Evening Market Update

Stocks and Dollar Gain on Strong Jobs and Services Data

Equities were able to end near session highs, erasing an early loss that came as the US dollar gained ground on better economic data. While the US dollar benefitted from a surge in private sector payrolls, the fastest pace of strength in the service sector since May 2006, as well as an increase in mortgage applications, Treasuries tumbled. Additionally, despite the gain in the dollar, commodities also edged into positive territory today, possibly the combination of a better economic growth outlook and bargain hunting after yesterday’s steep losses. In equity news, Mosaic Co beat, while Family Dollar Stores missed estimates, and Qualcomm Inc formally announced the $3.1 billion cash acquisition of Atheros Communications that was rumored yesterday.

The Dow Jones Industrial Average rose 32 points (0.3%) to 11,723, the S&P 500 Index gained 6 points (0.5%) to 1,270, and the Nasdaq Composite advanced 21 points (0.8%) to 2,702. In moderate volume, 1.0 billion shares changed hands on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil gained $0.92 to $90.30 per barrel, wholesale gasoline added $0.04 to $2.45 per gallon, while the Bloomberg gold spot price fell $3.45 to $1,377.28 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—rose 1.0% to 80.22.

Mosaic Co. (MOS $77) reported fiscal 2Q EPS ex-items of $1.01, one penny above the consensus estimate of analysts surveyed by Reuters, with revenues jumping 56% year-over-year (y/y) to $2.7 billion, topping the $2.4 billion that the Street had expected. The fertilizer firm said it benefitted from “significantly higher phosphate selling prices and potash sales volumes,” partially offset by higher sulfur and ammonia costs y/y. Looking ahead, the company said the market environment “remains robust,” driven by increasingly strong demand prospects, underpinned by profitable farm economics, record low producer inventories, a lean global distribution pipeline and strong farmer economics. MOS traded to the upside.

Meanwhile, Family Dollar Stores Inc. (FDO $45) announced fiscal 1Q EPS of $0.58, below the $0.61 that analysts were anticipating, with revenues rising 9.5% y/y to $2.0 billion, roughly inline with what was expected on the Street. The discount retailer said its same-store sales—sales at stores open at least a year—increased 6.9% y/y as customer traffic increased, while average transaction value was approximately flat. FDO was solidly lower.

In M&A news, Qualcomm Inc. (QCOM $52) reached an agreement to acquire wireless technology firm Atheros Communications Inc. (ATHR $45) for $45 per share in cash, or about $3.1 billion. The transaction has been approved by the boards of both companies and is expected to close in the first half of 2011. QCOM said it expects the deal to be “modestly accretive” to EPS in fiscal year 2012, and is intended to help accelerate the expansion of QCOM’s technologies and platforms to new businesses beyond cellular and provide access to significant new growth opportunities. Shares of both companies rose, with ATHR extending yesterday’s sharp rise that came on rumors of the deal.

Private sector payrolls jump and service-sector read reaches highest level since May 2006

The ADP Employment Change Report showed private sector payrolls rose by 297,000 jobs in December, almost tripling the forecast of economists surveyed by Bloomberg, which called for a 100,000 increase, and November’s 93,000 job gain was revised to 92,000 jobs. The release does not include government hiring and firing and comes ahead of Friday’s broader nonfarm payrolls report. The ADP report, despite being somewhat inconsistent with the Labor Department data, deviated enough from expectations that it caused economists to revise up their forecasts for Friday’s report. The median forecast now shows a 165,000 gain for headline payrolls, up from 140,000 at the start of the day, while private sector payrolls are expected to increase 150,000.

Meanwhile, the ISM Non-Manufacturing Index rose more than expected in December to 57.1 from 55.0, while the forecast was for a reading of 55.7. 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 57.0 in December. The index suggested that activity in the service sector expanded for the twelfth-straight month to a level not seen since May 2006 as new orders rose to 63.0 from 57.7 and business activity/production increased from 57.0 to 63.5. However, the enthusiasm from the data may be being tempered by the prices paid component reaching 70 for the first time since September 2008, which may be fueling inflation concerns. Also, employment declined from 52.7 to 50.5, tarnishing the luster from today’s favorable employment data.

In other economic news, the MBA Mortgage Application Index increased by 2.3% last week, after the index that can be quite volatile on a week-to-week basis, declined 3.9% in the previous week. The increase came as a 3.9% gain in the Refinance Index offset a 0.8% decline in the Purchase Index. The advance in the overall index also came as the average 30-year mortgage rate fell 11 basis points to 4.82%, above the record low of 4.21% on October 8.

Treasuries fell on the stronger-than-expected economic data, with the yield on the two-year note up 9 bps to 0.71%, the yield on the 10-year note rising 13 bps to 3.46%, and the 30-year bond yield gaining 13 bps to 4.54%.

Bond auction in Portugal and European economics dominate international news

The euro-zone debt crisis crept into the news today, as a debt auction in Portugal saw the nation’s cost of capital rise meaningfully from a previous auction, and a slew of European banks filed debt offerings, while the first bond issue from the European Commission to pay for the bailout fund for Ireland was met with strong demand.

Europe dominated economic reports, with a slew of PMI Services reports depicting diverging economic prosperity, with reads on Ireland, Spain, and Italy showing lackluster activity, while euro-zone heavyweight economies such as France and Germany saw better-than-expected service-sector activity. Adding to the pessimism in the region, separate reports revealed the UK PMI Construction declined more than expected to a level depicting contraction, and euro-zone industrial orders rose at a smaller-than-expected rate. Other economic reports in Europe included: euro-zone PMI Services unexpectedly improving, while euro-zone producer prices rose at a rate that was inline with expectations

Elsewhere, India’s services PMI slowed in December, Brazil’s industrial production fell month-over-month in November, despite accelerating on a y/y basis, and Canada’s industrial and raw materials price indexes rose more than expected in November.

Another read on US jobs in store tomorrow

The focus on the employment market will continue tomorrow, with the weekly reading on initial jobless claims, which is expected to increase to 408,000 from the multi-year low of 388,000 hit the week prior. The ADP report had little impact on estimates for jobless claims.

International releases will include UK services PMI, euro-zone retail sales, consumer and economic confidence, German factory orders, Canada’s Ivey PMI survey of business and government spending, and Australian building approvals.