Midday Market Update: Markets Shun Off Good Employment and Retail Numbers

Despite an unexpected drop in jobless claims and upbeat sales at major retailers, U.S. stocks and exchange traded funds (ETFs) are trading in the red on worries of the forthcoming stress test results.
The Labor Department reported that the number of laid-off workers applying for unemployment benefits dropped to 601,000 last week, a far cry from the 635,000 expected from economists. This puts the four-week moving average of new jobless claims at 623,500, a decrease of more than 30,000 from the high peak in April. This is an indicator that a peak may have been reached, states Martin Crutsinger of the Associated Press. We are still far from being in the clear, the total number of people receiving unemployment benefits climbed to a record 6.35 million.

In a separate report, the federal government reported that productivity, which is the key ingredient to living standards, grew at an annual rate of 0.8 for the first quarter of 2009, better than the expected increase of 0.6 that economists forecasted. Additionally, wage pressures increased at a rate of 3.3%, down from a 5.7% spike seen in the fourth quarter of last year.

An increase in consumer confidence lead to an increase in retail purchases which enabled some major retailers to post better results for the month than expected. Clothing store giant Gap (GPS) posted a 3% increase in sales, Wal-Mart (WMT) reported increases in same sale store revenues of 5% and Children’s Place Retail Stores (PLCE) posted a 4% increase in same-store sales. An overall index by Thomson Reuters of the retail sector, which excludes Wal-Mart, showed a decline in sales of 2.7%, far better than the expected decline of 3.4%.This news sent the retail sector in positive territory.The SPDR S&P Retail (XRT), was up about 0.3% in intraday trading.

The official results of the government’s stress tests are supposed to be released this afternoon and many investors are wary of the results.  We know that some banks are going to be required to raise more capital, which help tangible common equity of these banks.  However, the bigger problem at hand is how to deal with the toxic assets sitting on these banks’ books.  In essence, these stress tests are not making any fundamental changes to the banking industry, states Albert Bozzo of CNBC.

Auto giant General Motors (GM) showed more signs of weakness as it posted a $6 billion loss in the first quarter as global sales weakened.  To make it worse, revenue plunged by 47% and the company burned through $10.2 billion in the quarter.  In a nutshell, the company is surviving on $15.4 billion worth of government loans and many believe that it is doomed for bankruptcy.

On hopes that a global economic recovery is in sight, crude oil rallied to nearly $58/barrel.  Benchmark crude oil for June delivery rose to a six-month high in intraday trading, asking $57.92/barrel on the New York Mercantile Exchange.  United States Oil (USO) gained nearly 2% in morning trading.

The Dow Jones Industrial Average was down about 0.5%, the S&P 500 dropped nearly 0.3% and the NASDAQ gave back roughly 1.5% in morning trading.

For full disclosure, some of Tom Lydon’s clients own shares of XRT.

Kevin Grewal contributed to this article.