Evening Market Update

Bulls Can’t Overcome Disappointing Claims Data

Despite a late-day attempt to reach positive territory, stocks finished in the negative, but well off the lows of the day, following disappointing weekly initial jobless claims data that unsettled investors ahead of tomorrow’s labor report. In equity news, US retailers reported July same-store sales with mixed results, as Target, Nordstrom and J.C. Penney Co. missed estimates, while Costco Wholesale, Gap and Macy’s topped forecasts. Elsewhere on the equity front, DIRECTV met profit expectations, while Allstate and News Corp both reported results that far exceeded estimates. Treasuries ended higher, gaining ground following the employment data.

The Dow Jones Industrial Average lost 5 points (0.1%) to close at 10,675, the S&P 500 Index edged 1 point (0.1%) lower to finish at 1,126, and the Nasdaq Composite shed 11 points (0.5%) to 2,293. In light volume, 876 million shares were traded on the NYSE and 1.7 billion shares were traded on the Nasdaq. Crude oil fell $0.46 to $82.01 per barrel, wholesale gasoline was $0.01 lower at $2.16 per gallon, and the Bloomberg gold spot price gained $1.10 to $1,196.05 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.2% lower at 80.79.

Major retail same-store sales—sales at stores open at least a year—reports for July poured in, headlined by Target Corp. (TGT $53) which posted July sales growth of 2.0% year-over-year (y/y), versus the 2.3% consensus estimate of analysts. TGT said store traffic and apparel sales were “strong,” but it continued to see soft sales in electronics, video games, music and movies. Shares of TGT were higher.

Meanwhile, Costco Wholesale Corp. (COST $56) posted a July sales increase of 6%, including gasoline sales and foreign exchange, compared to the 5.5% gain that was expected. Excluding the impact of fuel and currency changes, sales were up 4%. COST traded below the flatline.

Macy’s Inc. (M $20) reported sales for the month were 7.3% higher, above the 5.9% increase that was anticipated, J.C. Penney Co. Inc. (JCP $22) posted a 0.6% decline, versus the 3.4% growth that was forecasted, Nordstrom Inc. (JWN $34) announced that its sales rose 7.6%, below the 8.1% gain that was expected, while Kohl’s Corp’s (KSS $48) 4.1% increase in sales matched that Street’s projections. M and KSS traded higher, while JCP and JWN were lower.

Meanwhile, inside the mall, Gap Inc. (GPS $18) posted a 1.0% rise in sales, besting the 0.1% growth that was expected, Abercrombie & Fitch Co. (ANF $40) topped the 4.1% sales gain that was expected, with a 7% increase, while Limited Brands Inc’s (LTD $26) steep 12% increase in sales trounced the 5.2% gain that analysts had expected. Shares of all three companies were higher.

The reports from the retailers revealed that back-to-school shopping, which typically begins to ramp up in late-July, has yet to swing into action to the detriment of sales, suggesting that high unemployment, volatility in the markets, and increasing propensity to save continue to knot the purse strings of the consumer. Other themes that accompanied July’s sales included continued discounting of summerwear to make room for back-to-school sales, and some are noting that the hot weather during the month may have impacted results.

Outside of the retail same-store sales front, DIRECTV (DTV $39) reported 2Q EPS ex-items of $0.60, matching the Reuters estimate, with revenues increasing 12% y/y to $5.85 billion, above the $5.74 billion that the Street was looking for. The satellite television provider said it had record-setting subscriber growth in Latin America, where it added 415,000 net new subscribers, while adding 100,000 net subscribers in the US. DTV was higher.

Also, Allstate Corp. (ALL $29) posted 2Q profits ex-items of $0.81 per share, well above the $0.68 that analysts were anticipating, with revenues of $6.6 billion, roughly inline with expectations. The insurance firm said it benefitted from a decline in catastrophe losses from a record 2Q level in 2009. Shares finished in the green.

News Corp. (NWSA $14) reported fiscal 4Q EPS of $0.33, above the $0.20 that the Street was forecasting, with revenues increasing 5.7% y/y to $8.1 billion, which also topped that $7.9 billion that analysts expected. The company’s cable and network programming segment posted strong y/y earnings growth aided by higher contributions from international channels, along with its television unit on improved advertising markets at its stations which include the Fox Broadcast Network. Shares were higher.

Jobless claims rise ahead of tomorrow’s headline labor report

Weekly initial jobless claims increased 19,000 to 479,000, versus last week's figure which was upwardly revised by 3,000 to 460,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to decrease to 455,000. The four-week moving average, considered a smoother look at the trend in claims, rose by 5,250 to 458,500, while continuing claims declined by 34,000 to 4,537,000, compared to the decrease to 4,515,000 that was anticipated by economists. A Labor Department spokesman said there were no special factors influencing last week’s report. However, the trend in claims in July were skewed by the government’s seasonal adjustment, which expected temporary factory layoffs from auto plant retooling that did not occur this year. Treasuries rose and remained higher following the claims data. The yield on the two-year note lost 4 bps to 0.53%, the yield on the 10-year note decreased 5 bps to 2.90% and the yield on the 30-year bond fell 3 bps to 4.05%.

The jobless claims report comes ahead of tomorrow’s release of nonfarm payrolls, expected to fall 65,000 in July, after declining by 125,000 in June, while excluding government hiring, private sector payrolls are expected to increase 90,000, after expanding by 83,000 in June, due to the impact of temporary hiring for the Census on the headline number. The unemployment rate is estimated to increase to 9.6% from 9.5%, as workers re-enter the workforce as job openings increase.

Gauges of the employment situation have been mixed lately, with leading indicators such as temporary hiring continuing to grow, albeit at low levels, and the employment components of the manufacturing and services ISM Purchasing Manager Indexes both increasing in July. The ISM services PMI reading has fluctuated just above and below the 50 level that indicates hiring over the past four months, while manufacturing has registered eight straight months of expansion. However, jobless claims have been stubbornly high and the average workweek fell last month.

After experiencing a strong rebound in economic activity off the low levels created during the recession, economic data has stalled. Benefits from the initial spending from pent-up demand by consumers, inventory rebuilding after plunging by record amounts, and fiscal stimulus programs around the world have begun to decelerate, after hitting their peaks. Recoveries during periods of deleveraging tend to result in a slow pace of growth, and the elevated levels of excess supply of factory output and individuals looking for work have prompted the Fed to say it would take five-to-six years for the economy to converge fully to its longer-run path. Chair Ben Bernanke has said the economic outlook remains unusually uncertain, but that consumer spending is likely to pick up amid a “moderate” expansion. The Fed responded to the recession by flooding the market with money, but it’s not working through the economy, due to tight lending standards and cautiousness among businesses. Small business is vital to economic expansion, as that’s where the majority of hiring is expected to come from, but their optimism remains low. As such, continued cautiousness will likely result in disappointing job growth.

The only other report on the US economic calendar is consumer credit, forecasted to decline by $6.0 billion.

Central bank announcements and mixed data overseas

The European economic calendar provided a plethora of mixed data, highlighted by a positive report out of Germany, which showed June factory orders in Europe’s largest economy jumped 3.2% month-over-month (m/m), well above the 1.4% increase that economists forecasted. However, separate reports in the euro-region showed Spain’s industrial output slowed and UK new car registrations fell solidly. Elsewhere, Ireland’s unemployment rate increased, while Sweden’s jobless rate came in below expectations, and the International Monetary Fund (IMF) said Greece has shown “great progress” in implementing its austerity measures to cut its deficit and should gain approval to receive a second installment from the euro-area bailout package.

In central bank news, the Bank of England left its benchmark interest rate unchanged at 0.5%, and did not add to its plans to purchase assets, as expected, while the European Central Bank also expectedly kept its benchmark interest rate unchanged at 1.0%. ECB President Jean-Claude Trichet’s customary press conference didn’t offer any new details regarding adding or removing stimulus efforts, but he noted that, ”Available data for the third quarter are better than expected,” but said the ECB’s interest rate remains “appropriate.” Trichet said he is “not declaring victory,” as the economy is growing at a “moderate, but still uneven pace.”, adding that inflationary pressures remain contained and inflation expectations remain firmly anchored.

Economic news in the Asia/Pacific region was relatively light, with India reporting slightly smaller increases in wholesale prices, but price gains remained solid year-over-year (y/y), and New Zealand’s employment data disappointed, showing the nation’s 2Q unemployment rate rose more than expected, and its employment change unexpectedly fell. Elsewhere, Taiwan’s consumer prices rose more than anticipated but wholesale prices came in lower the forecasted. In China, reports indicated that the Chinese government ordered stress tests of property-related firms in the event of a sharp decline in home prices, and Reuters reported that the Chinese Banking Regulatory Commission cracked down on extending mortgages to homebuyers looking to purchase their third home.

Tomorrow’s international economic calendar will include: Japan’s leading index, employment data out of Switzerland, France’s trade balance, industrial production and 2Q GDP figures from Italy, industrial production from Germany, while the UK will also report industrial production, as well as PPI and home prices. Back in the Americas, Canada will provide data on employment.