew 11% y/y, including the impact of fuel, just shy of the 11.2% that analysts were forecasting, while excluding inflation in gas prices and strengthening foreign currencies, sales were up 4%.

Outside of retail sales reports, DIRECTV (DTV $35) reported 1Q EPS of $0.59, above the $0.45 consensus estimate of Wall Street analysts, with revenues increasing 14% y/y to $5.6 billion, above the $5.4 billion that the Street forecasted. The company said its sales benefitted from a “strong” average revenue per unit subscriber in the US and Latin America, and a 321,000 net subscriber addition.

Jobless claims dip, 1Q productivity rises

Weekly initial jobless claims fell by 7,000 to 444,000, versus last week's figure which was upwardly revised by 3,000 to 451,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to decline to 440,000. The four-week moving average, considered a smoother look at the trend in claims, declined by 4,750 to 458,500, and continuing claims dropped by 59,000 to 4,594,000, compared to the decline to 4,610,000 that was anticipated.

Elsewhere, preliminary 1Q nonfarm productivity rose at a 3.6% annual rate, above the Bloomberg forecast of 2.6%, and 4Q’s report of a downwardly revised 6.3% gain. Unit labor costs fell 1.6%, versus a drop of 0.7% that was estimated, and the favorably revised 5.6% decline that was reported in 4Q. Treasuries are lower, but pared some losses after the jobless claims and productivity reports.

Europe rebounding but all eyes on ECB press conference

Stocks in Europe are moving modestly higher in afternoon action amid a rebound in materials and industrials issues on a strong economic report from Germany and following some upbeat corporate news. Germany reported that its factory orders jumped 5% month-over-month (m/m) in March, much higher than the 1.4% increase that economists surveyed by Bloomberg had anticipated. The equity front is also aiding sentiment, with BNP Paribas (BNPQY $31) posting a solid advance after France’s largest bank recorded 1Q profits that exceeded analysts’ forecasts. Elsewhere, the world’s second-largest reinsurance company, Swiss Re (SWCEY $40) is nicely higher after it announced 1Q earnings the bested forecasts, aided by higher investment income, and Germany’s Commerzbank AG (CRZBY $7) is solidly higher after its 1Q profits easily topped analysts’ expectations. However, Alcatel-Lucent (ALU $3) is down solidly after it posted a 1Q net loss, which was more than double the loss that had been anticipated.

Meanwhile, amid the backdrop of elevated euro-zone debt crisis concerns, the European Central Bank’s monetary policy announcement, in which they left its benchmark interest rate unchanged at 1.0%, is garnering some added attention. The customary press conference following the announcement by ECB President Jean-Claude Trichet is getting under way and traders are looking for any new actions aimed at supporting Greece’s debt problems or measures to stem the contagion of other euro-area nations, such as Spain and Portugal, which concerns of have contributed to the steep declines in the region this week. Today’s advance across the pond is being aided by Spain’s relatively successful debt auction even though it had to pay the highest yield since 2008, per Bloomberg, as the auction attracted higher demand than average. Also, sentiment was soothed somewhat by Greece pledging to stick to its aggressive austerity measures, despite yesterday’s riots in protest to these measures that Greece has agreed to implement in order to gain control of the 110 billion euro bailout package, which included tax hikes and wage cuts.

In other economic news, UK Services PMI unexpectedly deteriorated to 55.3 in April, from 56.5 in March, and compared to the rise to 57.0 that was expected. Britain’s FTSE 100 Index is flat as the nation begins its Parliamentary elections today, amid increased uncertainty that it could result in a “hung Parliament,” where no political party gains majority control, impacting policy making process. However, reports show that results of the election could take days to be unveiled officially.

Elsewhere, France’s CAC-40 Index is 0.6% higher, Germany’s DAX Index is up 0.3%, Spain’s IBEX 35 Index is advancing 0.2%, Portugal’s PSI 20 Index is gaining 1.3%, and Greece’s Athex Composite Index is increasing 0.8%.

Asia falls as euro-zone fears continue to stand tall

Stocks in Asia were solidly lower across the board, led by steep losses in Japan and China, as fears about the spreading of debt problems in the euro-zone and the potential impact on the global recovery stymied sentiment. Japanese markets returned from a three-day holiday, playing catch up to the week’s events and the Nikkei 225 Index fell 3.3%. The recent strength in the Japanese yen versus major currencies as the “safe-haven” currency found demand amid the aforementioned euro-area and global economic uneasiness, dampened optimism regarding profits of companies that rely heavily on sales outside of Japan, adding to the negative backdrop. Meanwhile, China’s Shanghai Composite Index dropped 4.1% on speculation that the government may deploy further measures to cool down the economy, mainly property speculation, exacerbated by increased concerns about what next week’s inflation report may reveal. Bloomberg reported that the China Business News cited a State Information Center economist as saying that the Consumer Price Index will rise at a faster pace in April, which did little to soothe inflation fears. However, Hong Kong’s Hang Seng Index posted a relatively smaller loss, as it declined 1.0%.

Australia’s S&P/ASX 200 Index fell 2.2% on the concerns about the impact of a potential slowdown in the global economy due to the euro-zone fallout on demand for resources. Also, pressure on shares followed a report showed the nation’s retail sales grew at a slower pace than economists had forecasted. However, a separate report showed Australia’s trade deficit came in narrower than expected for March. In other economic news, Japan’s vehicle sales rose 33.5% y/y in April, a slower pace than the 37.2% rise that was registered in March, and India reported that its exports jumped 54% y/y for March, compared to the 34.8% increase seen in the previous month.

Rounding out the day, South Korea’s Kospi Index fell 2.0% after returning from a holiday yesterday, Taiwan’s Taiex Index dropped 1.5%, and India’s BSE Sensex 30 Index declined 0.