Evening Market Update

Jobs Report Disappoints, But Equity Markets Advance

Stocks moved higher to close out the week on a positive note, after the much-anticipated US labor report revealed more jobs were lost than expected, while fewer private sector jobs were added to nonfarm payrolls than economists were anticipating. The report helped the equity markets by increasing the possibility that the Fed may implement further quantitative easing. Treasuries finished the day mixed, as the only other report on the economic front was a larger-than-expected rise in wholesale inventories. In equity news, Dow member Alcoa unofficially kicked off the 3Q earnings season on a positive note by beating the Street’s top- and bottom-line forecasts, while Micron Technology failed to match profit expectations. Elsewhere on the equity front, J.C. Penny and Fortune Brands both benefited after reports revealed that activist investor William Ackman’s hedge-fund firm Pershing Square Capital Management has acquired substantial stakes in the two firms. Please note, in observance of the Columbus Day holiday, the US bond market will be closed on Monday, October 11th, but the stock market will be open.

The Dow Jones Industrial Average gained 58 points (0.5%) to close at 11,006, the S&P 500 Index rose 7 points (0.6%) to 1,165, and the Nasdaq Composite advanced 18 points (0.8%) to 2,402. In moderate volume, 946 million shares were traded on the NYSE and 2.0 billion shares were traded on the Nasdaq. Crude oil rose $1.20 to $82.87 per barrel, wholesale gasoline advanced $0.04 to $2.15 per gallon, and the Bloomberg gold spot price jumped $14.00 to $1,347.55 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.2% lower at 77.26. For the week, including dividends, the DJIA increased 1.63%, the S&P 500 Index gained 1.65%, and the Nasdaq Composite advanced 1.31%.

Dow member Alcoa Inc. (AA $13) unofficially kicked off 3Q earnings season, posting profits ex-items of $0.09 per share, above the $0.05 consensus estimate of analysts surveyed by Reuters, with revenues increasing 15% year-over-year (y/y) to $5.3 billion, compared to the $5.0 billion that the Street was expecting. The aluminum producer said higher volumes in alumina, flat-rolled products, and engineered products and solutions partially offset the impact of lower metal prices and negative currency impacts. The company added that it is seeing markets strengthening and it has increased its 2010 global aluminum consumption forecast, aided by “more and more people” moving into the middle class in countries such as China, Brazil, India, and Russia, driving demand in building and construction, transportation, and packaging. Shares were solidly higher.

Micron Technology Inc. (MU $8) reported fiscal 4Q EPS of $0.32, below the $0.39 that analysts were anticipating, and although revenue almost doubled y/y to $2.5 billion, the figure came up short of the $2.7 billion that the Street was expecting. The chipmaker said DRAM—chips used in PCs and video-game consoles—revenue was down 14% quarter-over-quarter (q/q) due to a 12% decline in unit sales volume and a slight decrease in average selling prices, and revenue from its NAND flash—chips used in smartphones, MP3 players, and digital cameras—was 9% lower q/q due to a 7% decrease in sales volume and a slight decline in prices. Despite the report, shares gained solid ground. 

Shares of J.C. Penney Co. Inc. (JCP $32) traded nicely higher after it revealed that activist investor William Ackman’s hedge-fund firm Pershing Square Capital Management has acquired a 16.5% stake in the department store, making it the company’s largest shareholder. Also, shares of Fortune Brands Inc. (FO $56) finished higher after CNBC reported that Ackman’s Pershing Square has acquired an 11% stake in the maker of Jim Beam bourbon and Titleist golf balls. A spokesperson for Ackman’s hedge-fund firm confirmed the stake, per Bloomberg, but FO has not commented on the matter.

Private sector job growth smaller than expected, wholesale inventories expand

Nonfarm payrolls  fell by 95,000 jobs in September, more than the consensus estimate of economists surveyed by Bloomberg, which forecasted a 5,000 decline. Additionally, excluding government hiring and firing, private sector payrolls rose by 64,000, versus the forecast of a gain of 75,000, after expanding by an upwardly revised 93,000—from an initially reported 67,000 gain—in August. The unemployment rate remained at 9.6%, compared to expectations of a slight increase to 9.7%. Average hourly earnings were unchanged month-over-month (m/m) versus the Street's forecast of a 0.2% increase, and average weekly hours remained at 34.2, matching economists’ forecasts. Government payrolls dropped by 159,000 as Census employment fell by 77,000 temporary workers and state and local governments shed 76,000 jobs. Within the report, there were some distortions as unemployment benefits ended and then were re-extended, which was expected to increase the size of the labor force, but the labor force was nearly unchanged. Additionally, the status of unemployment benefits may have played a part in a broader measure of unemployment, the “U-6,” which grew to 17.1%, the highest since April. The U-6 measures people employed part time but who would prefer full-time work, discouraged job seekers, those who are not currently looking for work but have recently, and therefore are included in the labor force.

Overall, the report was mixed, with positives including temporary help services growth of 16,900, the number of long-term employed, those out of work for more than 27 weeks, remaining steady, but elevated, at 41.7%, and the private sector adding more jobs than expected when including revisions, but government payrolls ex-Census was disappointing. Budget deficits at the state and local level have necessitiated job cuts, and despite a federal aid package many teaching jobs had to be cut before the school year began. The unemployment rate was unchanged, but remains well above the rate that the Fed views is consistent with full employment and price stability in the overall economy, and the rate of job gains is insufficient to bring down the rate in a reasonable time period.

In other economic news, wholesale inventories for August increased 0.8% m/m, above the 0.5% advance that economists surveyed by Bloomberg had forecasted, and July’s 1.3% rise was revised higher to a 1.5% increase.

Treasuries finished mixed after overcoming early losses following the labor report. The yield on the two-year note lost 1 bp to 0.34%, the yield on the 10-year note was flat at 2.39%, and the 30-year bond yield gained 3 bps to 3.74%. Please note, the US bond market will be closed on Monday, October 11th, in observance of the Columbus Day holiday, but equity markets will be open.

Economic data mixed out of Europe, Moody’s sees strength in China

The international economic news was highlighted by reports showing the trade balance in Germany—Europe’s largest economy—narrowed by a larger amount than expected, due to a bigger-than-forecasted drop in exports, and UK producer prices came in hotter-than-anticipated. Other reports out of Europe included: French business sentiment improving, Sweden’s industrial production unexpectedly falling, and Switzerland’s unemployment rate falling surprisingly. In Asia/Pacific, Japan’s trade surplus narrowed by a larger amount than economists forecasted for August, exacerbating the uneasiness regarding the impact of the surging yen on the overall Japanese economy. Meanwhile, Moody’s Investors Service said that it may upgrade its credit rating of China, due to the nation’s economic strength and ability to contain losses from unprecedented lending, per Bloomberg. Back in the Americas, Canada’s employment change unexpectedly fell, while housing starts rose more than expected.

Market rise, aided by Japan’s policy easing surprise

In a relatively quiet period for equity news this week before 3Q earnings season begins in earnest, the market’s attention was focused on the economic calendar and the plethora of monetary policy decisions across the globe. The global equity markets posted solid gains for the week as expectations continued to grow that further quantitative easing by the US Federal Reserve, where it buy assets to increase the supply of money in the system aimed at stimulating the economy, is in the offing. This sentiment was taken to another level as the Bank of Japan unexpectedly cut its benchmark interest rate and announced it was examining a potential asset purchase program of up to 5 trillion yen ($60 billion). Moreover, the Reserve Bank of Australia surprisingly kept its benchmark interest unchanged for a fifth-consecutive month, helping suggest that global central banks are relentlessly committed to supporting the recovery. The Fed continues to fight an uphill battle trying to restore confidence to the business sector. The conundrum the Fed faces: It can push money into the economy, but can't force lending, borrowing, spending or investing, leading to a continued low velocity of money—getting money circulating in the economy.

However, the Bank of England and European Central Bank held steady on their monetary policies, offering no new plans for asset purchases or any other further stimulus efforts. Schwab’s Liz Ann, Brad and Michelle, also point out that the ECB has been reluctant to provide more stimulus as Europe’s debt problems appear contained—at least for now—and we believe there's low probability of contagion, when the problems of one country become the problems of many. However, euro-zone growth will likely be reduced as governments cut spending and raise taxes to cut deficits.

Aid for the equity markets this week also came as the US ISM Non-Manufacturing Index increased more than anticipated to indicate expansion in the non-manufacturing sector, which accounts for about 75% of the total economy, and grew for the ninth-consecutive month.

Fed minutes, inflation data and retail sales around the corner

The week’s fireworks may lie with Tuesday’s midday release of the minutes from the August Federal Open Market Committee (FOMC) meeting. In the statement following the meeting, the Fed changed its outlook on inflation, saying it is currently at levels "somewhat" below the level consistent with its dual mandate of price stability and maximum employment, and indicated that they are prepared to provide additional accommodation if needed. With the fed funds target rates already at 0-0.25%, the Fed's most likely form of additional accommodation would come in the form of asset purchases of bonds, commonly known as quantitative easing (QE).

St. Louis Fed President Bullard said that QE was not a given at the November FOMC meeting, as economic data, while soft, wasn’t clearly negative, while New York Fed President Dudley said the expected rate of progress on the economy and job growth was “unacceptable.” Traders will be looking for any nuances as to the uniformity of opinions and satisfaction with current and forecasted economic data and if QE was tied to any quantifiable measures of weakness. Additionally, Bernanke and others have noted the risks to doing more QE, and a discussion of these will also be monitored.

Thursday brings the Producer Price Index (PPI), expected to show prices at the wholesale level advanced by 0.2% month-over-month (m/m) in September, while the core rate, which excludes food and energy, is expected to rise only 0.1%. On a year-over-year (y/y) basis, the PPI is expected to advance 3.7% in September, and 1.5% at the core level. The release precedes Friday’s report on the Consumer Price Index (CPI), forecasted to show a 0.2% m/m increase in September, while ex-food and energy, it is expected to rise 0.1% m/m. On a y/y basis, the CPI is expected to increase 1.2% at the headline level and 0.9% y/y at the core level.

The week concludes with Friday’s release of advance retail sales, forecasted to rise 0.4% m/m in September, the same rate as in August, while sales ex-autos are also estimated to grow 0.3%, after advancing by 0.6% in August. Same-store sales results for September —sales at stores open at least a year—reported by retailers were generally better-than-expected. The retail sales report includes spending at supermarkets and gas stations.

Other releases on the US economic calendar  include theNFIB Small Business Optimism survey, business inventories, the Empire Manufacturing Index, MBA Mortgage Applications, initial jobless claims, the trade balance for August, and the University of Michigan Consumer Sentiment Index.

The international economic calendar will include French industrial and manufacturing production, CPI, Italian industrial production, German CPI and wholesale price index, UK CPI, trade balance, consumer confidence and jobless claims, euro-zone industrial production and CPI, Japanese consumer confidence, machine orders and industrial production, Chinese trade balance, money supply and new loans, and Australian business and consumer confidence.