Evening Market Update

US Equities Rally To Close Out Strong Week

Stocks found some pressure early on Friday, but managed to claw their way back and finish in the green. An unexpected increase in the unemployment rate and a smaller-than-expected addition to nonfarm payrolls provided the early pressure, but a promising expansion in the ISM Non-Manufacturing Index and a smaller-than-expected drop in factory orders helped turn the momentum positive. On the equity front, Walgreen Co matched the Street’s 1Q revenue forecast and posted an increase in November same-store sales, while VeriFone Systems and Phillips-Van Heusen both beat analysts’ earnings expectations. Treasuries were mixed on the day, while the US dollar lost ground.

The Dow Jones Industrial Average gained 19 points (0.2%) to 11,382, the S&P 500 Index rose 3 points (0.3%) to 1,225, and the Nasdaq Composite advanced 12 points (0.5%) to 2,591. In moderately light volume, 904 million shares were traded on the NYSE and 1.8 billion shares were traded on the Nasdaq. Crude oil gained $1.40 to $89.40 per barrel, wholesale gasoline was flat at $2.36 per gallon, and the Bloomberg gold spot price gained $30.48 to $1,415.65 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was 1.3% lower at 79.20. For the week, including dividends, the DJIA rose 2.6%, the S&P 500 Index gained 3.0%, and the Nasdaq Composite advanced 2.2%.

Walgreen Co. (WAG $37) reported that November same-store sales-sales at stores open at least a year-rose 3.2% year-over-year (y/y), with the company providing more flu shots and filling more prescriptions, though calendar day shifts positively impacted its results. Also, the company reported that 1Q revenue rose 5.9% y/y to $17.3 billion, roughly inline with the Street’s forecast. Shares were higher.

VeriFone Systems Inc. (PAY $40) reported fiscal 4Q EPS ex-items of $0.40, above the $0.36 consensus estimate of analysts surveyed by Bloomberg, with revenues jumping 27% y/y to $276 million, topping the $263 million that the Street had expected. Also, the electronic payment equipment firm issued 1Q and full-year 2011 guidance that exceeded analysts’ forecasts. PAY was up over 8%.

Phillips-Van Heusen Corp. (PVH $70) reported 3Q EPS ex-items of $1.55, above the $1.43 that was anticipated by analysts, with revenues more than doubling y/y to $1.5 billion, compared to the $1.4 billion that was expected. The retailer raised its full-year outlook, but shares traded lower.

Labor report disappoints, but service-sector activity accelerates

Nonfarm payrolls rose by 39,000 jobs in November, well below the consensus estimate of economists surveyed by Bloomberg, which forecasted a 150,000 increase. Additionally, excluding government hiring and firing, private sector payrolls increased by 50,000, versus the forecast of a gain of 160,000, and October was upwardly revised by 1,000 to 160,000. The unemployment rate rose from 9.6% to 9.8%, compared to expectations of the rate to remain unchanged, as the size of the labor force increased by 103,000 after declining by 254,000 in October. Average hourly earnings were flat month-over-month (m/m), versus the Street's forecast of a 0.2% increase, and average weekly hours remained at 34.3, as expected. Treasuries were mixed after paring modest losses on the employment data. The yield on the two-year note lost 7 bps to 0.47%, the yield on the 10-year note rose 2 bps to 3.01%, and the 30-year bond yield gained 6 bps to 4.32%.

The largest swing in employment was within the retail trade sector, which lost 28,100 seasonally-adjusted jobs in November, a 41,000 change from the 13,000 gain in October. Positive components in the report include a 39,500 increase in temporary positions, and a relatively unchanged number of involuntary part-time workers and long-term unemployed.

Despite the weak employment report, the stock market is little changed, taking its cue from the decline in the US dollar. The report bolsters the case for monetary stimulus by the Fed, wherein the Fed adds to the supply of money by buying assets, causing a decline in the dollar. A less-stated purpose of the asset purchase program is to get investors to sell low-yielding Treasuries and buy riskier investments, and the decline in the dollar has been associated with increases in the stock market in recent trading. Leading indicators of job growth on the horizon include the increase in temporary employment, initial jobless claims falling below 450,000, high productivity, the ADP Employment Report, the NFIB Small Business report and the employment component of the ISM surveys. While it may be some time before the job market returns to normalcy, and month-to-month data may be volatile, we think the trend is toward improvement, and the stock market tends to look at trends rather than the absolute level of data.

The ISM Non-Manufacturing Index rose more than expected in November to 55.0 from 54.3, while the forecast was for a reading of 54.8. A reading of 50 separates expansion from contraction. The report is generally considered a measure of economic strength in the service sector and is the companion to the ISM Manufacturing Index, which was better than expected at 56.6 in November. Within the report, new orders rose to 57.7 from 56.7, employment advanced to 52.7 from 50.9, and supplier deliveries increased to 52.5 from 51.0. Supplier deliveries are a component in the leading indicator index, and also increased in the manufacturing index to 57.2 from 51.2, although both fell in the prior month.

Elsewhere, factory orders fell by a smaller amount than expected, declining 0.9% m/m in October, compared to the drop of 1.2% that economists had expected, and September’s 2.1% gain was favorably revised to a 3.0% increase. October durable goods orders-reported last week-were downwardly revised slightly from a 3.3% decline to a 3.4% drop. Nondefense capital goods ex-aircraft, considered a good proxy for business spending, fell 4.3%, following the 1.8% increase that was seen in September, and last week’s report of a 4.5% drop.

European service-sector improves, Canada’s jobless rate falls

The European economic calendar painted a mixed picture with service-sector activity reports on the euro-zone, Italy, and Germany-Europe’s largest economy-all exceeding economists' expectations, being met with lower-than-anticipated service-sector readings from the UK and France. Moreover, euro-zone retail sales rose more than forecasted, but Spain's industrial output fell and a separate reading showed the nation's service sector, although improving, remained at a level depicting contraction.

In Asia/Pacific, speculation continued that the Chinese government will announce further measures to cool inflation, and a report issued today showed expansion in the nation's service-sector activity slowed in November. Meanwhile, a report out of Australia showed a similar decline in the service-sector, while India’s service-sector showed further expansion.

Back in the Americas, Canada's jobless rate fell in November to 7.6%, the lowest level since January of 2009, after an increase of 15,200 jobs. Economists were expecting an increase of 19,800 jobs and jobless rate of 7.9%. The drop was due in large part to a growing number of young people leaving the labor force, but hiring did improve as well. Elsewhere, Brazil's central bank raised reserve and capital requirements, in an effort to slow consumer lending growth and prevent a credit bubble. The decision will remove about $36 billion from circulation, according to the central bank, and banks will be required to use more capital to back consumer loans that exceed 24 months.

Bulls pleased on global data and as euro-area debt concerns eased

Despite Friday's disappointing US labor report, the equity markets enjoyed solid broad-based gains as the outlook for the global recovery improved and uneasiness toward the euro-area debt crisis waned somewhat. Materials and energy issues lead the way, as global manufacturing activity reports, headlined by releases out of US, China, and the UK all came in above economists' forecasts, with Chinese activity expanding at the fastest pace in seven months, while the UK’s gauge hit a sixteen-year high. Moreover, a plethora of better-than-forecasted US retail sales reports for November, coupled with a surprising jump in pending home sales, boosted the outlook for the holiday shopping season and the economic recovery in the world's largest economy, adding some motivation for the bulls to work up a lather.

Meanwhile, financials also were among the major market sectors' top performers as heavy scrutiny continued to follow the debt crisis in Europe. The 85 billion euro ($114 billion) bailout of Ireland and speculation that the European Central Bank stepped up the pace of its purchases of government debt from Ireland and Portugal soothed some euro-area debt concerns and buoyed the sector, overshadowing disappointment that the ECB did not introduce new measures to help combat the debt crisis across the pond.

Quiet economic week planned in the US but active internationally

There are no major US economic reports scheduled for next week and markets will likely continue to monitor the situation in Europe and China. Ireland's legislature will vote on the 2011 budget on Tuesday and the Bank of England meets on Wednesday and Thursday, while China's top leaders meet to discuss economic policies for 2011.

Other releases on the US economic calendar include the MBA Mortgage Applications Index, initial jobless claims, wholesale inventories, the trade balance, and the preliminary University of Michigan Consumer Sentiment Index reading for December. Other reports in the Americas include Canadian building permits, the Ivey purchasing manager index, and housing starts, and Brazil’s 3Q GDP.

In Asia/Pacific, Japan will announce its leading indicator, trade balance, machine orders, machine tool orders, final 3Q GDP and consumer confidence. China will release its trade balance, and Australia will release their leading indexes. Economic releases in Europe will include German factory orders, trade balance, industrial production, and CPI, as well as PPI in the UK.

Central bank meetings will include the Bank of England, as well as the central banks of Canada, Korea, New Zealand and Brazil.