Evening Market Update

Rally Rolls On Strong Retail Sales

US stocks took a cue from the European markets today and finished solidly in the green, extending yesterday’s sharp advance. The European Central Bank voted to keep interest rates unchanged, and some were disappointed by the decision not to expand the purchases of government bonds, but speculation that the ECB has stepped up debt purchases in Portugal and Ireland helped to improve sentiment surrounding the euro-debt issue. Back on the homefront, an unexpected increase in pending home sales was partially offset by a larger-than-expected increase in US weekly initial jobless claims, causing Treasuries to fluctuate and finish mostly lower. Domestic equity news was highlighted by mostly positive November same-store sales results from the nation’s retailers. Additionally, PepsiCo agreed to pay $3.8 billion to acquire a 66% stake in Russian food-and-beverage company Wimm-Bill-Dann Foods, and Kroger lowered the high end of its full-year EPS guidance.

The Dow Jones Industrial Average gained 107 points (0.9%) to 11,362, the S&P 500 Index rose 15 points (1.3%) to 1,222, and the Nasdaq Composite advanced 30 points (1.2%) to 2,579. In moderate volume, 1.1 billion shares were traded on the NYSE and 2.0 billion shares were traded on the Nasdaq. Crude oil gained $1.26 to $88.01 per barrel, wholesale gasoline advanced $0.06 to $2.36 per gallon, and the Bloomberg gold spot price fell $3.45 to $1,384.45 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.6% lower at 80.21.

The nation’s retailers reported November same-store sales results—sales at stores open at least a year—headlined by Target Corp. (TGT $60), which announced a 5.5% year-over-year (y/y) increase, compared to the 3.7% gain that analysts surveyed by Reuters had anticipated. TGT said its “better-than-expected” sales were driven by strong guest traffic. Shares were higher.

Meanwhile, Costco Wholesale Corp. (COST $69) said its November same-store sales grew 9.0% y/y, including gasoline sales and foreign exchange, above the 6.2% that the Street had forecasted, but excluding fuel and currency, sales rose 6.0%. COST traded higher.

J.C. Penney Co. Inc. (JCP $34) highlighted reports from the department stores, reporting a 9.2% y/y increase, easily exceeding the 3.1% growth that analysts were expecting, noting that its holiday season has gotten off to a strong start with the “biggest” Black Friday sales event in its history. Also, Macy’s Inc. (M $26), achieved 6.1% y/y growth in same-store sales for November, topping the 5.0% gain that analysts had anticipated. The company said the Black Friday weekend was “particularly strong, bolstering our confidence as we enter the heart of the holiday shopping season.” JCP finished nicely higher but Macy’s traded lower.

Inside the mall, Gap Inc. (GPS $22) reported a same-store sales gain of 4.0% y/y, versus the 2.6% growth that the Street had forecasted, and Limited Brands Inc. (LTD $35) announced that its sales jumped 10% y/y, well above the 4.0% increase that analyst had expected, while Abercrombie & Fitch Co. (ANF $56) posted a 22% y/y jump in sales, trouncing the 6.8% rise that was expected. GPS and LTD gained ground, while ANF was sharply higher.

Outside of the same-store sales reports, PepsiCo Inc.(PEP $65) reported that it has reached an agreement to acquire a 66% stake in Russian food-and-beverage company, Wimm-Bill-Dann Foods (WBD $31), for $3.8 billion, pending the required government approvals. PEP said that it will offer to acquire the remaining shares of WBD following the completion of the acquisition. PEP traded lower, while WBD was sharply higher.

Also, grocery store operator Kroger Co. (KR $22) finished solidly lower after it narrowed its full-year EPS guidance from its prior range of $1.60-1.80 to $1.65-1.78, compared to the $1.79 estimate of analysts. The company also reported 3Q EPS of $0.32, inline with expectations, as revenues rose 5.9% y/y to $18.7 billion, above the $18.5 billion that the Street was forecasting.

Jobless claims rise, home sales report after the opening bell

Weekly initial jobless claims rose by 26,000 to 436,000, versus last week's figure which was upwardly revised by 3,000 to 410,000, and versus the consensus estimate of economists surveyed by Bloomberg, which called for claims to increase to 424,000. The four-week moving average, considered a smoother look at the trend in claims, fell by 5,750 to 431,000, and continuing claims increased by 53,000 to 4,270,000, above the forecast of economists, which called for claims to come in at 4,200,000. The report was disappointing, but the fact that claims remained below the 450,000 mark, which typically coincides with a relatively flat labor market, limited some of the concern.

 Meanwhile, pending home sales unexpectedly jumped, rising 10.4% month-over-month (m/m) in October, compared to the decrease of 1.0% that economists were anticipating. Compared to last year, the gauge of the pipeline of existing home sales is down 22.4%.

Treasuries finished slightly lower in a choppy session as traders grappled with the divergent employment and housing reports out of the US and the continued focus on the euro-zone debt crisis. The yield on the two-year note was flat at 0.54%, the yield on the 10-year note rose 4 bps to 3.00%, and the 30-year bond yield gained 3 bps to 4.27%.

European Central Bank keeps rates unchanged  

In European economic news, the European Central Bank kept its benchmark interest rate unchanged at 1.0%, as expected, while heavy scrutiny was on the press conference by ECB President Jean-Claude Trichet that followed the announcement. Trichet said the central bank will delay the exit from its liquidity measures, soothing some concerns among traders, by continuing to offer loans to banks through 1Q 2011 and will be adjusted “as appropriate.” Also, the ECB head said that it will continue to purchase government bonds, but failed to announce an expansion of the purchases, instead saying the size would be “commensurate” with what is needed to stabilize the sovereign debt market, per Dow Jones Newswires. Speculation also emerged that the ECB purchased debt of Portugal and Ireland at a rate above normal levels in today’s trading session.

In other international economic news, euro-zone 3Q GDP rose 0.4% quarter-over-quarter (q/q), and expanded by 1.9% y/y, both matching economists’ forecasts. Also, euro-zone producer prices rose slightly more than expected, and the UK Construction PMI unexpectedly improved in November. In Asia/Pacific, Australia issued a report showing an unexpected drop in the nation’s retail sales for October, while Japan’s 3Q capital spending came in softer than economists’ expected and South Korea 3Q GDP was left unrevised at a 0.7% q/q rate of expansion. Back in the Americas, Brazilian industrial production rose 0.4% in October, slightly lower than the 0.6% growth rate expected by economists, and the fastest pace in the last three months.

Job market in focus tomorrow

All eyes will be on tomorrow’s release of nonfarm payrolls, expected to rise 150,000 in November after increasing more than expected in October, at 151,000. October’s report was likely the last to be distorted by Census jobs and private sector payrolls are expected to increase 158,000 in November, after expanding by 159,000 in October. The unemployment rate is estimated to remain at 9.6%.

The Fed has focused on the anemic growth in the jobs market as one of the reasons for the second round of quantitative easing, or QE2. The Fed’s projection of both the near-term and longer-term unemployment rate was recently increased due to the minor progress made on reducing unemployment and the large amount of people unemployed.

After the start of trading the ISM Non-Manufacturing Index, will be released, at 10 a.m. EST. The forecast is that the measure of services activity will increase to 54.8 in November from 54.3 in October. The level that separates expansion from contraction is 50.0. The services index has been more volatile on a month-to-month basis than the ISM Manufacturing Index, which rose more than expected to 56.6 in November. The manufacturing sector has rebounded on inventory rebuilding, as well as export demand, while the non-manufacturing sector has been weighed down by smaller changes in consumer demand, as well as a moribund construction sector.

The final release on the US economic calendar tomorrow is factory orders, expected to fall 1.2% in October after rising 2.1% in September.

International releases will include euro-zone, UK, China and Australia services PMIs, euro-zone retail sales and Canadian employment.