Evening Market Update

Stocks Notch Solid Gains on QE2, Strong Retail Sales

The equity markets moved higher right out of the gates and never looked back, as reaction to yesterday’s Fed announcement of an additional $600 billion in asset purchases combined with mostly impressive retail same-store sales to improve investor sentiment. Stocks were also sparked by reports that the Obama Administration may be open to extending tax cuts to all income brackets, but showed little reaction to a larger-than-forecasted increase in weekly initial jobless claims, while 3Q nonfarm productivity rose more than anticipated and unit labor costs unexpectedly declined. In other equity news, Whole Foods Market Inc exceeded the Street’s earnings expectations, while DIRECTV matched analysts’ projections. Treasuries were mostly flat, except for a rise in the 10-year note, while gold and crude oil prices saw significant advances as a result of the falling US dollar.

The Dow Jones Industrial Average rose 220 points (2.0%) to 11,435, the S&P 500 Index gained 23 points (1.9%) to 1,221, and the Nasdaq Composite was 37 points (1.5%) higher at 2,577. In heavy volume, 1.4 billion shares were traded on the NYSE and 2.5 billion shares were traded on the Nasdaq. Crude oil gained $2.11 to $86.80 per barrel, wholesale gasoline added $0.04 to $2.18 per gallon, while the Bloomberg gold spot price surged $44.30 to $1,392.85 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.6% lower at 75.88.

The nation’s retailers reported October same-store sales—sales at stores open at least a year—headlined by Target Corp. (TGT $55), which posted a 1.7% gain in sales year-over-year (y/y), above the 1.5% increase that analysts surveyed by Reuters were expecting. Also, Costco Wholesale Corp. (COST $65) reported a 6% increase in total same-store sales, above the 4.6% growth that the Street had forecasted, while excluding the “positive” impact of strengthening foreign currencies and gasoline inflation, sales were 5% higher. TGT and COST traded higher.

Meanwhile, department store Macy’s Inc. (M $26) announced that it achieved a 2.5% y/y rise in its October same-store sales, above the 1.6% growth that was anticipated. M also increased its earnings and sales guidance for the second half of 2010. Other reports from the major department stores were mixed with Saks Inc. (SKS $12) posting a 8.1% gain in October, well above the 2.0% growth that was expected, while J.C. Penney Co. Inc. (JCP $32) reported a 1.9% decline in sales, versus the gain of 1.0% that was anticipated, and Kohl’s Corp. (KSS $52) achieved a 2.5% decline in sales, compared to the 2.3% increase that was forecasted. KSS also lowered its full-year EPS guidance. All four stocks traded higher.

Inside the mall, Gap Inc. (GPS $20) posted a 2.0% increase in same-store sales for October compared to last year, and versus the 2.4% decline that analysts were expecting. GPS also raised its guidance. Also, Limited Brands Inc. (LTD $31) reported a 9% jump in sales, compared to the 6.1% increase that was forecasted. However, there were some reports that disappointed, as Abercrombie & Fitch Co. (ANF $46) reported a 2.0% increase in sales for the month, compared to the 5.6% growth forecast on the Street, and Aeropostale Inc. (ARO $24) recorded a 2.0% decline in sales, compared to the 3.1% increase that was expected. Nonetheless, shares of all these companies were higher, led by a solid gain in GPS.

Outside of the retail sales reports pouring in, DIRECTV (DTV $43) reported 3Q EPS of $0.55, inline with the Street’s forecasts, with revenues increasing 10% y/y to $6.0 billion, roughly inline with analysts’ expectations. The satellite TV service provider said its Latin American unit lead the way with 206,000 net subscriber additions, while the US continued its “strong momentum,” as a net 174,000 subscribers were added. Shares were lower.

Elsewhere, Whole Foods Market Inc. (WFMI $47) reported fiscal 4Q EPS of $0.33, above the $0.29 that analysts were forecasting, with revenues increasing 15% y/y to $2.1 billion, roughly inline with the Street’s forecast. Same-store sales rose 8.7% y/y and the natural food grocer attributed its performance to its relative price positioning and its initiatives in areas such as healthy eating, animal welfare and sustainable seafood. WFMI increased its full-year 2011 EPS outlook. WFMI traded sharply higher.

Jobless claims rise more than expected, 3Q productivity increases, but labor costs decline

Weekly initial jobless claims rose by 20,000 to 457,000, versus last week's figure which was upwardly revised by 3,000 to 437,000, and versus the consensus estimate of economists surveyed by Bloomberg, which called for claims to rise to 442,000. The four-week moving average, considered a smoother look at the trend in claims, increased by 2,000 to 456,000, and continuing claims fell by 42,000 to 4,340,000, compared to the 4,378,000 that was anticipated by economists.

Elsewhere, the preliminary reading on 3Q nonfarm productivity was 1.9% higher on an annual basis, compared to the 1.0% increase that economists expected, and following the 1.8% decrease seen in 2Q. Unit labor costs were 0.1% lower, versus a gain of 0.6% that was estimated, and the upwardly revised 1.3% increase that was reported in the previous quarter.

Treasuries were mostly flat, although the yield on the 10-year bond was down solidly in the wake of Tuesday’s US midterm elections, which saw the Republicans gain control of the House, and yesterday’s conclusion of the US Federal Reserve’s monetary policy meeting, in which it announced an additional $600 billion in purchases of longer-term Treasury securities. The yield on the two-year note was flat at 0.33%, while the yield on the 10-year note lost 9 bps to 2.48%, and the 30-year bond yield was flat at 4.04%.

Meanwhile, Federal Reserve Chairman Ben Bernanke penned an op-ed piece in the Washington Post today following yesterday’s actions, saying the job market remains “quite weak” and most measures of inflation are running somewhat below 2%, or a bit lower than the rate most Fed policymakers see as being most consistent with healthy economic growth in the long run. Bernanke said that even in the absence of deflation risks, low and falling inflation indicate that the economy has considerable spare capacity, implying that there is scope for monetary policy to support further gains in employment without risking economic overheating. The Fed Chief noted that although asset purchases are relatively unfamiliar as a tool of monetary policy, some concerns about this approach are “overstated,” and the Fed will take all measures necessary to keep inflation low and stable. Bernanke concluded that the Federal Reserve cannot solve all the economy’s problems on its own, and that will take time and the combined efforts of may parties, including the central bank, Congress, the administration, regulators, and the private sector.

ECB and BoE policy meetings dominate international headlines

In international news, the Bank of England and European Central Bank both left their respective benchmark interest rates unchanged at 0.5% and 1.0%. Also, the BoE kept its asset purchase program unchanged as expected, but minutes from its previous meeting showed policy makers broached the subject of adding to its purchases. In the customary press conference following the announcement, ECB President Jean-Claude Trichet said, “All the non-standard measures are fully consistent with our mandate and temporary in nature,” and the governing council will monitor all developments “very closely,” per Dow Jones Newswires. Moreover, the ECB head noted that it continues to expect price development to remain moderate and the economic momentum in the euro region is “positive,” though “uncertainty is prevailing,” per Bloomberg.

In other economic news out of Europe, UK home prices increased more than economists’ forecasts, and a separate report showed the deceleration in euro-zone service sector activity slowed by a smaller amount than previously expected. However, separate reads on service sector activity in Italy, France, and Germany—Europe’s largest economy—all were revised to lower paces of expansion than originally reported. In other economic news in the region, euro-zone producer prices rose inline with expectations.

Jobs on the minds of traders and the Fed

All eyes will be on tomorrow’s release of nonfarm payrolls, expected to grow by 60,000 in October, after declining by 95,000 in September, while excluding government employment, which has been falling as temporary Census workers are relieved, private sector payrolls are expected to increase 80,000, after expanding by 64,000 in September. The unemployment rate is estimated to remain at 9.6%. Headline job numbers were distorted by the Census since hiring began in February, but will be less of a factor going forward.

Meanwhile, the unemployment rate remains well above the rate that the Fed views is consistent with full employment and price stability in the overall economy, and the 95,000 average monthly rate of job gains thus far this year is insufficient to bring down the rate in a reasonable time period. The Fed noted the “disappointingly slow” progress toward its objectives of maximum employment and price stability in its meeting yesterday.

Other releases on the US economic calendar are pending home sales, expected to increase 3.0% in September after a 4.3% rise in August, and consumer credit, forecasted to fall $3.0 billion in September, while declining $3.3 billion in August.

International economic releases tomorrow will include UK PPI, euro-zone retail sales, as well as Canadian employment data and building permits. Meanwhile, the Reserve Bank of Australia will release its quarterly monetary policy statement after unexpectedly raising rates on Monday, and the Bank of Japan meets, and there has been speculation that more stimulus measures could be on the way.