Evening Market Update

Gains Get Slim as Sentiment from Favorable Employment Dims

The Dow and S&P 500 are holding onto modest gains, while weakness in technology issues has the Nasdaq threatening negative territory, as early enthusiasm that followed a larger-than-expected drop in the US weekly initial jobless claims is waning heading into afternoon action. Treasuries remain lower on the mid-to-long end of the curve and the yield on the 10-year note continues to trade above the 3% mark. A mixed bag of retail same-store sales for June, highlighted by Target Corp missing forecasts and Macy’s Inc exceeding expectations, may be limiting some of the conviction among the bulls. In other equity news, Tractor Supply Co boosted its EPS guidance, while the CEO at tax preparer H&R Block resigned and Wells Fargo & Co announced the restructuring of its financial unit, resulting in 3,800 job losses. In other US economic news, a read on consumer credit is set to be released in the final hour of trading. Overseas, Europe moved higher after the Bank of England and the European Central Bank both kept their benchmark interest rates unchanged and following the better-than-expected US employment report.

At 12:55 p.m. ET, the Dow Jones Industrial Average is up 0.4%, the S&P 500 Index is 0.2% higher, and the Nasdaq Composite is flat. Crude oil is up $1.00 at $75.07 per barrel, wholesale gasoline is up $0.02 at $2.04 per gallon, and the Bloomberg gold spot price is down by $8.05 at $1,194.70 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is flat at 83.96.

The nation’s retailers are reported June same-store sales—sales at stores open at least a year—headlined by Target Corp. (TGT $50), which posted a 1.7% increase year-over-year (y/y), short of the 2.7% that analysts surveyed by Reuters had expected. TGT said sales “remained relatively soft” for the second month this quarter, but it continued to experience favorable merchandise sales mix, effective retail expense control, and strong profitability in its credit card segment. The company added that sales were soft in June for electronics, video games, music and movies, while sales trends in apparel, food, healthcare and beauty remained strong. Shares were lower.

Meanwhile, Costco Wholesale Corp. (COST $56) announced that its June same-store sales rose 4% y/y, including fuel sales and foreign exchange, compared to the 4.2% increase that was expected. Excluding fuel and foreign exchange, sales rose 3%. COST said the Memorial Day holiday shift negatively impacted this year’s sales by approximately 2%. COST is traded higher.

On the department store front, Macy’s Inc. (M $18) reported that its same-store sales increased 6.5% in June, above of the 6.1% rise that the Street had expected. J.C. Penney Co. Inc. (JCP $23) achieved 4.5% growth in same-store sales for the month, above the 3.4% increase that analysts were forecasting. Shares of both companies rose.

Inside the mall, apparel retailers reported mixed results, with steep price discounting a common theme, with American Eagle Outfitters Inc. (AEO $12) posting a 1% decline in same-store sales, compared to the 2% gain that was anticipated, and Gap Inc. (GPS $18) announcing a flat reading on same-store sales, versus the 3.4% increase that the Street was looking for, and said that June traffic was disappointing, while Abercrombie & Fitch Co. (ANF $35) reported a 9% jump in sales, well above the 2.8% advance that was anticipated. Nordstrom Inc. (JWN $34) posted a 14.1% jump in same-store sales, compared to the 9.6% gain that analysts were forecasting, while Kohl’s Corp. (KSS $48) announced that its sales rose 5.9% on a same-store basis, short of the 6.5% increase that was anticipated. ANF was sharply higher, while JWN AEO, GPS, and KSS are all fell.

Jobless claims drop more than expected, consumer credit plunges

Weekly initial jobless claims declined 21,000 to 454,000, versus last week's figure which was upwardly revised by 3,000 to 475,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to decrease to 460,000. The four-week moving average, considered a smoother look at the trend in claims, declined by 1,250 to 466,000, and continuing claims tumbled by 224,000 to 4,413,000, compared to the decline to 4,600,000 that was anticipated. Treasuries were mixed and the yield curve steepened, with the yield on the 2-year note 1 bp lower at 0.61%, the yield on the 10-year note gaining 4 bps to 3.02%, and the 30-year bond rising 4 bps to 4.00%.

Released in the last hour of trading, consumer credit fell more than expected in May by $9.1 billion, compared to expectations of a $2.3 billion decline, while last month’s initially reported $1.0 billion increase was revised much lower to a $14.9 billion decline. Within the report, revolving debt, such as credit cards, fell $7.3 billion, while non-revolving debt such as auto and mobile-home loans declined by $1.8 billion. The Fed’s report doesn’t cover lending secured by residential real estate.

European bank stress test method and global growth forecast raise by the IMF

Early market sentiment was buoyed by the International Monetary Fund (IMF) raising its global growth forecast to 4.6% for 2010, from a previous forecast of a 4.2% expansion, while its outlook for 2011 remained unchanged at 4.3% growth. While US and European markets rose yesterday in anticipation of the release of the methodology for the European bank stress tests, the results of which will be published July 23, the Committee of European Banking Supervisors (CEBS), the entity conducting the stress test on 91 banks, said the adverse scenario assumes a 3 percentage point deviation of GDP for the EU compared to the European Commission’s forecasts over the two-year time horizon. Also, CEBS said the EU sovereign risk shock applied in the test represents a deterioration of market conditions as compared to the situation observed in early May 2010. Financials in Europe rose but the details of the test were seen as still lacking clarity by some market observers.

In monetary policy news, the Bank of England left its interest rate unchanged at 0.5% and made no changes to its asset purchase program, and the European Central Bank (ECB) kept its benchmark interest rate unchanged at 1.0%. In the press conference that followed, ECB President Jean-Claude Trichet said the central bank welcomes the decision to publish the individual results of the stress tests and, “appropriate action will have to be taken where needed.” Trichet also said the stress tests will boost confidence in the banking sector, per Dow Jones Newswires.

In other European economic news, Germany’s trade surplus narrowed more than expected by economists in May, Switzerland’s unemployment rate ticked lower from 3.8% in May to 3.7% in June, and a gauge of French business sentiment decreased slightly in June. Elsewhere, Sweden’s consumer prices were mostly flat and UK housing prices unexpectedly fell month-over-month (m/m) in June, while separate reports showed industrial production in Germany and the UK both grew at levels exceeding expectations.

In Asia/Pacific, Japan reported mixed economic data as machine orders fell 9.1% month-over-month (m/m) in May, after rising 4.0% in April, and compared to the decline of 3.0% that economists had expected, while machine tool orders slowed, the trade surplus narrowed more than expected, and bank lending fell. Meanwhile, Australian employment increased 45,900 in June, compared to the 15,000 rise that economists had forecasted, with the unemployment rate remaining at a downwardly revised 5.1%, versus the 5.2% that economists were anticipating.

However, stocks in China were mixed, with Hong Kong’s Hang Seng Index gaining 1.0%, while the Shanghai Composite Index declined 0.3%, as traders reacted to the monetary policy statement from China’s central bank, which noted that policy makers will maintain policy continuity and flexibility and use multiple monetary policy tools to maintain “appropriate” growth in money and credit this year, per Bloomberg. The statement also said money and loan growth was “reasonable” so far this year and liquidity in the banking system was “basically appropriate.” Also, Bloomberg pointed out that Chinese central bank left out a reference in its previous statement to the management of loan and credit growth being an “arduous task.”

Elsewhere, Korea’s money supply increased at a slower pace in May, Thailand’s consumer confidence improved in June and Taiwan’s trade surplus narrowed by a larger amount than anticipated.

Tomorrow’s economic calendar will be light, with the US reporting wholesale inventories, expected to rise 0.4% in May, while Germany will announce CPI, France and Italy release industrial production, the UK releases PPI, and Canada announces employment and housing starts.