Morning Market Update

Labor Pains Cause Sentiment to Wane

The equity markets fell below the flatline in morning action following a disappointing US labor report, which showed about double the amount of jobs were shed from nonfarm payrolls and fewer private sector payrolls were added than anticipated, reopening some economic recovery wounds. Treasuries are higher after receiving a boost from the jobs report, with a final-hour reading of consumer credit up next for the economic calendar. Meanwhile, 2Q earnings reports continue to come in, with Dow member Kraft Foods Inc and government-controlled financial firm American International Group Inc both posting earnings that exceeded expectations. Overseas, Asia was nearly unchanged but China moved higher, while Europe has given up early gains and is lower following the US jobs report.

As of 8:54 a.m. ET, the September S&P 500 Index Globex future is 8 points below fair value, the Nasdaq 100 Index is 17 points below fair value, while the DJIA is 67 points below fair value. Crude oil is down $0.60 at $81.41 per barrel, and the Bloomberg gold spot price is up $10.80 at $1,205.75 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.1% at 80.69.

Dow member Kraft Foods Inc. (KFT $30) reported 2Q EPS ex-items of $0.60, eight cents above the Reuters estimate, with revenues jumping 25.3% year-over-year (y/y) to $12.3 billion, roughly inline with the Street’s forecasts. The consumer products conglomerate said it achieved combined organic net revenues—revenues excluding acquisitions and divestitures—of 2.2%. KFT also said its acquisition of Cadbury helped boost its headline revenues by 22.8 percentage points. The company confirmed its full-year EPS outlook.

American International Group Inc. (AIG $40) posted 2Q earnings ex-items of $1.99 per share, well above the $0.98 that analysts were expecting. The company said its continuing insurance operating results remain solid, while the company continues to execute on its restructuring plans and prepares for separation from the US government.

Private sector payrolls rise by smaller amount than forecasted

Nonfarm payrolls fell by 131,000 jobs in July, about double the consensus estimate of economists surveyed by Bloomberg. Meanwhile, excluding government hiring, private sector payrolls increased by 71,000, versus the forecast of a gain of 90,000, after expanding by a downwardly revised 31,000—from an initially reported 83,000 gain—in June. The unemployment rate remained at 9.5%, while the expectation was for it to rise slightly to 9.6%. Average hourly earnings rose by 0.2% month-over-month (m/m) versus the Street's forecast of a 0.1% increase, and average weekly hours increased slightly to 34.2 from the 34.1 where economists expected it to remain. Government payrolls fell by 202,000 as Census employment dropped by 143,000 temporary workers. Treasuries are higher after gaining ground following the report.

In the final hour of trading today, the economic calendar will yield the release of consumer credit, forecasted to drop by $5.3 billion in June after falling by $9.1 billion in May.

Europe gives up gains on disappointing data

Stocks in Europe have relinquished early gains that came from strength in basic materials along with oil and gas issues, advancing despite some disappointing manufacturing data across the pond, as the dismal US labor data stymied sentiment. Meanwhile, financials are finding some support, on the heels of a solid increase in shares of Royal Bank of Scotland (RBS $17) after the UK government-controlled lender unexpectedly swung to a profit for the first-half of the year, as asset impairment losses fell. Consumer goods are also under some pressure to weigh on the equity markets as wheat prices hit a 23-month high in the wake of a Russian ban on exports of the commodity, due to a severe drought.

The economic calendar across the pond is heavy, with some major manufacturing reads in focus, headlined by an unexpected decline in industrial production in Germany, falling 0.6% month-over-month (m/m) in June, compared to the expectation of economists, which called for production in Europe’s largest economy to increase 0.5%. Also, the UK released a couple manufacturing reports, which showed industrial production unexpectedly declined by 0.5% m/m in June, while a separate report showed the nation’s manufacturing production rose 0.3% m/m in June, short of the 0.4% increase that was anticipated. Other reports rounding out the European economic front include a 0.4% expansion in Italy’s 2Q GDP, matching expectations, UK producer input prices falling 1% m/m in June, doubling the decline that was forecasted, while output prices rose more than expected. Moreover, Italy’s industrial production increased by an amount that was below expectations, France’s trade deficit narrowed by a larger amount than anticipated, and Switzerland’s unemployment rate dipped to 3.6% in July, inline with expectations.

The UK FTSE 100 Index is 0.3% lower, France’s CAC-40 Index and Germany’s DAX Index are declining 0.6%, and Italy’s FTSE MIB Index is decreasing 0.4%, while Russia’s RTS Index and Switzerland’s Swiss Market Index are down 0.5%.

Asia mostly flat but China posts solid gains

Stocks in Asia finished near the unchanged mark in most major markets, with stocks in South Korea and Australia flat, while Japan’s Nikkei 225 Index dipped 0.1% as traders lacked some conviction ahead of the key labor report in the US and some manufacturing reports out of Europe. However, stocks in China moved higher, with the Hong Kong Hang Seng Index increasing 0.6% and the Shanghai Composite Index rising 1.4%, aided by strength in agriculture issues as flooding in the region boosted produce prices. Elsewhere, Taiwan’s Taiex Index gained 0.3%, while India’s BSE Sensex 30 Index declined 0.2%. In economic news in the Asia/Pacific region, Japan’s Leading Index rose slightly more than anticipated in June, and the Reserve Bank of Australia reiterated its economic growth and inflation outlooks in its quarterly monetary policy statement.