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Weak Retail Sales Leave Stocks Mixed Ahead of Jobs Report

The US equity markets finished today’s session mixed as traders anxiously await the release of tomorrow’s labor report, which was preceded by a better-than-expected ADP Employment Change Report released yesterday and a modest increase in weekly initial jobless claims announced today. Today’s focus was also on the nation’s retailers, as they reported mostly disappointing same-store sales figures for December, headlined by lower-than-expected results out of Target, Costco Wholesale and Macy’s, while some of the higher-end retailers managed to top analysts’ expectations. Treasuries moved higher, while the US dollar continued to gain ground.

The Dow Jones Industrial Average fell 26 points (0.2%) to 11,697, the S&P 500 Index lost 3 points (0.2%) to 1,274, while the Nasdaq Composite advanced 8 points (0.3%) to 2,710. In moderate volume, 1.1 billion shares changed hands on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil declined $2.00 to $88.30 per barrel, wholesale gasoline added $0.01 to $2.45 per gallon, while the Bloomberg gold spot price fell $6.08 to $1,372.25 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—rose 0.7% to 80.81.

The nation’s retailers reported December same-store sales results—sales at stores open at least a year—headlined by Target Corp. (TGT $55), which announced a 0.9% year-over-year (y/y) increase, compared to the 4.0% gain that analysts surveyed by Reuters had anticipated. TGT said December sales were below expectations, as strength in grocery and apparel was offset by softness in electronics, toys, and some home categories. Also, the company added that some key gift-giving categories moved earlier into the holiday season, and lower margin items drove a higher portion of sales than expected. TGT is down solidly.

Meanwhile, Costco Wholesale Corp. (COST $71) reported its December same-store sales grew 6.0% y/y, including gasoline sales and foreign exchange, just shy of the 6.2% that the Street had forecasted, and excluding fuel and currency, sales rose 4.0%. COST traded modestly lower.

Department store chain Macy’s Inc. (M $24) achieved 3.9% y/y growth in same-store sales for December, below the 4.4% gain that analysts had anticipated. The company said snowstorms disrupted after-Christmas shopping along the East Coast, but sales were “strong” at both Macy’s and Bloomingdale’s. Elsewhere, J.C. Penney Co. Inc. (JCP $32) announced that its sales rose 3.7% y/y, topping the 3.3% growth that was expected, while Kohl’s Corp. (KSS $52) posted a 3.9% y/y increase in sales, missing the 4.4% gain that was forecasted. Shares of all three firms were lower.

Inside the mall, Gap Inc. (GPS $21) said its same-store sales declined 3.0% y/y, versus the 2.8% growth that the Street had forecasted, and Limited Brands Inc. (LTD $29) announced that its sales rose 5.0% y/y, above the 4.6% increase that analysts had expected, Abercrombie & Fitch Co. (ANF $54) posted a 15% y/y jump in sales, topping the 10.8% rise that was expected. All three firms traded lower.

However, higher-end retailers faired relatively better, with Saks Inc. (SKS $11) reporting a jump of 11.8% y/y, easily beating the 3.9% increase that was expected, and Nordstrom Inc. (JWN $44) posting an 8.4% gain in sales, topping the 3.2% growth that was anticipated. SKS and JWN finished nicely higher.

Jobless claims rise more than expected but seasonal factors may have played a role

Weekly initial jobless claims rose by 18,000 to 409,000, versus last week's figure which was upwardly revised by 3,000 to 391,000, and the 408,000 level that economists surveyed by Bloomberg had expected. However, the four-week moving average, considered a smoother look at the trend in claims, fell by 3,500 to 410,750, and continuing claims dropped by 47,000 to 4,103,000, above the forecast of economists, which called for continuing claims to come in at 4,080,000. The rise in initial claims was tempered by seasonal factors that may have impacted the results, along with the severe winter weather that hit the East Coast recently.

Treasuries finished higher after showing little reaction to the employment data. The yield on the two-year note was down 3 bps to 0.67%, the yield on the 10-year note fell 6 bps to 3.41%, and the 30-year bond yield lost 2 bps to 4.52%. Yields rose solidly yesterday on the heels of favorable employment service sector activity data.

Confidence higher than expected in the euro-zone

European economic news was highlighted by a gauge of euro-zone economic confidence among executives and consumers, which rose to 106.2 in December, from 105.1 in November, and compared to the increase to 105.8 that economists had expected. The index reached the highest level since October 2007. Moreover, factory orders in Germany—Europe’s largest economy—increased more than five times what was forecast month-over-month (m/m) in November and jumped 20.6% y/y, compared to the expectation of a 15.9% y/y increase. These favorable reports helped limit the sting of separate releases that showed UK PMI Services fell back to a level depicting contraction in activity and euro-zone retail sales unexpectedly fell in November.

The lone economic releases out of Asia/Pacific came from Australia, which issued a report showing building approvals in the nation fell more than economists had anticipated in November, while a separate report noted Australia’s service industry activity improved slightly.

Job market in focus tomorrow

All eyes will be on tomorrow’s release of nonfarm payrolls, expected to grow 150,000 in December after posting a disappointing 39,000 increase in November. Wednesday’s ADP Employment Change Report added uncertainty to the release, as it showed private sector hiring nearly three times more than expected. The ADP report has a mixed history in matching up with the private sector portion of the Labor Department data, but deviated enough from the forecast that it caused some economists to revise up their forecasts for Friday’s report and raised market expectations. Excluding government payrolls, private sector jobs are estimated to increase 175,000. The unemployment rate is estimated to fall to 9.7% after increasing in November to 9.8%, average hourly earnings are forecast to rise 0.2% m/m and the average workweek is expected to remain at 34.3 hours.

The slow improvement in the jobs market is a key reason behind the Fed’s asset-purchase program, also called quantitative easing, or QE2. Therefore, Fed Chairman Ben Bernanke’s semi-annual testimony before the Senate Budget Committee, scheduled for 7:30 a.m. EST on Friday, will also be closely monitored. Wednesday’s release of the minutes from the December Fed meeting indicated that while economic growth had picked up, the change in the outlook was not sufficient to warrant any adjustment to QE2, and that some members indicated they had a “fairly high threshold” for making changes. Additionally, as the Fed’s independence is under increasing political pressure, the Q&A session may heat up.

Meanwhile, there are numerous indicators that suggest an uptick in hiring, such as initial jobless claims, which has significantly broken out to the downside, employment components of various regional manufacturing surveys, and even the NFIB small business sentiment survey. Despite the disappointing headline payrolls number in December, temporary hiring has remained strong, which can lead to permanent employment. The payrolls report is a net number of hiring and layoffs, and while the pace of layoffs has declined, hiring has been slow to pick up as uncertain demand outlooks has resulted in employers waiting longer than usual to decide to hire. Good news here though, the Labor Department’s October JOLT survey of Job Openings and Labor Turnover showed the highest total of job openings since August 2008, at nearly 3.4 million jobs, up 12% m/m, and typically leads hiring by one to three months.

The only other report on the domestic docket will be consumer credit, which economists are expecting to have increased by $0.5 billion in November, following a surprising $3.4 billion increase in October.

The international economic calendar will also be busy tomorrow, with releases including German retail sales, industrial production and trade balance, the French trade balance, the Italian unemployment rate, the euro-zone unemployment rate and the final reading of 3Q GDP. Canada will also release its December unemployment rate and Mexico will report on consumer confidence.