Evening Market Update

Anemic Job Growth and Foreclosure Issues Drag on Stocks

The US equity markets finished in the red, but off the lows of the day after showing some resiliency in the face of a smaller-than-expected increase in US nonfarm payrolls. Traders also took note of testimony from Federal Reserve Chairman Ben Bernanke on Capitol Hill in which he classified the US economy as improving, but at a pace insufficient to combat the current rate of unemployment. On the equity front, KB Home beat analysts’ earnings expectations, AIG announced further progress on its exit from government control, and Liz Claiborne lowered its profit forecast after a disappointing reading of December same-store sales. Financial issues were the worst performers on the day, led lower following a Massachusetts court decision to invalidate two foreclosures due to documentation issues. Treasuries finished higher, as the only other release on the economic front was a larger-than-expected increase in consumer credit.

The Dow Jones Industrial Average fell 23 points (0.2%) to 11,675, the S&P 500 Index lost 2 points (0.2%) to 1,272, while the Nasdaq Composite declined 7 points (0.2%) to 2,703. In moderate volume, 1.1 billion shares changed hands on the NYSE and 2.0 billion shares were traded on the Nasdaq. Crude oil gained $0.05 to $88.43 per barrel, wholesale gasoline fell $0.02 to $2.43 per gallon, while the Bloomberg gold spot price lost $2.03 to $1,369.58 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—rose 0.2% to 81.09. For the week, including dividends, the DJIA was 0.8% higher, the S&P 500 Index gained 1.1%, and the Nasdaq Composite advanced 1.9%.

KB Home (KBH $15) traded nicely higher after the homebuilder reported fiscal 4Q EPS of $0.23, compared to the loss of $0.17 per share that analysts surveyed by Reuters had forecasted, driven by higher margins and lower expenses. Also, although revenues fell 33% year-over-year (y/y) to $451 million, the result topped the $445 million that the Street was anticipating.

American International Group Inc.  (AIG $61) was higher after the company announced that its Board of Directors approved the issuance of 75 million warrants to purchase its shares, as part of its recapitalization plan to exit from government control. Separately, the insurer agreed to pay $450 million to settle litigation with some of its competitors pertaining to AIG’s alleged under-reporting of premiums on its workers compensation policies.

Meanwhile, shares of Liz Claiborne Inc. (LIZ $6) are sharply lower after the retailer warned that reduced traffic—impacted by weather-related issues, especially in Europe—fashion misses in certain product categories and a highly competitive promotional environment, resulted in December same-store sales—sales at stores open at least a year—and gross profit at its Juicy Couture, Lucky Brand and Mexx Europe that were “clearly disappointing.” As a result, the company lowered its profit forecasts for the second half of the year.

The financial sector took a hit today after US Bancorp (USB $26) and Wells Fargo & Co. (WFC $31) lost a court case that could guide future decisions on the documentation required to foreclose on a property. The Massachusetts Supreme Court upheld a judge’s decision that two foreclosures were invalid, because the banks couldn’t prove that they owned the mortgages, after they were improperly transferred into two mortgage-backed trusts. The decision comes on the heels of an investigation launched late last year by the attorneys general of all 50 U.S. states into whether lenders are forcing people out of their homes improperly, which led many banks and loan servicers to freeze U.S. foreclosures. Both banks declined to comment on the case, and shares of both USB and WFC were down sharply.
December jobs miss, but revisions close gap and unemployment rate falls

Nonfarm payrolls rose by 103,000 jobs in December, below the consensus estimate of economists surveyed by Bloomberg, which forecasted a 150,000 increase. The prior two months of data were revised up by a combined 70,000, with November now coming in at an addition of 71,000 jobs. Meanwhile, excluding government hiring and firing, private sector payrolls increased by 113,000, versus the forecast of a gain of 178,000, and the prior two months were adjusted higher by 62,000, with job growth in November now estimated at 79,000. The unemployment rate fell from 9.8% to 9.4%, compared to expectations for the rate to decline to 9.7%. Average hourly earnings were up 0.1% 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.

Job growth remains anemic, and even the leading indicator of temporary employment slowed during the month to 15,900 from 39,500 the prior month. The decline in the unemployment rate was primarily due to a 260,000 reduction in the labor force, as people discouraged with job prospects quit looking for work.

Meanwhile, Federal Reserve Chairman Ben Bernanke testified before the Senate Budget Committee on monetary and fiscal policy, as well as the outlook for the US economy. While Bernanke noted increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold, he remains concerned about the slow pace of improvement in the labor market. He noted that the 100,000 average job growth in 2010 is “barely enough to accommodate the normal increase in the labor force,” and thus insufficient to materially reduce the unemployment rate. While Bernanke noted that indicators of job openings and hiring plans in November and December look stronger, most Fed members expected the unemployment rate to be “close to 8% two years from now, taking four to five more years for the job market to normalize fully.” The minutes from the December Fed meeting indicated that the Fed’s asset purchase program is helping keep longer-term yields lower than would otherwise be the case, and that some members had a high threshold to make changes to the program.

Treasuries were higher after erasing losses following the employment data and Bernanke’s testimony. The yield on the two-year note fell 7 bps to 0.59%, the yield on the 10-year note was 7 bps lower at 3.32%, and the 30-year bond yield declined 3 bps to 4.48%.

The only other release on today’s US economic calendar came in the final hour of trading, with consumer credit increasing $1.3 billion in November, well ahead of the $500 million increase expected by economists, while October’s figure was revised to an increase of $7.0 billion from the preliminary $3.4 billion rise reported. Revolving debt, which includes credit cards, fell by $4.2 billion during the month, while non-revolving debt, which includes loans for cars, rose by $5.6 billion.

Europe continues to search for solutions to debt crisis

Economic news out of Europe was headlined by reports that the European Union is mulling spreading the cost of euro-area bailouts to senior bondholders, which exacerbated euro-debt concerns. Meanwhile, European Central Bank President Jean-Claude Trichet weighed in on the matter, recommending that euro-area nations should do more to tighten their fiscal policies, saying, “Monetary-policy responsibility cannot substitute for government irresponsibility,” per Bloomberg. Elsewhere, retail sales in Germany—Europe’s largest economy—unexpectedly fell in November, and 3Q euro-zone GDP was revised to a 0.3% quarter-over-quarter (q/q) rate of expansion, from the 0.4% pace that was previously forecasted. Moreover, separate reports showed German industrial production fell more than expected m/m in November and exports in Germany rose at a rate that missed forecasts, but imports increased much more than anticipated, resulting in an unexpected narrowing of the nation’s trade surplus.

Back in the Americas, Canada’s unemployment rate was unchanged at 7.6% in December, while economists were looking for a slight uptick to 7.7%. Additionally, Mexico released a report that showed consumer confidence increased to 91.2 in December, up from 88.5 in November.

Global economic optimism outweighs emerging threats

The equity markets managed to post gains in the first week of 2011, as a plethora of favorable manufacturing data, highlighted by the seventeenth-straight month of expansion in the US as depicted by the ISM Manufacturing Index. Also, the ISM Non-Manufacturing Index posted the highest level of expansion in the service sector since May 2006 to provide additional support. The bulls were able fight off a strengthening of the US dollar, which caused some pressure on commodity prices, and a solid gain in Treasury yields that could stymie the Fed’s attempt to promote economic stimulus through its asset purchases. Moreover, stocks showed some relative resilience in the face of the disappointing labor report on Friday, even as the lackluster payroll growth came amid ramped-up optimism from the mid-week release of the ADP Employment Change, which showed private sector jobs grew almost triple what economists had anticipated. Not even a slew of disappointing December retail sales reports, notably from Target Corp. (TGT $55) and Macy’s Inc. (M $23), were able to derail the upward momentum.

Economic data heats up as week progresses

The economic calendar starts with Tuesday’s release of the Federal Reserve Beige Book, wherein Fed staffers summarize anecdotal economic data from all twelve Federal Reserve districts in preparation for the next Federal Open Market Committee (FOMC) meeting scheduled for January 25-26. The minutes from the last FOMC meeting showed increased confidence regarding the economic recovery, but continued concerns about the slow pace of job growth.

Thursday brings the Producer Price Index (PPI), expected to show prices at the wholesale level rose 0.8% m/m in December, the same rate as in November, while the core rate, which excludes food and energy, is expected to increase 0.2% after advancing 0.3% the prior month. The release precedes Friday’s report on the Consumer Price Index (CPI), forecasted to show a 0.4% m/m increase in December after inching 0.1% higher in November, while ex-food and energy, it is expected to again rise 0.1%. On a y/y basis, the CPI is expected to increase 1.3% at the headline level and 0.7% at the core level. Friday also brings the December reading on industrial production, expected to rise 0.5% m/m after gaining 0.4% in November, and capacity utilization is forecasted to increase to 75.6% from 75.2% in November.

Advance retail sales will also be announced Friday, forecasted to rise 0.8% m/m in December, after gaining 0.8% in November, while sales ex-autos are estimated to grow 0.7% after advancing 1.2% in November. Same-store sales results - sales at stores open at least a year - reported by retailers were lower than expected, as some spending was seen to have taken place earlier than normal, in November, and the East Coast snowstorm affected after-Christmas sales. The retail sales report includes spending at supermarkets and gas stations.

Other releases on the US economic calendar include the NFIB Small Business Optimism Index, wholesale inventories, the import price index, MBA Mortgage Applications, initial jobless claims, the trade balance, the University of Michigan Consumer Sentiment Index and business inventories. Other reports in the Americas include Canada’s building permits and housing starts, Brazil retail sales, and Mexico industrial and vehicle production.

Reports elsewhere include euro-zone industrial production and CPI, German consumer and wholesale prices, UK and French industrial and manufacturing production, UK house prices and PPI, Japan’s leading index, machine orders, and machine tool orders, Australia’s retail sales and employment, and China’s trade balance and leading indicator. Lastly, the Bank of England and European Central Bank meet to discuss monetary policy.