Evening Market Update

Stocks Lose Steam Ahead of Jobs Report

The US equity markets got an early boost from a report on US manufacturing, but lost ground as the day progressed to close solidly in the red. Traders were hit with a plethora of economic data from the domestic and international fronts, including a mixed bag of manufacturing reports from China, Brazil, and the eurozone. Back home, US jobless claims declined, but remained above the 400,000 mark, as focus now turns to tomorrow’s critical labor report. Treasuries moved higher, as 2Q productivity was revised lower—while unit labor costs exceeded expectations—and July construction spending unexpectedly declined. In equity news, the nation’s retailers reported August same-store sales, with results coming in mixed amid a hurricane-related slowdown in the final days of the month. Meanwhile, the major automakers posted solid US sales gains in August, led by double-digit increases from General Motors, Ford and Chrysler. Rounding out the equity headlines, the Chairman and CEO of Bank of New York Mellon stepped down and Dow member Verizon Communications raised its quarterly dividend.

The Dow Jones Industrial Average fell 120 points (1.0%) to 11,494, the S&P 500 Index lost 15 points (1.2%) to 1,204, and the Nasdaq Composite declined by 33 points (1.3%) to 2,546. In moderate volume, 1.0 billion shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil rose by $0.01 to $88.82 per barrel, wholesale gasoline gained $0.01 to $2.89 per gallon, and the Bloomberg gold spot price rose $0.10 to $1,825.65 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.5% higher at 74.49.

The nation’s retailers reported results for August same-store sales (sss)—sales at stores open at least a year—and some key companies recorded stronger-than-expected results, despite the impact of Hurricane Irene, which hampered sales in the last week of the period. Target Corp. (TGT $51) announced a 4.1% increase year-over-year (y/y), compared to the 3.5% gain that analysts surveyed by Reuters had anticipated. TGT said August sales were “in line” with its expectations, reflecting “solid results” in its back-to-school and back-to-college categories. TGT gave up an early advance and finished lower.

Meanwhile, Costco Wholesale Corp. (COST $79) posted a sss jump of 11.0% y/y, including the impact of fuel sales and foreign currency fluctuations, above the 9.3% increase the Street had forecasted. Excluding fuel and foreign currency, COST’s sales grew 7%. Additionally, the company announced that its Chief Executive Officer (CEO) Jim Sinegal plans to step down effective January 1, 2012, and current President and Chief Operating Officer, Craig Jelinek, will be the new CEO. COST traded higher.

Among the department stores,  Macy’s Inc. (M $27) reported August sss growth of 5.0%, exceeding the 4.5% expectation, while Kohl’s Corp. (KSS $45) and J.C. Penney Co. Inc. (JCP $26) both posted declines in sss of 1.9%, compared to estimated increases of 1.6% and 0.8%, respectively. Inside the mall, Gap Inc. (GPS $16) reported a drop of 6.0% in sss y/y for August, larger than the 3.8% decrease that was anticipated, while Limited Brands Inc. (LTD $37) achieved an 11.0% gain in sss, above the 7.6% increase that was forecasted. Shares of M moved higher, while KSS, JCP, GPS and LTD finished lower.

Moreover, the major automakers reported August US sales, with General Motors Co. (GM $23) posting an 18.2% y/y jump in sales, Ford Motor Co. (F $11) announced that August sales rose 11.3% y/y, and Chrysler said sales surged 30.6%. GM and F traded lower. Among other automakers that have reported so far today, Volkswagen (VLKAY $30) recorded an increase in sales of 10.4% and Nissan Motor Co. (NSANY $18) achieved a 19.2% gain for the month, while Toyota Motor Corp. (TM $71) reported a larger-than-expected decline of 12.7% in August.

Elsewhere, Bank of New York Mellon Corp. (BK $21) announced that its Chairman and CEO Robert Kelly has stepped down, “due to differences in approach to managing the company,” and Gerald Hassell has been appointed Chairman and CEO, effective immediately. Shares were lower.

Finally, the board of Dow member Verizon Communications Inc. (VZ $36) approved a 2.6% increase in the company’s quarterly dividend, marking the fifth consecutive year that the payout has been raised. The telecommunications giant will now pay $0.50 cents per share each quarter, up from $0.4875 per share, which will cost the company an additional $35 million per quarter. Shares of VZ traded lower.

US manufacturing remains in expansion, jobless claims fall, and 2Q productivity drops

The ISM Manufacturing Index unexpectedly remained at a level depicting expansion in August, declining to 50.6 from 50.9 in July, while the expectation of economists surveyed by Bloomberg was for the index to decrease to 48.5, with 50 the demarcation point between expansion and contraction. The key underlying components of the better-than-expected reading were new orders, which rose to 49.6 from 49.2 in July, inventories, which gained 3 points to 52.3, and employment remaining above the 50 mark after declining from 53.5 to 51.8. Additionally, supplier deliveries, a component within the Leading Economic Indictors Index, ticked higher to 50.6 from 50.4. However, the index remained at the lowest level since July 2009, with production declining 3.7 points to 48.6, and new export orders dropping 3.5 points to 50.5.

Weekly initial jobless claims fell by 12,000 to 409,000, versus last week's figure which was upwardly revised by 4,000 to 421,000, and compared to the 410,000 level that economists had expected. However, the four-week moving average, considered a smoother look at the trend in claims, increased by 1,750 to 410,250, and continuing claims fell by 18,000 to 3,735,000, above the forecast of economists, which called for continuing claims to come in at 3,681,000.

Meanwhile, the final reading on 2Q nonfarm productivity showed a 0.7% decline on an annual basis, revised down from the 0.3% drop that was initially reported, and compared to the 0.5% decrease that economists had expected. 2Q’s drop compared to the 0.6% decline that was seen in 1Q. Unit labor costs came in at a 3.3% increase, versus a gain of 2.2% that was recorded in the preliminary estimate, and compared to the 2.4% growth that was estimated. 1Q unit labor costs were 6.2% higher, after being solidly revised.

Finally, construction spending snapped a string of three monthly gains, falling 1.3% month-over-month (m/m) in July versus the 0.2% increase forecasted by economists, while June’s previously-announced 0.2% increase was revised sharply higher to an increase of 1.6%. Within the report, residential construction fell 1.6% while non-residential spending decreased 1.1%.

Treasuries moved higher, as the yield on the 2-year note declined 2 bps to 0.18%, the 10-year note fell 9 bps to 2.13%, and the 30-year bond decreased 10 bps to 3.50%.

European manufacturing declines, China manufacturing improves, Brazil cuts rates

In economic news across the pond, the eurozone PMI Manufacturing Index for August was revised from a preliminary reading of 49.7—where economists had expected the index to remain—to 49.0, with a reading below 50 denoting a contraction in activity. July’s reading of manufacturing activity in the eurozone was 50.4. The downward adjustment came as PMI Manufacturing Indices out of France and Germany—Europe’s largest economy—were also revised lower, but the German index did remain above the key 50 level. Elsewhere, the UK PMI Manufacturing Index decelerated from an upwardly revised 49.4 in July to 49.0 in August, matching expectations. In other economic news, German 2Q GDP was left unrevised at a 0.1% quarter-over-quarter (q/q) rate of expansion, as stronger-than-expected exports were offset by declines in construction investment and private consumption. In other GDP news, Switzerland’s 2Q GDP expanded at a 0.4% q/q rate, matching expectations, while 1Q was revised higher. Finally, a disappointing debt auction in Spain helped preserve concerns about the debt crisis in the region.

The Asia/Pacific region was helped by some economic news out of China, as the Chinese PMI Manufacturing Index accelerated from 50.7 in July to 50.9 for August, compared to the 51.0 level that economists had estimated. Output increased and new orders remained in expansion territory, while new export orders fell to a level depicting contraction. Meanwhile, a separate Manufacturing PMI report from HSBC showed China’s activity rose from 49.3 in July to 49.9 for August. PMI readings above 50 denote expansion in activity. Elsewhere, South Korean exports rose more than forecasted in August, while a separate report showed that manufacturing slowed from 51.3 in July to 49.7 in August, and Australia’s retail sales exceeded the expectation of analysts in July.

Back in the Americas, Brazil’s central bank surprised economists by cutting its target Selic interest rate by 50 bps to 12.00%. The central bank’s board voted 5-2 in favor of the cut, which comes after five consecutive increases to the benchmark rate earlier this year in an effort to combat rising prices. The policy makers cited a “substantial deterioration” in growth projections for the major economic blocs, despite an inflation rate in Brazil that surpassed 7% in August for the first time since 2005. In other news out of Brazil, the country’s PMI manufacturing survey fell to 46.0 in August, down from 47.8 in July, while a separate report showed a larger-than-expected widening of the trade balance in August.

All eyes on tomorrow’s US labor report

After the volatility in markets in August, declining business and consumer confidence in surveys and generally weak economic data, investors will be focused on the impact on hiring for the month. The survey of economists by Bloomberg is forecasting nonfarm payrolls to grow by 65,000 in August after increasing a better-than-expected 117,000 in July, while excluding government hiring, private sector payrolls are expected to increase 95,000, after expanding by 154,000 in July. Additionally, the unemployment rate is expected to remain at 9.1%.

International economic releases scheduled for tomorrow include eurozone PPI, Brazil’s GDP and India’s manufacturing PMI.