Evening Market Update

Stocks Mixed Ahead of Friday’s Key Labor Report

The US equity markets finished the day mixed, as investors were cautious ahead of tomorrow’s labor report and the kickoff of earnings season. A better-than-expected initial jobless claims report provided some hope early in the day, but failed to result in any significant gains. Treasuries were also mixed, as the only other release on the domestic economic docket was a report showing that consumer credit fell for the seventh-consecutive month. On the equity front, the nation’s retailers reported same-store sales, with results coming in mostly above forecasts, highlighted by impressive numbers from Macy’s and J.C. Penny, while Target missed the Street’s expectations. Dow member Alcoa kicked off the 3Q earnings season after the close by beating on the top- and bottom-lines. Meanwhile, PepsiCo matched analysts’ profit expectations, while Marriott International missed earnings and revenue forecasts. 

The Dow Jones Industrial Average fell 19 points (0.2%) to close at 10,949, the S&P 500 Index lost 2 points (0.2%) to 1,158, and the Nasdaq Composite gained 3 points (0.1%) to 2,384. In moderately light volume, 915 million shares were traded on the NYSE and 1.8 billion shares were traded on the Nasdaq. Crude oil fell $1.89 to $81.34 per barrel, wholesale gasoline declined $0.04 to $2.11 per gallon, and the Bloomberg gold spot price decreased $14.41 to $1,334.65 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was flat at 77.48.

The nation’s retailers are reporting September same-store sales—sales at stores open at least a year—headlined by Target Corp. (TGT $54), which posted a 1.3% gain in sales year-over-year (y/y), shy of the 1.9% gain that analysts surveyed by Reuters were expecting. The company said sales were near the low end of its expectations, but it is pleased with its back-to-school and back-to-college categories and it continues to see strong performance in grocery, beauty and healthcare. TGT said in October it expects to build on its strong guest traffic trends with the launch of its Redcard Rewards program, which it believes will help it gain market share and profitability in the upcoming holiday season. TGT finished higher.

Meanwhile, department store Macy’s Inc. (M $24) announced that it achieved a 4.8% y/y increase in its September same-store sales, above the 3.3% growth that was anticipated. The company said the back-to-school season has been one of its most successful in years. Elsewhere, J.C. Penney Co. Inc. (JCP $32) posted a 5.1% gain in September same-store sales, above the 3.1% increase that was anticipated, aided by “better-than-expected” back-to-school sales, and Nordstrom Inc. (JWN $38) announced a 7.5% jump in sales, versus the 4.3% growth that was expected, while Kohl’s Corp. (KSS $53) reported a 3.0% increase in sales for the month, below the 3.3% advance that was forecasted. Shares of JWN, M and JCP were higher, while KSS traded lower.

Inside the mall,  Gap Inc. (GPS $18) posted a 2% decline in same-store sales for September compared to last year, and versus the flat reading that analysts were expecting. Meanwhile, Limited Brands Inc. (LTD $29) achieved a solid 12% increase in sales, easily topping the 4.1% that analysts projected, and Abercrombie & Fitch Co. (ANF $42) announced that its sales surged 13%, compared to the 3.6% increase that was forecast. ANF and LTD moved solidly higher, while GPS was lower.

Outside of the retail sales reports, Dow member Alcoa Inc.  (AA $12) kicked off the 3Q earnings season after the close by beating analysts’ top- and bottom-line estimates. 3Q EPS ex-items came in at $0.09, above estimates of $0.05, while revenue rose to $5.29 billion, up from $4.615 billion in the same quarter last year. Shares of AA traded lower ahead of the report.

PepsiCo Inc. (PEP $66) reported 3Q EPS ex-items of $1.22, which matched the Street’s forecast, while revenues jumped 40% y/y to $15.5 billion, topping the $15.3 billion that analysts were expecting. The company benefitted from broad-based gains across its snack and beverage portfolio and the acquisition of its two anchor bottlers. PEP added that, “Even in a macroeconomic environment that continues to be challenging, we believe we have achieved top-tier performance among leading consumer staple companies.” The company lowered the high end of its full-year EPS outlook. PEP finished lower.

Also, Marriott International Inc. (MAR $36) announced 3Q EPS of $0.22, one penny below the Street’s expectations, and revenues increased 7% y/y to $2.6 billion, below the $2.7 billion that was forecasted by analysts, and shares were down solidly. However, the hotel chain said corporate and leisure demand continues to strengthen, and it is leading the US industry in pushing retail price increases. MAR said its international systemwide hotels showed “tremendous strength,” led by the Asia Pacific region.

Weekly jobless claims fall, consumers continue to use less credit 

The week’s focus on the employment sector continues, with the release of weekly initial jobless claims, which fell by 11,000 to 445,000, versus last week's figure which was upwardly revised by 3,000 to 456,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to come in at 455,000. The four-week moving average, considered a smoother look at the trend in claims, declined by 3,000 to 455,750, and continuing claims dropped by 48,000 to 4,462,000, compared to the 4,450,000 that was anticipated by economists. Treasuries remain mixed after paring gains on the employment report.

Consumer credit fell for the seventh-consecutive month, dropping by $3.3 billion during August, less than the $3.5 billion decline forecasted by economists, while July’s figure was revised to a larger drop, of $4.1 billion from the initially reported $3.6 billion decrease. The decline was led by waning use of revolving credit, which fell for the twenty-fourth straight month, decreasing by $4.5 billion in August and $35 billion during 2010. Meanwhile, non-revolving credit, which includes auto loans and other personal loans but excludes debt secured by real estate such as home equity lines of credit, rose $1.65 billion in August and is up by $9.2 billion in 2010.

Europe grapples with data and central bank announcements

Economic news out of Europe was highlighted by a disappointing UK housing report and some favorable manufacturing reports, as well as monetary policy announcements from the Bank of England and the European Central Bank. Both the BoE and ECB kept their benchmark interest rates unchanged at 0.5% and 1.0%, respectively, as widely expected. The BoE did not announce any additions to its asset purchase program and the focus shifted to the customary press conference by ECB President Jean-Claude Trichet. The head of the ECB noted that the euro-zone’s economy should continue to recover at a moderate rate, with risks tilted slightly to the downside, as concerns remain related to the re-reemergence of tensions in financial markets. On inflation, Trichet said rates will remain near current levels in the next few months before moderating again in the course of next year. Trichet did not offer any comments or signals regarding the timing of any new stimulus efforts or changes to the central bank’s current policy stance, but did comment on the recent weakness in the US dollar, saying a strong dollar is in the US’s interest.

Meanwhile, other reports from the European economic calendar deserve a mention, with the largest drop in UK home prices, per Bloomberg, since at least 1983 being offset by some favorable manufacturing data. Stocks in Europe overcame some early weakness from caution ahead of the aforementioned announcements from the BoE and ECB and the disappointing UK housing data, after reports showed industrial production in Germany—Europe’s largest economy—and the UK exceeded economists’ expectations. Also, a separate reading of manufacturing production in the UK exceeded forecasts.

In Asia/Pacific, Japan issued a report that showed the nation’s Leading Index deteriorated from 100 in July to 99.1 in August, while a separate release noted the pace of growth in Japanese machine tool orders decelerated y/y in September. Meanwhile, Australian employment change rose by 49,500 in September, more than double the 20,000 forecast of economists, as full-time employment picked up while part-time employment declined, and Taiwan reported an unexpected narrowing of its trade surplus. Back in the Americas, Canadian building permits fell sharply in August, as the total value of permits issued by municipalities decreased 9.2%, compared to a 2% drop expected by economists. Permits for non-residential constructions fell 23%, while residential permits showed an increase of 2%.

Jobs on the minds of traders and the Fed

All eyes will be on tomorrow’s release of nonfarm payrolls, expected to fall 5,000 in September, after declining by 54,000 in August, while excluding government employment, which has been falling as temporary Census workers are relieved, private sector payrolls are expected to increase 75,000, after expanding by 67,000 in August. The unemployment rate is estimated to increase to 9.7% from 9.6%, as workers re-enter the workforce as job openings increase.

While private sector payroll growth of 763,000 during the past eight months has disappointed, the household survey within the labor report, which includes small businesses and contractors and tends to lead changes in the payrolls number, tells a different story, growing by 2.3 million jobs during the same timeframe. Additionally, initial jobless claims have backed away from the 500,000 level hit this summer, indicating some relief on the jobs front.

The stock market has been buoyed by the prospect that the Fed could implement a second round of asset purchases to stimulate the economy, also known as quantitative easing, or QE2. Thus far, markets have tended to cheer positive economic data, but some investors have floated the idea that poor economic data will raise the probability of QE2, which would support a wide variety of asset prices.

The other release on the US economic calendar is wholesale inventories, expected to increase by 0.5% in August, after rising by 1.3% in July.

International economic releases tomorrow will include Canadian employment data and housing starts, German trade data for August, and UK PPI.