MarketView for September 3

 

 

Summary   

 

We finally managed a rally on Thursday but it took until about the last half hour of the trading day for the major equity indexes to really gain some traction, thereby ending a four-day losing streak, after stronger-than-expected retail sales data eased concerns about the economy before Friday's important jobs data. The August retail sales data was complemented by a survey showing improvement in the services sector.

 

Financials and retail stocks were among the day's leaders, with Bank of America chalking up a gain of 3.5 percent to $16.84, and Citigroup closing up 4.8 percent at $4.77. Among the retailers posting higher-than-expected sales in August were Costco and Target. Costco's shares, which were upgraded by JPMorgan, closed up 8.6 percent at $55, while Target was up 1.7 percent to close at $47.07.

 

The Labor Department is due to release its non-farm payrolls figures on Friday morning, which should shed light on the outlook for the economic recovery. The payrolls report, accompanied by the U.S. unemployment rate for August, will come before a long Labor Day holiday weekend with the financial markets closed on Monday.

 

Gold prices climbed to their highest level since late February, with spot gold hitting a peak of $997.20 an ounce before paring gains to $992.25 at the end of the day in New York. Mining company shares rose, with Newmont Mining up 4.5 percent at $45.77 and Freeport-McMoRan Copper & Gold up 4.34 percent at $64.48.

 

On a gloomier note, credit-rating agencies Moody's and Standard & Poor's, a division of McGraw-Hill came under pressure after a federal judge ruled the two companies must defend fraud charges in a class-action lawsuit. McGraw-Hill fell 10.2 percent to $29.01, while Moody's ended the day down 7.1 percent to $24.26.

 

Services Sector Improves

 

According to a report by Institute for Supply Management, the country’s services sector continued to shrink again in August, but a considerably reduced rate. The ISM’s index measuring activity was at its highest in nearly a year, according a report released on Thursday. In that report, the ISM said its services index rose to 48.4 in August from 46.4 in July.

 

A reading above 50 indicates expansion in the sector. The last time the index was at the 50 mark was September 2008. The index's business activity component rose to 51.3, up from 46.1 in July. The August reading was its first above 50 since last September.

 

The services sector represents about 80 percent of all domestic economic activity and includes businesses such as banks, airlines, hotels and restaurants.

 

Jobless Claims Fall

 

According to a report released by the Labor Department on Thursday, initial claims for state unemployment insurance benefits fell 4,000 to 570,000 last week, the result of a marginal decline in the number of layoffs.

 

Economists closely watch initial claims, which are considered a gauge of layoffs and an indication of companies' willingness to hire new workers. First-time claims have trended down in recent months and are well below the recession's high of 674,000 hit in the first week in April. But even with the improvement, they are running at levels well above the 325,000 mark considered a sign of a healthy labor market.

 

The number of people still on the benefit rolls after at least an initial week of aid rose by 92,000 claims to 6.23 million claims for the week ended August 22, the Labor Department reported. The insured unemployment rate, which measures the percentage of the insured labor force that are jobless, inched up to 4.7 percent in the week ended August 22 from 4.6 percent in the prior week.

 

A Labor Department report on the jobs market slated for release on Friday is expected to show employers shed another 225,000 workers last month after eliminating 247,000 positions in July.

The large number of people remaining on the rolls indicates that unemployed workers are having a hard time finding new jobs.

 

More job cuts were announced this week. Washington-based manufacturer Danaher said it will lay off about 3,300 of its roughly 50,000 employees, an increase from the 1,700 cuts it announced in the spring. American Airlines said it is cutting 921 flight attendant jobs as it deals with an ongoing downturn in traffic and lower revenue.

 

Among the states, California had the largest increase in claims of 8,632, which it attributed to greater layoffs in the construction, trade and service industries. The next largest increases were in Ohio and New Hampshire. The state data lag initial claims by a week.

 

Michigan had the largest drop in claims of 2,968, which it attributed to fewer layoffs in the auto industry. The next largest decreases were in Florida, Pennsylvania, New Jersey and Alabama.

 

Retailers Report Lower Sales

 

Retailers posted lower sales for August although overall results came in ahead of expectations. A monthly compilation of 31 retailers' results by The International Council of Shopping Centers and Goldman Sachs showed sales in established stores fell 2.1 percent in August compared with the same month in 2008. That was better than the 3.5 percent to 4 percent drop expected.

 

Those doing better than expected were mainly discounters, but declines were less than expected in the specialty apparel and department store sectors as well. If Wal-Mart, which stopped reporting monthly sales figures in May, were included in the monthly numbers they may well have been on the positive side of the ledger.

 

Discounters remained the best performers. Target said sales at established stores fell 2.9 percent. Health care products were strong sellers, while apparel and home products were weaker. Meanwhile, warehouse club operators Costco Wholesale  and BJ's Wholesale Club both reported lower results but again ahead of Street expectations. Food remains a best seller at the clubs, while apparel and jewelry were weaker.

 

TJX, which operates discount chains TJMaxx and Marshall's, said its 5 percent increase topped expectations as consumers to look for bargains. Upscale retailers meanwhile reported a weak month. Saks indicated that its results fell more than analysts had expected.

 

The teen sector was weak as back-to-school sales failed to take off. Hot Topic sales in stores open at least a year fell 8.1 percent. The Buckle, typically an outperformer, said results rose but missed Street expectations.

 

Aeropostale, which has outperformed competitors by focusing on low prices, said results rose more than expected. Meanwhile, Abercrombie & Fitch reported a 29 percent sales decline.

 

Labor Day falls a week later this year, so some back-to-school buys are likely to come later. However, the shift of the sales-tax holidays from July to August in most of the 14 states that have them partly offset the later Labor Day.

 

Limited Brands, which operates Bath and Body Works and Victoria's Secret, said sales in stores open at least a year fell 4 percent. Gap also said results fell but came in above expectations, as a result of sales at its low-priced Old Navy chain. Department store sales remained a weak sector. Macy's said sales at established stores dropped 8.1 percent in August.

 

Precipitous Drop in Price of Natural Gas

 

Natural gas prices fell sharply on Thursday, hitting new seven-year low after the government reported more supplies were put into storage as the country pares down on energy usage.

 

Natural gas for October delivery fell 19 cents to $2.525 per 1,000 cubic feet on the New York Mercantile Exchange. Prices dropped as low as $2.50 per 1,000 cubic feet, the lowest since March 2002, after the government reported that natural gas supplies grew again last week and are now nearly 18 percent above the five-year average.

 

Natural gas, a key energy source for power plants, is now at a level that is less than a third of the price last summer, and its contract on the NYMEX gave up nearly 23 percent in the past six trading days.

 

The United States Natural Gas fund, an exchange-traded fund that tracks natural gas prices, has fallen steadily this year, giving up 76 percent of its value and it hit a 52-week low of $8.94 a share on Thursday.

 

Crude Oil Falls

 

The price of crude oil came under pressure on Thursday as disappointing news from the labor market outweighed economic optimism from data showing that the service sector and retail sales improved. Sweet domestic crude futures for October delivery settled down 9 cents per barrel at $67.96, after reaching a high of $69.40 earlier in the day. London Brent crude settled down 54 cents per barrel at $67.12.

 

Oil inventory data that indicated some demand recovery in a report released on Wednesday failed to push prices much higher. Total crude oil product demand rose 0.1 percent during the past four weeks compared with year-ago levels and gasoline demand increased 0.5 percent during the same period. Oil prices are not likely to break out of the confines of the current range in the short term. Crude prices have been range bound, between $65 to $75 a barrel since the start of August, fluctuating on the latest clues about the speed of an impending economic recovery.

 

The markets were also eyeing reports that some of the world’s largest oil producers are increasing output. For example, Russian oil output hit a record high in August, nearing 10 million barrels per day as the country launched a new giant field. Meanwhile, OPEC is expected to leave output targets unchanged when it next meets on September 9 in Vienna.