Trader Talk

Strong US Jobs Data; A Decoupling From Europe?

S&P futures popped about 5 points as the ADP Employment Report for December came in much stronger than expected, at 325,000 jobs created, well above the consensus of 175,000. This bodes well for the December nonfarm payroll report, out tomorrow.

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Futures improved another few points as weekly jobless claims also continued to improve, but futures have weakened going into the open.

U.S. continues to decouple from Europe, to a degree. The euro has dropped to new (15-month) lows against the dollar; Italy, Greece and Spain are down 2 to 3 percent, led by euro banks such as Deutsche Bank, Credit Suisse, and UBS, down 3 to 4 percent. UniCredit, the Italian bank that floated a large rights offering yesterday, is down another 12 percent this morning.

Yet U.S. banks are mostly flat this morning.


1) France did get off a series of bond auctions totaling 7.96 billion euros ($10.2 billion), including a 10-year which was sold at 3.29 percent with a tepid bid-to-cover ratio of 1.6. Germany also sold 4.06 billion euros ($5.2 billion) of 10-year bonds.

Where's the downgrade? Enough with the suspense. The whole world has been waiting for the European sovereign debt downgrade threatened last month by Standard and Poor's. The only suspense: Will it be a one-notch or two-notch downgrade for France, and how much is priced into the market? The consensus: A one-notch downgrade will raise borrowing costs modestly for France (see the above auction), but a two-notch downgrade is definitely not priced in.

A bigger issue: What the cost will be to the European Financial Stability Facility (EFSF) , whose bonds are backed by the triple-A rating of several countries.

Speaking of the EFSF, good news: It did indeed price a three-year bond, at a slight discount to par, with a respectable coupon of 1.625 percent. That is close to what France is paying, which implies the market is building in some expectation of a downgrade. Demand was fair, not great: Close to 4.5 billion in orders came in for the 3 billion euro ($3.8 billion) issue, a bid-to-cover of 1.5

2) Retail sales: some good, some bad. Total sales up 3.6 percent for December, according to RetailMetrics, a bit above the estimate of 3.3 percent, but those numbers have been coming down. Strong reports from the high end — Macy's, Saks, etc. But in the mid-range, like Kohl's, it was tough.

Even those with sales gains noted the competitive environment and the impact on margins.

The Good:

Macy's guided fourth-quarter same-store sales higher to 5.3 percent to 5.5 percent from 4 to 4.5 percent, and guided fourth-quarter earnings per share higher to $1.55 to $1.60 (consensus $1.61). It beat expectations posting a 6.2 percent gain, doubled its quarterly dividend to $0.20 per share and added $1 billion to buybacks.

Zumiez guides higher for the fourth quarter.

The Bad:

Target sales were below expectations, and lowered foutrth-quarter guidance to $1.35 a share to $1.43 a share vs. previous guidance of $1.43 a share to $1.53 a share.

Kohl's were down 0.1 percent in sales, expectations were for 2.4 percent gain, and guided downward for fourth quarter ($1.70 a share to $1.73 a share; consensus was $1.92 a share)

American Eagle Outfitters lowered fourth-quarter guidance to $0.33 a share to $0.35 a share vs. $0.40 a share to $0.44 a share previously (compared with a $0.43 a share consensus).

Cato said fourth-quarter guidance would be at low end of expectations.

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