Morning Market Update

Job Growth Comes Up Short to Thwart the Bulls’ Snort

The US equity markets have erased early gains and are modestly lower in morning action following the US labor report, which showed job growth was smaller than expected. However, the release showed the unemployment rate—derived from a separate survey than the payrolls data—fell more than expected, but traders are debating the validity of the steeper-than-expected drop as seasonal factors may have amplified the result. Treasuries are mixed after paring losses following the release, but Fed Chairman Ben Bernanke is set to testify on policy and the US economic outlook on Capitol Hill just after the opening bell, while a read on consumer credit is due out in the final hour of trading. In equity news, Dow member JPMorgan Chase & Co and Morgan Stanley received approval by Chinese securities regulators to establish investment-banking joint ventures in mainland China, while retailer Liz Claiborne Inc lowered its profit forecast as December same-store sales were “clearly disappointing.” Overseas, Asia finished mixed, while disappointing data in Europe and the US is weighing on stocks.

As of 8:48 a.m. ET, the March S&P 500 Index Globex future is 2 points below fair value, the Nasdaq 100 Index is 1 point below fair value, while the DJIA is 11 points below fair value. Crude oil is $0.11 higher at $88.49 per barrel, and the Bloomberg gold spot price is down $9.40 at $1,362.20 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.1% at 80.88.

Dow member JPMorgan Chase & Co. (JPM $44) and Morgan Stanley (MS $29) are in the headlines as the two financial firms received approval by Chinese securities regulators to establish investment-banking—underwriting of stocks and bonds—joint ventures in mainland China. According to the Wall Street Journal, this was the first approval for a US bank since 2004, when Goldman Sachs Group Inc. (GS $172) got the greenlight to form a joint venture in the Asian nation.

Meanwhile, shares of Liz Claiborne Inc. (LIZ $7) 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 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.

Nonfarm payrolls growth misses forecasts but 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, and following the 71,000 increase seen in November, which was revised higher by 32,000. Additionally, excluding government hiring and firing, private sector payrolls increased by 113,000, versus the forecast of a gain of 178,000, after expanding by an upwardly revised 79,000—from an initially reported 50,000 gain—in November. The unemployment rate fell from 9.8% to 9.4%, compared to expectations of 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.

Treasuries are mixed after paring losses following the employment data. The yield on the two-year note is down 2 bps to 0.64% and the yield on the 10-year note is 3 bps lower at 3.36%, while the 30-year bond yield is rising 1 bp to 4.52%.

In the final hour of trading today, the economic calendar will yield the release of consumer credit, forecasted to increase by $500 million in November, after rising by $3.4 billion in October.

Also, Federal Reserve Chairman Ben Bernanke will testify before the Senate Budget Committee on monetary and fiscal policy, as well as the outlook for the US economy. Bernanke is expected to begin his testimony at 9:30 a.m. ET and traders will likely be looking for any comments on whether the recent string of favorable US economic data changes the Fed’s plans to carry out its second round of asset purchases, commonly known as quantitative easing or QE2. Earlier this week, the minutes from the December Federal Open Market Committee (FOMC) meeting showed that participants had increased confidence in the economic recovery, but that “the change in the outlook was not sufficient to warrant any adjustments to the asset-purchase program,” and that more time was needed “before considering any adjustment.” Also, the Fed noted that economic improvement was disappointingly slow, that that the recovery remained subject to downside risks such as the housing sector and the European debt crisis. Members emphasized that the pace and size of the purchase program would be contingent on economic and financial developments, although some participants indicated they had a “fairly high threshold for making changes to the program.”
Europe mostly lower amid lackluster data

The equity markets in Europe are under pressure in afternoon action, led by weakness in materials issues on the recent pullback in commodity prices, while traders are grappling with some disappointing economic signals across the pond as well as the US employment data. On the negative side of the economic ledger, 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 to a level that missed forecasts, but imports rose much more than anticipated, resulting in an unexpected narrowing of the nation’s trade surplus. Financials are also lower after yesterday’s jump in bond interest rates for troubled peripheral euro-area nations and reports that the European Union is mulling spreading the cost of euro-area bailouts to senior bondholders, which exacerbated euro-debt concerns.

The UK FTSE 100 Index is down 0.6% and France’s CAC-40 Index is declining 0.8%, while Germany’s DAX Index is 0.3% lower.

Asia mixed ahead of US labor data

Stocks in Asia finished mixed with traders treading cautiously ahead of Friday’s US labor report, while weakness in commodities pressured equities closely tied to resources. Japan’s Nikkei 225 Index rose 0.1%, an eight month high, aided by continued weakness in the Japanese yen, which is helping improve the outlook for export issues, but the lack of conviction in front of the US employment data kept gains in check. Meanwhile, stocks in China finished mixed, with weakness in Chinese lenders snapping a seven-session winning streak for the Hong Kong Hang Seng Index, which declined 0.4%, while the Shanghai Composite Index managed to rise 0.5% despite lingering uneasiness regarding the possibility of further policy tightening by the Chinese government. Stocks in the resource-rich nation of Australia finished lower, with the S&P/ASX 200 Index declining 0.4%, on the aforementioned losses seen in commodities yesterday, exacerbated by concerns regarding the impact of the massive flooding in the region on the nation’s economy.

Elsewhere, South Korea’s Kospi Index rose 0.4% on strength in automakers and retailers, but a 1% drop in shares of Samsung Electronics Co. (SSNLF $830) limited the advance after the world’s largest maker of TVs and flat screens, per Bloomberg, reported earnings that missed analysts’ forecasts on soft prices for TVs. Finally, Taiwan’s Taiex Index fell 1.1% following a report that showed the nation’s imports and exports grew at a pace that was smaller that economists had expected.