Evening Market Update

Jump in Job Creation Can’t Extend Yesterday’s Rally

The equity markets finished slightly higher after failing to capitalize on the strongest jobs report in months, but still managed to finish the week with solid gains after yesterday’s advance. Stocks showed little reaction to an unexpected decline in pending home sales, as well as a surprising increase in consumer credit. On the equity front, Dow member Kraft Foods beat analysts’ profit expectations but missed revenue targets, Starbucks posted better-than-expected earnings and increased guidance, and Atmel topped the Street’s top- and bottom-line expectations. Treasuries moved lower, but managed to pare some of the losses resulting from the jobs data.

The Dow Jones Industrial Average rose 9 points (0.1%) to 11,444, the S&P 500 Index gained 5 points (0.4%) to 1,226, and the Nasdaq Composite was 2 points (0.1%) higher at 2,579. In moderate volume, 1.2 billion shares were traded on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil gained $0.58 to $87.07 per barrel, wholesale gasoline added $0.01 to $2.19 per gallon, while the Bloomberg gold spot price increased $1.70 to $1,394.20 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.9% higher at 76.58. For the week, including dividends, the DJIA rose 2.93%, the S&P 500 Index gained 3.60%, and the Nasdaq Composite advanced 2.85%.

Dow member Kraft Foods Inc. (KFT $31) reported 3Q EPS ex-items of $0.47, one penny ahead of the consensus estimate of analysts surveyed by Reuters, with revenues rising 26.2% year-over-year (y/y) to $11.9 billion, just shy of the $12.0 billion that the Street had forecasted. The food company said the integration of its Cadbury acquisition is progressing well, helping its European unit profits jump 57%, and it had solid performance in every geography. KFT said its organic revenues—excluding acquisitions, divestitures, and foreign exchange—grew 2.5%, driven by pricing in response to higher input costs, partially offset by volume and product mix, which was unfavorably impacted by higher pricing and the continued weak consumer environment. The company reaffirmed its full-year guidance. KFT finished lower.

Starbucks Corp. (SBUX $31) announced fiscal 4Q earnings ex-items of $0.37 per share, above the $0.32 that was expected, with revenues increasing 17.2% y/y to $2.8 billion, roughly inline with the Street’s forecast. Same-store sales—sales at stores open at least a year—rose 8%, driven by a 5% rise in traffic and an increase in average purchases by customers. The company raised its 2011 guidance, and also announced that it has notified Kraft Foods of its intention to end a distribution agreement that has been in place since 1998, in which Kraft delivered Starbucks’ packaged coffee to grocery stores and other outlets. Shares of SBUX were higher.

Atmel Corp. (ATML $10) traded sharply higher after the microcontroller chips and touch solutions technology firm reported 3Q EPS ex-items of $0.18, above the $0.12 that was anticipated, with revenues jumping 40% y/y to $444 million, compared to $428 million that had been expected.

Nonfarm payrolls increase by more jobs than forecasted

Nonfarm payrolls rose by 151,000 jobs in October, above the consensus estimate of economists surveyed by Bloomberg, which forecasted a 60,000 increase. Additionally, excluding government hiring and firing, private sector payrolls increased by 159,000, versus the forecast of a gain of 80,000. The prior two months of data were also revised up by a combined 93,000, with September now coming in at an addition of 107,000 jobs. The unemployment rate remained at 9.6%, matching expectations. Average hourly earnings were 0.2% higher month-over-month (m/m), inline with the Street's forecast, and average weekly hours inched higher to 34.3, compared to economists’ forecasts for an unchanged reading of 34.2. Government payrolls were “little changed” as Census employment fell by 5,000 temporary workers and state and local governments shed 14,000 jobs. With only 1,000 temporary Census workers remaining on payrolls in October, distortion from Census jobs will be less of a factor going forward. Treasuries were lower, but managed to pare some losses that immediately followed the employment data. The yield on the two-year note gained 4 bps to 0.37%, while the yield on the 10-year note rose 5 bps to 2.54%, and the 30-year bond yield was 6 bps higher at 4.13%.

There were several positives within the report including temporary help services growth of 35,000 and a decrease of 318,000 in involuntary part-time workers, those who would prefer full-time work but are unable to find it. While the job market remains far from healthy, below the 200,000 payroll growth that is needed to reduce the unemployment rate, we have experienced four straight months of private sector payroll growth above 100,000, and the gains and trend in jobs is positive for the economy. The increase in temps, large number of involuntary part-time workers and increase in productivity reported yesterday could be positive signs for future hiring, as these are techniques used by businesses to bridge time until hiring on a full-time basis. This boosts asset prices and confidence and reduces the amount of savings needed to rebuild and could encourage spending. The muted stock market reaction to the better-than-expected job gains today could be due to the reduced need for additional rounds of stimulus beyond QE2 implied by the report, the gain in the dollar, and a strong run in the market leading up to the report.

Meanwhile, pending home sales, unexpectedly fell, dropping 1.8% m/m in September, compared to the increase of 3.0% that economists were anticipating. Compared to last year, the gauge of the pipeline of existing home sales is down 24.9%.

Consumer credit unexpectedly rose for the first time in eight months, increasing $2.1 billion during September, compared to the $3.0 billion decline forecasted by economists, while the August figure was revised to a larger drop, of $4.9 billion from the initially reported $3.3 billion decrease. The increase was led by a $10.4 billion surge in the use of 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, while revolving credit, which includes credit cards, dropped $8.3 billion in September, the most since December 2009. Federal government non-revolving loans, such as those for student loans, increased an unadjusted $27 billion.

BoJ leaves rates unchanged, Australian central bank predicts increased economic growth

The economic calendar across the pond was not kind to sentiment as euro-zone retail sales unexpectedly fell m/m in September, factory orders in Germany—Europe’s largest economy—surprisingly slumped, and producer prices in the UK came in hotter than anticipated. In Asia/Pacific, the Bank of Japan kept its benchmark interest rate unchanged near zero, and released details of its asset purchase program, pertaining to its purchases of exchange traded funds (ETFs) and Japanese real estate investment trusts (J-REITs). Additionally, the Reserve Bank of Australia released its quarterly monetary policy statement, in which it said the pace of the nation’s economic growth will increase next year. Back in the Americas, Canada added 3,000 jobs in October, below the 15,000 job gain predicted by economists, but an improvement over the 6,600 job decline in September. The jobless rate declined to 7.9% from 8.0% last month due to decreases in the labor force. In a separate report, the country’s main realtor group said home resales will fall 4.9% to 442,000 units this year, and by 9% next year to 402,500 units, while home prices will decline by 1.3% next year.

US labor report takes a back seat

It was a rare week in the markets when a US nonfarm payroll report, which came in much better than expected to boot, did not take top billing on the economic front. By the time Friday’s jobs data came out, the action was already done in the markets, with stocks posting solid gains courtesy of the widely-expected announcement of further asset purchases—$600 billion—from the US Federal Reserve, and US midterm elections, which gave control of the House to the Republicans. Also, the equity markets found some support from better-than-forecasted readings of the ISM Manufacturing and Non-manufacturing Indices. Meanwhile, the US dollar took the brunt of the blows of the week’s events, as the Dollar Index touched the lowest level since December 2009.

Economic focus will be international next week

With no major economic reports scheduled in the US next week, traders will be watching the G20 summit in Seoul, wherein the heads of state meet. While the initial response to the financial crisis was met with fiscal and monetary policies coordination, divergent economic growth has resulted in recent policies moving in different directions. A slew of economic releases from China will also be in focus, including the trade balance, PPI, CPI, retail sales, industrial production and fixed asset investment, which includes housing and infrastructure spending.

Releases on the US economic calendar include the NFIB Small Business Optimism survey, wholesale inventories, MBA Mortgage Applications, initial jobless claims, the trade balance for September, import prices, and the University of Michigan Consumer Sentiment Index. Elsewhere in the Americas, releases include Canada’s housing starts and house prices, Mexico’s CPI and industrial production, and Brazil’s retail sales.

Asia/Pacific releases will include Japan’s leading indicator, bank lending, trade balance, machine tool orders, machine orders, and consumer confidence, Australian business and consumer confidence, home loans, and employment data, and India’s industrial production.

In Europe, releases include GDP reports from Germany, France and Italy, as well as the euro-zone, industrial production from the euro-zone and the UK, and the German CPI and wholesale price index.