Weekend Market Summary

Fireworks Reserved for the Weekend

Amid lighter-than-usual volume on Friday, traders appeared to start the extended weekend early ahead of the Independence Day holiday, as stocks were unable to find any spark in a blasé US labor report to ignite any optimism and finished lower. The jobs report showed the unemployment rate and a drop in nonfarm payrolls were better than forecast, however private sector job growth and average hourly earnings were below what economists were expecting. As well, May's factory orders report showed a decline more than double expectations. Treasuries finished mixed in choppy trading after giving up gains that initially followed the labor data. Equity news was light, with Google acquiring ITA Software, Continental Airlines saying a key industry metric fell short of expectations, and AutoNation reporting a rise in June vehicle sales. Please note, in observance of the Independence Day holiday, all US markets will be closed on Monday, July 5.

The Dow Jones Industrial Average fell 46 points (0.5%) to close at 9,686, the S&P 500 Index shed 5 points (0.5%) to finish at 1,023, and the Nasdaq Composite declined 10 points (0.5%) to 2,092. In light volume, 1.1 billion shares were traded on the NYSE and 1.6 billion shares were traded on the Nasdaq. Crude oil lost $0.81 to $72.14 per barrel, wholesale gasoline fell $0.02 to $1.98 per gallon, while the Bloomberg gold spot price gained $12.55 to $1,211.50 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was 0.1% lower at 84.42. For the week, including dividends, the DJIA fell 4.5%, the S&P 500 Index lost 5.0%, and the Nasdaq Composite saw a 5.9% decline.

In M&A news, Google Inc. (GOOG $437) announced that it has signed a definitive agreement to acquire privately-held flight information software firm ITA Software Inc. for $700 million in cash. GOOG's CEO said ITA has created an impressive product to organize flight information, and their technology opens up exciting possibilities for it to create new ways for users to more easily find flight information online. GOOG finished lower.

Continental Airlines Inc. (CAL $20), which entered into a definitive $3 billion merger agreement with United Airlines parent, UAL Corp. (UAUA $19) in May, reported that its consolidated passenger revenue per available seat mile (RASM)-a key industry metric-for June is estimated to have increased between 21-22% year-over-year (y/y). CAL came under solid pressure as the figure was a slowdown from the 23.4% that it posted in May and it was short of the 25% estimate of analysts, per CNBC. CAL also reported that traffic increased 4.7% and that its load factor was 86.9%, 2.1 points above the same period last year.

AutoNation Inc. (AN $19) reported that its new vehicle sales in June rose 13% year-over-year (y/y), with sales of domestic and premium luxury cars increasing 23% and 25%, respectively, while import segment sales rose 4%. However, the company’s CEO said on CNBC that on a month-over-month basis, sales were down 15% versus May. Shares were under pressure.

Jobs fall by smaller amount than expected, unemployment rate unexpectedly drops

Nonfarm payrolls fell by 125,000 jobs in June, less than the consensus estimate of economists surveyed by Bloomberg, which called for a 130,000 decrease, and on a net combined basis, May's and April's readings were revised 25,000 higher. Meanwhile, excluding government hiring, private sector payrolls grew by 83,000, versus the forecast of a gain of 110,000, after expanding by a downwardly revised 33,000 in May. The unemployment rate fell to 9.5% from 9.7%, as the labor force dropped by 652,000 in the month, while the expectation was for it to come in at 9.8%. Average hourly earnings declined by 0.1% versus the Street's forecast of a 0.1% increase, and average weekly hours dipped to 34.1 from the 34.2 where economists expected for it to remain. Government payrolls fell as Census hiring dropped 225,000 temporary workers.

The report had mixed indicators for future job growth, as temporary help services gained 21,000, the number of involuntary part-time workers (workers who want full-time work, but are working part-time) was little changed, and the workweek declined. These factors can be leading indicators of future job growth, as businesses often try to do more with current employees, including moving workers from part-time to full time, and also add temporary positions, before committing to permanent additions to payrolls.

During the unprecedented recession, businesses and consumers pulled back sharply, and the initial recovery showed a steep increase, correcting some imbalances created in the economy. However, with uncertainty still high about the sustainability of growth, a slowdown in economic growth in May, and adding in the volatility of the stock market during May, companies are likely waiting to hire only when necessary, instead of hiring ahead of demand. Professional investors are also exhibiting higher than normal levels of uncertainty, with a wide range of views for where the market will end by December 2011. On the bullish side of the equation, sentiment is negative, the Fed remains accommodative, and Treasuries offer low yields, likely making stocks attractive on a relative basis. Of course the bears also have compelling stories, citing high earnings estimates, slowing growth in Europe and China, and the threat of deflation. These divergent views could lead to some extended range-bound trading during the summer months.

Factory orders fell 1.4% month-over-month (m/m) in May, compared to the decrease of 0.5% that economists had expected, snapping an eighth-straight monthly winning streak, and April's increase was revised lower, from a 1.2% gain to a 1.0% advance. May durable goods orders-reported last week-were favorably revised from a 1.1% drop to a 0.6% decline. Nondefense capital goods ex-aircraft, considered a good proxy for business spending, jumped 3.9%, following a drop of 2.8% that was seen in April.

In choppy trading, the yield curve steepened with the yield on the 2-year note 1 bp lower at 0.63%, the yield on the 10-year note up 2 bps to 2.98%, and the 30-year bond gaining 4 bps to 3.94%. All US markets will be closed on Monday, July 5, in observance of the Independence Day holiday.

Europe economic data mixed, Australia mining tax solidified

There were several economic reports across the pond that garnered some attention. The euro-zone unemployment rate came in at 10.0% for May, unchanged from the downwardly revised April figure, and compared to the 10.1% that economists had expected, while euro-area producer prices rose by an amount that was expected. Also, Italy's unemployment rate moved to 8.7% for May, compared to the 9.0% that was anticipated, after April's rate was downwardly revised. In other economic news in the region, the UK PMI Construction Index unexpectedly declined and separate reports in Spain showed industrial output was stronger than expected, and the number of unemployed workers in June fell by a larger amount than was anticipated.

In the Asia/Pacific region, the story in the spotlight was the conclusion of negotiations regarding the hefty Australian mining industry tax, in which new Australian Prime Minister Julia Gillard and major mining firms came to agreement on a 30% tax for iron ore and coal-rather than on all resource-related profits-with the levy on oil and gas remaining at 40%. The original proposal was for a 40% tax on profits of all resources. Moreover, the return-on-capital trigger point for the tax was raised as part of the agreement. The tax deal, however, still needs to be passed by the Australian Parliament. Elsewhere, retail sales in Hong Kong jumped 19.7% year-over-year (y/y) in May, above the 17.3% that economists had expected, while after the close in Asia, India's central bank increased interest rates for the third time this year, in an unscheduled meeting.

Bulls continue to shed tears as data continues to induce global economic fears

The week got off to an inauspicious start on a roughly inline personal income and spending report, despite G-20 members pledging over the weekend to cut deficits by 2013 while being mindful of the global economic recovery, but would end decisively lower. The global equity markets got on the wrong path following some disappointing data out of China and the US, which helped global economic recovery uneasiness to resurface, ramping up concerns about a potential double-dip recession and stoking flight-to-safety buying, sending the yield on the ten-year Treasury note below the 3% mark. China concerns came in two waves, beginning with a downward revision by the US Conference Board of its Chinese Leading Economic Indicators (LEI) and culminating with a larger-than-expected deterioration in the Chinese PMI Manufacturing Index.

Meanwhile, the US economic calendar exacerbated the aforementioned global recovery sentiment, as sharp drops in consumer confidence and pending home sales, teamed up with an unexpected rise in weekly initial jobless claims and a larger-than-forecasted drop in the US ISM Manufacturing Index. Friday's lackluster labor report did little to assuage the unnerved sentiment.

As if that was not enough, euro-area debt fears continued to linger, helping end a dismal week, month, and quarter in a sour fashion, with Moody's Investors Service warning about a possible downgrade of Spain's debt rating, and a European Central Bank 12-month lending facility maturing. However, some of the euro-area uneasiness was soothed by smaller-than-expected demand for shorter term ECB funds by banks in the region amid the expiration of the aforementioned lending facility, and Spain and France conducted successful debt auctions.

Holiday shortened week is light on data

The week starts with Tuesday's release of the ISM Non-Manufacturing Index, forecasted to decline to 55.0 in June from 55.4 in May, which would mark the eighth month in the past ten months above the 50.0 level that separates expansion from contraction, but would be the first decrease after the index was flat for three straight months. The report is generally considered a measure of economic strength in the service sector and is the companion to the ISM Manufacturing Index, which posted a worse-than-expected decline to 56.2 in June from 59.7 in May, driven by a sharp drop in the prices paid component, which fell from 77.5 in May to 57.0 in June, along with reductions in the rate of growth for new orders, export orders and production.

Companies are still struggling to find pricing power, particularly those levered to the US consumer, while deep cyclicals, such as industrials, have fared better due to growth in emerging markets. The Fed has the dual objective of maximum employment and stable prices and remains on hold. Using the Taylor rule to calculate where the fed funds rate should be at the current rate of unemployment and inflation implies rates should be 6-8% lower according to Wolfe Trahan & Company, which isn't possible of course, with rates at 0%. The Fed will likely be taking a global view of economic growth and pricing trends when considering monetary policy. However, as we’ve seen with Japan, monetary policy that provides "cheap money" doesn’t necessarily stimulate demand, particularly when in an environment of deflation. Deflation is a period of falling prices, which can result in a self-reinforcing cycle when consumers believe that prices will be lower in the future, delaying purchases, resulting in a drop in production, job cuts and wage decreases. With global growth slowing, particularly amid fiscal austerity in Europe, there is an increased risk of deflation, not inflation, for most of the developed world.

Other releases on the US economic calendar include MBA Mortgage Applications, initial jobless claims, wholesale inventories and consumer credit.

Elsewhere in the Americas, Canada releases building permits, housing prices, unemployment, and housing starts.

In Europe, releases include euro-zone and UK services PMI reports, euro-zone retail sales, UK housing prices, industrial and manufacturing production, and PPI, as well as German factory orders, May trade balance, industrial production and final June CPI.

In Asia/Pacific, Japan is slated to announce money supply and lending, the leading index, and machine orders, and Australia will report unemployment.

In central bank action, the Reserve Bank of Australia, the Bank of England and the European Central Bank meet to discuss monetary policy.