Caution Likely Ahead Of Friday's Non-farm Payroll Numbers - RTTNews Daily Market Analysis

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The major U.S. index futures are pointing to a negative opening on Wednesday. Despite Tuesday's recovery, some amount of caution prevails amid economic reports pointing to a slowdown and an uncertain inflation environment. The weak private non-farm payroll numbers, as revealed by the ADP Employment Survey for February are expected to exacerbate these concerns. Given the fact that the two major markets in the Asia-Pacific region, namely Japan and Hong Kong did not confirm a sustainable recovery, there may be some apprehensions over the near term direction of the U.S. markets. Traders are also expected to adopt a wait-and-watch attitude ahead of Friday's non-farm payroll number.

The major U.S. markets advanced strongly on Tuesday, benefiting from a rebound in global equities. The Dow Industrials jumped 157.18 points or 1.30% to 12,208 and the S&P 500 Index rose 21.29 points or 1.55% to 1,395. The Nasdaq Composite Index soared 44.46 points or 1.90% to 2,385.

Despite widespread fears over a deep correction, many analysts see redemption from the current malaise. AG Edwards Chief Equity Strategist Stuart Freeman notes that the current stock market valuations in the U.S. are reasonable, given the fact that the S&P 500 trades at less than 15 times its estimated earnings for 2007. This is roughly in line with the historical average. Further, the interest rates and inflation environments are not very antagonistic, while the job market is treading along on a fairly solid foundation. Moreover, the ongoing moderation in growth is likely to lead to Fed easing. Accordingly, Freeman recommends building positions in companies with reliable earnings growth.

Among the economic reports released on Tuesday, a Commerce Department report showed that January factory goods orders fell more than expected due to a downward revision to durable goods orders. The most important metric of the report, namely the non-defense capital goods orders, excluding aircraft orders, were revised down to represent a 6.3% decline. This does not bode well for business investment and in turn economic growth. A separate Labor Department report showed that bonus payments and stock option expenses contributed to a sharp upward revision to fourth quarter unit labor costs and compensation costs, while productivity growth was revised down to a 1.4% increase. Wachovia Securities notes that the downward revision to productivity growth means that the economy's long-run sustainable growth rate is now lower.

Merrill Lynch's David Rosenberg is of the view that along with the housing market correction, the credit issues in the subprime mortgage market and the tightening in banks' lending standards strengthen expectations of a further slowdown in the economy in the second half of 2007. A continuation in the below trend growth is expected to bring about a moderation in inflation, paving the way for an easing of monetary policy. Accordingly, Rosenberg sees the Fed rates at 4% at the end of 2007, which he believes is the neutral rate for the nominal funds rate.

Alan Greenspan, the former Federal Reserve Chairman, seems to be believe that the current expansion does not have the staying power of the previous expansion, which spanned for about a decade. The housing market, which has been acting as a drag, is not showing signs of bottoming. There have also been other areas that are showing a slackening of activity such as business investments.

Currency, Commodity Markets

Crude futures are rising $0.23 to $60.92 a barrel after rising $0.52 to $60.69 a barrel on Tuesday. Gold futures are easing $2.10 to $648.30 an ounce. On Tuesday, gold futures settled at $646.20 an ounce, which represented a gain of $7.

The U.S. dollar is weakening mildly against the yen and is currently trading at 116.28 yen compared to 116.44 yen at the close of New York trading on Tuesday. After trading at $1.3141 against the euro yesterday, the dollar is currently at $1.3124

Asia

The major Asian markets ended Wednesday's session on a mixed note. The Japanese, Hong Kong and Indian markets closed lower, while the rest of the markets revealed positive sentiment.

Despite beginning the day on a positive note, Japan's Nikkei 225 average lost momentum in late morning trading. Although the index staged a recovery in the afternoon, a late hour selling spree pushed the index back into negative territory. The index closed down 79.88 points or 0.47% to 16,765.

Aeon lost close to 3% and Canon slipped 2.41%. UFJ Nicos slumped 5.72%. Clarion, Comsys Holdings, Credit Saison, Dentsu, Fujifilm, Fujitsu, Japan Tobacco, JGC, Konica, Kyocera, NGK Insulators and Tokyo Electron also came under selling pressure. Sony was down 1.19%.

Among automakers, Honda was down 0.71%, while Toyota Motor posted a modest advance. All Nippon Airways, Asahi Glass, Daiwa Securities, Heiwa Real Estate, Inpex Holdings, Japan Steel Work, Kajima, Kirin Brewery, Mitsubishi Real Estate, Mitsubishi Logistics, Nikko Cordial, Nippon Sheet Glass, Shimizu and Sumitomo Realty saw buying interest.

Japan's Cabinet Ministry released the Leading Index, which came in at 35 in January, suggesting a contraction in activity. The Coincident Index declined to 55.6% in January from 75% in December.

Hong Kong's Hang Seng Index, which was higher for most of the session, pulled back in late trading to close down 139.92 points or 0.73% at 18,919. Property stocks were mostly lower, with Hang Lung Property and New World Development bucking the downtrend. The banking space revealed mixed sentiment. HSBC Holdings fell 0.66%, while Hang Seng Bank and Bank of East Asia advanced.

China Mercantile Holding, Citic Pacific, China Resources, Esprit Holding, China Netcom, China Mobile and FIH receded sharply. On the other hand, Cathay Pacific, Hong Kong Exchange, Li & Fung and China Unicom saw some degree of buying interest.

Encouraged by the Reserve Bank of Australia's decision to pause, Australia's All Ordinaries rose sharply in early trading and moved mostly sideways thereafter. The index closed near the highs of the day at 5,803, representing a gain of 53.40 points or 0.93%.

In line with expectations, the central bank of Australia decided to maintain its cash target rate at 6.25%. In 2006, the bank had lifted rates three times, each time by a quarter basis point-increment. Moderating inflation seemed to have tilted the scales in favor of a hold decision. Meanwhile the Australian Bureau of statistics released fourth quarter GDP data, which revealed 1% growth compared to a 0.3% expansion in the third quarter. The growth is commendable, as it came despite the economy being severely hit by a drought.

South Korea's Kospi hovered in positive territory despite a mid-session slump. At the close of trading, the index was up 8.02 points or 0.57% at 1,411. Strong buying by foreign institutional investors, especially of steel and financial stocks, helped the market to sustain its early gains.

Posco rose 2.29%, while Kookmin Bank and Shinhan Financial Group gained 1.08% and 4.72%, respectively. Shipbuilding stocks Hyundai Heavy Industries and Samsung Heavy Industries advanced 1.90% and 1.75%, respectively.

India's Sensex began the day on a positive note, but it declined steadily over the course of trading to close down 117.34 points or 0.92% at 12,580. Bank, metal and public sector unit stocks suffered the worst declines.

Europe

The major European averages are trading mixed. The French CAC 40 Index and the German DAX Index are up 0.12% and 0.15%, respectively. However, the FTSE 100 Index is declining about 0.11%.

In Paris, EADS is surging up about 2.40%. Suez, Air Liquide, EDF, Schneider Electric, Bouygues, Gaz de France, L'Oreal and Arcelor are all up over 1% each. Auto stocks, Renault and Peugeot are also higher. However, Vallourec is declining more than 6%. Credit Agricole is down more than 1% despite the company reporting an increase in its fourth quarter profits. Other bank stocks are also seeing some weakness. France Telecom is receding about 1.31%.

Among Frankfurt stocks, Volkswagen, Thyssenkrupp, Metro, Man, E.ON and Deutsche Post are firming up. However, Allianz, Bayer, Deutsche Bank, Deutsche Boerse, Deutsche Post, Deutsche Telekom, Henkel and Infineon Technologies are revealing negative sentiment.

In the U.K., Lloyds is down more than 4% and Royal Bank of Scotland is losing about 2.70%. ITV is retreating by about 2.25% in reaction to a decline in its adjusted earnings for the fiscal year 2006. Mining and oil stocks are revealing mixed sentiment.

U.S. Economic Reports

The ADP Employment report, which is a private survey that covers 14 million private employees at roughly 225,000 business establishments, released today revealed job growth of 57,000 for February.

According to the survey, job growth in the month was less than the recent three month average increase in employment of 99,000, as estimated by the ADP National Employment Report. The report also revealed that the service providing sector added 100,000 jobs, while the goods producing industries lost 43,000 jobs.

The weekly crude oil inventory report of the Energy Information Administration is due out at 10.30 AM ET on Wednesday.

In the week ended February 23rd, crude stocks increased by 1.4 million barrels to 329 million barrels. Inventories of crude oil are currently above the upper end of the average range for this time of the year. Gasoline and distillate stocks declined by 1.9 million barrels and 3.8 million barrels, respectively.

The average retail price of regular grade gasoline was $2.383 per gallon as of February 26th compared to $2.296 in the previous week and $2.254 in the year-ago period. The price of crude oil was at $60.28 per barrel, up 1.52% from the previous week, but 1.92% lower than in the year-ago period.

The Beige Book, which is a compilation of the anecdotal evidence on economic conditions from each of the twelve Federal Reserve Districts, is expected to be released at 2 PM ET on Wednesday.

Federal Reserve Bank of Chicago President Michael Moskow is expected to speak on An economic forecast for 2007 at a Jewish United Fund luncheon in Chicago at about 1 PM ET on Wednesday.

Consumer Credit, which is the dollar value of consumer installment credit outstanding, is scheduled for release at 3 PM ET on Wednesday. Economists expect Consumer Credit to reveal an increase of $7 billion for the month of January.

In December, consumer credit outstanding rose by $6 billion, as revolving and non-revolving credit increased by $0.6 billion and $5.5 billion, respectively. Non-revolving credit is used to finance vehicle purchases. The November reading was revised up to represent a $13.7 billion increase.

Stocks in Focus

Apollo Investment Corp. (AINV) may trade higher after it declared a dividend of 51 cents per share, payable on March 29th to shareholders of record as of March 22nd. CV Therapeutics (CVTX) is expected to see weakness after it said its angina drug Ranexa did not meet the primary endpoint of a Phase III clinical trial. However, a study on safety supported contentions that the drug could be used for first line treatment.

Progenics (PGNX) and Wyeth (WYE) could react to their announcement that they have begun clinical trials for a new formulation of their drug candidate for treating opioid induced constipation. Copart (CPRT) may see some weakness after it said its second quarter earnings from continuing operations were 32 cents per share, a penny below the consensus estimate. Revenues increased 3.1% to $128.9 million, also falling below the mean analysts' estimate of $136 million.

Heelys (HLYS) traded down in Tuesday's after hours trading despite reporting fourth quarter net income of 44 cents per share compared to 6 cents per share last year. Sales also jumped to $71 million from $14.9 million last year. However, Payless Shoes (PSS) may see some buying interest after it said its fourth quarter earnings rose to 37 cents per share from 8 cents per share in the same period last year. Sales were up 11% to $692.7 million, exceeding the Street estimate of $639.6 million.

Molson Coors Brewing Co. (TAP) could be in focus over its announcement at an analyst meeting that it expects to reduce expenses by about $250 million over the next three years. Chico's FAS (CHS) is expected to firm up after it said the current consensus estimate for the fiscal year 2007 looks reasonable. However, the company reported a decline in its fourth quarter earnings to 10 cents per share from 24 cents per share last year. Sales rose about 19% to $446.3 million.

BJ's Wholesale (BJ) is expected to react to its fourth quarter earnings, which declined to 18 cents per share from 76 cents per share in the year-ago period. The company's adjusted earnings were 62 cents per share, as revenues rose 13% to $2.43 billion. Saks (SKS) reported fourth quarter earnings from continuing operations of 14 cents per share compared to a loss of 22 cents per share last year. Net sales rose to $955 million from $817.78 million in the fourth quarter of 2005.

American Eagle (AEOS) is receding sharply in pre-market trading despite reporting fourth quarter earnings of 66 cents per share, up 40% from the year-ago period. Sales surged up 27% to $973.4 million. Analysts, on average, expected earnings of 66 cents per share on revenues of $955.02 million. Looking forward, the company targets first quarter earnings of 31-33 cents per share compared to the mean analysts' estimate of 33 cents per share.

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