Evening Market Update

Ahead of Holiday, Not Much Labor in Jobs Report

Stocks fell solidly on Friday ahead of the Labor Day holiday weekend as the US nonfarm payrolls report showed no growth in jobs in August and as traders moved to the sidelines with continued worries about the eurozone debt crisis. Meanwhile, financials were solidly to the downside in the US on a report that indicated the US Federal Housing Finance Agency was planning to sue more than a dozen large banks over misrepresenting the quality of mortgage securities, and on a separate report that the Fed has asked Dow member Bank of America to create a contingency plan in case conditions for the bank worsen. In equity news, Starz Entertainment LLC announced it will cease to distribute content on Netflix Inc's streaming platform in February 2012, and DISH Network was reported to begin a streaming service in October. Treasuries were mixed and the dollar rose. All US market will be closed Monday in observance of Labor Day.

The Dow Jones Industrial Average fell 253 points (2.2%) to 11,240, the S&P 500 Index lost 30 points (2.5%) to 1,174, and the Nasdaq Composite declined by 66 points (2.6%) to 2,480. In moderately light volume, 974 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil declined by $2.48 to $86.45 per barrel, while wholesale gasoline fell $0.05 to $2.84 per gallon, and the Bloomberg gold spot price jumped $55.65 to $1,881.75 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was 0.2% higher at 74.72. For the week, including dividends, the DJIA fell 0.4% and the S&P 500 Index lost 0.2%, while the Nasdaq Composite was flat.

Financials were under some pressure on the heels of a report late yesterday from the New York Times, suggesting the US Federal Housing Finance Agency (FHFA) is planning to sue more than a dozen large banks, including Dow members Bank of America Corp. (BAC $7) and JPMorgan Chase & Co. (JPM $35), along with Goldman Sachs Group Inc. (GS $107). According to the report, the suit is for allegedly misrepresenting the quality of mortgage securities sold during the housing bubble and the FHFA will seek billions of dollars in compensation. None of the entities involved commented on the report.

Separately, the skittishness toward the sector was heightened by a report from the Wall Street Journal that the US Federal Reserve is asking for Bank of America Corp. to issue contingency plans it could take if conditions worsen for the financial firm, with the list of options reportedly including the potential to issue a separate class of shares to track the performance of the Merrill Lynch division. BAC and the Fed did not comment on the report and shares were solidly lower.

Meanwhile, shares of  Netflix Inc. (NFLX $211) fell after its partner Starz Entertainment LLC announced that contract renewal negotiations with NFLX have ended and when the current agreement expires on February 28, 2012, it will cease to distribute its content on the NFLX streaming platform. The expired contract will result in NFLX being unable to offer content from the studios of Dow member Walt Disney Co. (DIS $33) and Sony Corp. (SNE $21). Starz said the decision is a result of its strategy to protect the premium nature of its brand by preserving the appropriate pricing and packaging of its exclusive content. NFLX did not comment on the report. Late in the trading day, Bloomberg Television reported that DISH Network Corp (DISH $24) was planning to launch a streaming service through its Blockbuster unit in October, citing a person familiar with the matter. DISH has not commented on the report and shares were nearly flat.

Nonfarm payrolls come in flat and hourly earnings decline

Nonfarm payrolls were unchanged month-over-month (m/m) in August, compared to the consensus estimate of economists surveyed by Bloomberg, which forecasted a 68,000 increase. Additionally, prior months were revised down by 58,000, with June now reported at a gain of 20,000 and July at an increase of 85,000 jobs. Excluding government hiring and firing, private sector payrolls increased by 17,000 in August, versus the forecast of a gain of 95,000, while prior months were revised by a combined 3,000 lower, to a gain of 156,000 in July and 75,000 increase in June. The unemployment rate remained at 9.1%, matching expectations. Additionally, average hourly earnings unexpectedly declined, dipping 0.1% versus the Street's forecast of a 0.2% increase, while average weekly hours surprisingly slipped to 34.2, from 34.3 in the previous month, compared to expectations of an unchanged reading.

The report was negatively impacted by the Verizon strike, which lowered payrolls by 45,000, and excluding this impact, private payrolls would have increased 62,000. Health care accounted for the majority of the increase in private jobs, growing by 35,500 during the month. Temporary help added 5,000 and has shown little improvement on a net basis so far this year. Elsewhere, manufacturing lost 3,000 jobs.

Treasuries were mixed with the yields on the mid-to-long end of the curve moving solidly lower following the employment data, while rates on the short-end were modestly higher. The yield on the 2-year note rose 2 bps to 0.20%, while the yield on the 10-year note fell 13 bps to 2.00%, and the 30-year bond rate declined 19 bps to 3.31%.

Please note that all US markets will be closed on Monday in observance of the Labor Day holiday.

European debt crisis continues to fester

New negative developments in the eurozone debt crisis pressured European stocks solidly to the downside today, led by declines in financials. The quarterly review of Greece's finances were seen as potentially under threat as Greece announced that it could miss its budget deficit target and talks between Greece and the European Union, International Monetary Fund, and the European Central Bank regarding the next disbursement of funds have been put on hold until mid-September, per Bloomberg. Elsewhere, Italy's Prime Minister Berlusconi's proposal to back off some austerity measures is adding to tension ahead of the vote by Germany’s top court next week on the constitutionality of the European Financial Stability Fund (EFSF) bailout fund.

Elsewhere, in international economic news, eurozone producer prices rose 0.5% m/m in July, matching expectations, after being flat in June, while rising 6.1% y/y, also inline with forecasts, after rising 5.9% in June. Additionally, Japanese capital spending in 2Q unexpectedly fell, and while India’s manufacturing activity slowed for the fourth-straight month, the index remained at a level depicting expansion.

Late-week weakness erases early gains

Before the late-week fall off in the equity markets, stocks appeared poised to extend last week's sharp advance, as US recession concerns eased on the heels of a stronger-than-forecasted report on consumer spending and as the impact of Hurricane Irene looked less severe than some had forecasted. Also, a merger between two banks in Greece in an attempt to combat the region's debt crisis and slowing economic growth helped keep the uneasiness across the pond relatively subdued. Meanwhile, the markets seemed to take the release of the Federal Reserve’s minutes in stride even as the report revealed growing divergence among policymakers.

Stocks get hamstrung by the Consumer Confidence Index falling to the lowest level since April 2009, while concerns about government action in the corporate sector dampened sentiment as the US Department of Justice filed a lawsuit to block Dow member AT&T Inc’s (T $28) proposed $39 billion acquisition of Deutsche Telekom’s (DTEGY $12) T-Mobile USA Inc unit. As confidence began to turn skittish with the week maturing, reports that showed the US ISM Manufacturing Index unexpectedly remained in expansion territory and Chinese manufacturing activity improved for August provided muted support for the equity markets. As such, Friday's disappointing US labor report, flare-up in Greek debt concerns, and potential banking sector litigation reports undid the gains that US stocks racked up earlier in the week, finishing modestly lower ahead of the Labor Day weekend.

Next week will be dominated by global central bank talk

After returning from the holiday weekend, the economic calendar in the US starts with Tuesday's ISM Non-Manufacturing Index, which is expected show the services economy slowed but remained in expansion territory, with a forecast of 51.0 in August, down from the 52.7 level in July. The index is the companion to the ISM Manufacturing Index, which unexpectedly remained in expansion territory with a reading of 50.6.

While the central bank in the US is not scheduled to meet next week, anecdotal economic information collected by Fed staffers in advance of the next Federal Open Market Committee (FOMC) meeting scheduled for September 20-21 will be released in Wednesday's midday Federal Reserve Beige Book. At the August FOMC meeting, the Fed downgraded its view on the economy, and made the historic announcement that it expected conditions to warrant keeping the Fed funds rate at an exceptionally low level through at least mid-2013.

Other US releases scheduled include MBA Mortgage Applications, the trade balance, initial jobless claims, consumer credit, and wholesale inventories, and President Obama's Congressional speech will also be monitored. Other reports in the Americas include Canada's Ivey Purchasing Managers Index, building permits, new home prices, and employment, and Mexico’s consumer confidence and CPI.

Releases in Europe include euro-zone and UK services PMIs, eurozone investor confidence, retail sales, and GDP, German factory orders, industrial production, July trade balance, CPI and wholesale prices, as well as UK home prices, industrial and manufacturing production, and PPI. Asia/Pacific reports will include Japan's leading index, July trade balance, machine orders, and GDP, Australia's GDP and employment, and Taiwan's August trade balance. China will report its services PMI, CPI and PPI, while the monthly readings on retail sales, industrial production and fixed asset investment may not be released until trading is completed at the end of the week.

Although no change to monetary policy at major central banks is expected next week, with global economic slowing amid generally tight fiscal situations, traders will be closely watching central bank meetings for signs of future policy changes. The central banks of Australia, Japan, Sweden, Canada, South Korea, as well as the Bank of England and European Central Bank, are scheduled to meet, and the minutes from the Mexico and Brazil meetings will be released.