MarketView for June 12

Summary

The major equity indexes took a hit on Thursday, but nonetheless managed to end the day off of their session lows but with the day's decline, the S&P 500 was down for three straight sessions for the first time since early April.

Hours after ethnic Kurdish forces took control of the oil hub of Kirkuk after the Shi'ite-led government's troops abandoned their posts, President Barack Obama was asked if he might order drone strikes or other action to halt the insurgency that has seized much of northern Iraq this week.

Obama told reporters that he refused to rule out U.S. action in Iraq against Sunni Islamist militants who have surged out of the north toward Baghdad, threatening to divide the country and establish their own jihadist state.

The stock market's losses quickly accelerated following Obama's comments, with industrials and consumer discretionary sectors leading the decline. The CBOE Volatility index VIX closed up 8.3 percent at 12.56.

State Department spokeswoman Jen Psaki followed Obama's comments by telling a daily briefing that the administration was considering all options, except for sending U.S. troops into Iraq.

In macroeconomic news, retail sales rose 0.3 percent in May, half the growth rate that economists had forecast. Americans' new claims for unemployment benefits unexpectedly rose last week.

While both economic indicators were below expectations, neither was seen as so weak as to change the perception of improving economic conditions, and the market's recent uptrend is still viewed as intact.

Energy shares among the few gainers on Thursday. Oil prices hit the highest for the year on worries that escalating violence in Iraq could disrupt oil supplies from the major OPEC exporter.

Geron was one of the Nasdaq's most-active stocks, rising 21 percent to $3.15 on heavy volume after the U.S. Food and Drug Administration lifted a partial clinical hold on a study testing its blood cancer drug. Lululemon fell 16 percent to $37.25 on heavy volume. The athletic apparel retailer cut its full-year earnings and revenue outlook.

In contrast to the overall market's downturn, Restoration Hardware was up 12.7 percent to $80.40 a day after the luxury home goods retailer's first-quarter results.

Approximately 5.5 billion shares changed hands on the major equity exchanges, a number that was slightly below the 5.76 billion share average for the last month, according to data from BATS Global Markets.

Economic Data Underwhelms

Retail sales rose less than expected in May and first-time applications for unemployment benefits increased last week, but did little to change views that the economy is regaining steam. Thursday's reports came on the heels of recent data showing solid job growth in May and strong expansion in manufacturing and services industries.

The Commerce Department reported on Thursday that retail sales gained 0.3 percent last month. While that was below economists' expectations for a 0.6 percent rise, April's retail sales were revised to show a 0.5 percent increase after having previously been reported to have edged up 0.1 percent in April.

In a separate report, the Labor Department reported on Thursday that initial claims for state unemployment benefits climbed by 4,000 claims to a seasonally adjusted 317,000 claims for the week ended June 7.

Nonetheless, economic growth in the second quarter is expected to top a 3.0 percent annual pace after the economy contracted at a 1.0 percent rate in the January-March period. That growth forecast is supported by a second report from the Commerce Department showing business inventories recorded their largest increase in six months in April.

So-called core retail sales, which strip out automobiles, gasoline, building materials and food services, and correspond most closely with the consumer spending component of gross domestic product, were unchanged last month.

However, they were revised to show a 0.2 percent rise in April, instead of the previously reported 0.1 percent dip. Economists said retail sales were up at a 9.2 percent annualized pace over the last three months.

In May, consumers bought automobiles, thereby increasing receipts at auto dealerships by1.4 percent. Excluding autos, retail sales rose 0.1 percent.

There were solid gains in sales at building materials and garden equipment stores, as well as receipts at non-store retailers, which include online sales. Sales at furniture stores also rose. However, there were marginal declines in sales at sporting goods shops, electronics and appliances stores, as well as at clothing retailers and restaurants and bars.

Another report from the Labor Department showed little signs of imported inflation, with import prices edging up 0.1 percent last month. In the 12 months through May, prices increased 0.4 percent, advancing for the first time since July.

Inventories Rise Sharply

Business inventories recorded their largest increase in six months during Aprilsupporting expectations of a sharp rebound in growth in the second quarter.

The Commerce Department said on Thursday inventories increased 0.6 percent in April after rising 0.4 percent in March. The increase in April was the largest since October.

Economists polled by Reuters had expected inventories, which are a key component of gross domestic product changes, to rise 0.4 percent in April. Retail inventories, excluding autos, which go into the calculation of GDP, rose 0.2 percent.

Retail stocks excluding autos had edged up 0.1 percent in March.

A sharp slowdown in the pace of inventory accumulation contributed to depressing growth in the first quarter.

The economy contracted at a 1.0 percent annual pace in the January-March period as inventories subtracted 1.6 percentage points from GDP. A swing in inventories is expected to help growth top a 3.0 percent pace this quarter.

In April, business sales increased 0.7 percent after rising 1.1 percent in March. At April's sales pace, it would take 1.29 months for businesses to clear shelves, unchanged from March.