Morning Market Update

Bulls Sent on Deployment on Favorable Read on Employment

Stocks continue to trade in the green, extending yesterday’s steep gains, as the bulls are finding support from a larger-than-expected drop in the US weekly initial jobless claims report. The upbeat sentiment sent Treasuries lower, pushing the yield on the 10-year note back above the 3% mark and is helping the Street stomach a mixed bag of June retail same-store sales reports, highlighted by Target Corp missing forecasts, while Macy’s Inc exceeded expectations. However, the equity markets have come off of the best levels of the day. In other equity news, Tractor Supply Co boosted its EPS guidance, while the CEO at tax preparer H&R Block resigned. In other US economic news, a read on consumer credit is set to be released in the final hour of trading. Overseas, Asia moved higher on the optimism from yesterday’s solid gains in the US and some upbeat employment data out of Australia. Elsewhere, Europe is moving 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 10:55 a.m. ET, the Dow Jones Industrial Average is up 0.6%, the S&P 500 Index is 0.4% higher, and the Nasdaq Composite is advancing 0.5%. Crude oil is up $1.58 at $75.65 per barrel, wholesale gasoline is up $0.04 at $2.07 per gallon, and the Bloomberg gold spot price is down by $14.05 at $1,188.70 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.1% at 83.84.

The nation’s retailers are reporting 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 are lower.

Meanwhile, Costco Wholesale Corp. (COST $55) 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 trading 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 $22) achieved 4.5% growth in same-store sales for the month, above the 3.4% increase that analysts were forecasting. Shares are moving to the upside.

Inside the mall, apparel retailers reported mixed results, with American Eagle Outfitters Inc. (AEO $12) posting a 1% decline in 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, while Abercrombie & Fitch Co. (ANF $36) 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 $47) announced that its sales rose 5.9% on a same-store basis, short of the 6.5% increase that was anticipated. ANF is sharply higher, and JWN is nearly unchanged, while AEO, GPS, and KSS are all trading lower.

In other retail sector news, shares of Tractor Supply Co. (TSCO $66) are nicely higher after the farm and ranch retail firm increased its full-year guidance, saying it expects EPS to be between $4.00-4.10, versus the prior estimate of between $3.48-3.60, with net sales forecasted between $3.49-3.53 billion, up slightly from $3.44-3.50 billion. Analysts were expecting the company to post full-year EPS of $3.72, and revenues of $3.38 billion. Additionally, TSCO said 2Q EPS are expected to come in at a range of $2.03-2.05, versus the Street’s forecast of $1.71. The company said pet food and animal feed continued to be solid sales drivers, helping it post same-store sales growth of 6.1% y/y.

H&R Block Inc. (HRB $14) is sharply lower after CEO of the tax preparation firm, Russ Smyth, resigned in order to accept the position of CEO of a privately held company in Chicago. Smyth had been CEO of the company since 2008 and HRB named Alan Bennett as the new Chief Executive.

Jobless claims drop more than expected, consumer credit set for an afternoon release

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 are lower after losing ground following the report, with the yield on the 10-year note moving back above the 3.00% mark.

In the final hour of trading, the economic calendar will yield the release of consumer credit, expected to decline by $2.3 billion in May, following the $1.0 billion increase that was seen in April.

Europe advancing amid central bank announcements

Stocks in Europe remain higher in late-day action, as traders digest some key central bank interest rate decisions and a plethora of other economic data in the region, while extending gains on the US employment data. Oil & gas and materials issues are leading the way, 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. Financials are also gaining ground to aid the advance, extending yesterday’s upward move even as uncertainty regarding the rigorousness of the European Central Bank’s stress tests of the banking industry remains as traders are anxious to see if the scenarios that made up the tests will be enough to instill confidence in the industry. Traders paid close attention to the ECB’s customary press conference that followed the central bank’s announcement that it kept its benchmark interest rate unchanged at 1.0%, for any details regarding the stress tests, which results of are expected to be released on July 23rd.

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. The Committee of European Banking Supervisors (CEBS), the entity conducting the stress test for the ECB, said 91 banks will be put through the tests, with the adverse scenario assuming 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 sovereign risk shock in the EU represents a deterioration of market conditions as compared to the situation observed in early May 2010. In other central bank news, the Bank of England also left its interest rate unchanged at 0.5%, and made no changes to its asset purchase program.

There were other economic headlines in the euro-zone that deserve a mention, as 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, 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.

The UK FTSE 100 Index is 1.9% higher, France’s CAC-40 Index is up 1.7%, Germany’s DAX Index is gaining 0.8%, and Switzerland’s Swiss Market Index is rising 1.2%, while Sweden’s OMX Stockholm Index is declining 0.9%.

Asia advances following US rally

Stocks in Asia were mostly higher on the heels of the strong advance in the US, and following the IMF’s increased global growth forecast, with financials leading the way. Japan’s Nikkei 225 Index rose 2.8% to pace the advance despite some mixed economic data in the region. Japan reported that its 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. Other reports out of Japan included a slowdown in the year-over-year (y/y) growth rate of machine tool orders in June, a larger-than-expected narrowing of the nation’s trade surplus in May, and a drop in bank lending y/y in June. Meanwhile, Australian stocks also helped lead the way, with the S&P/ASX 200 Index rising 2.4% on the optimism following the favorable action in the US, and after better-than-expected employment data. Australia’s employment change 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, South Korea’s Kospi Index increased 1.4%, amid the broad-based improved sentiment, and after a report showed the nation’s money supply increased at a slower pace in May, Thailand’s SET Index rose 0.4% amid a report that showed consumer confidence improved in June. Rounding out the day, Taiwan’s Taiex Index gained 1.0% in the wake of a report that showed its trade surplus narrowed by a larger amount than anticipated, and India’s BSE Sensex 30 Index advanced 1.0%.