In the U.S.: Jobless Claims Could Boost Stocks as Europe Weighs

29 December 2011


From 1249 to 1350? In 2 days? Even with key data still coming in, year-end S&P prediction seems far-fetched.

If weekly jobless claims once more show improvement Thursday, they could provide the magic needed to put stocks back in the black for the year.

That is, if Europe’s sovereign debt crisis doesn’t once more strangle any progress. The jobless claims, reported at 8:30 a.m. EST, could be the fourth in a row below 400,000, an important level to economists who are now seeing a slightly improving labor market.

The S&P 500 has been teetering on both sides of unchanged and closed below it Wednesday, after a 1.3 percent decline put it at 1248, eight points below its 2010 close of 1257.  The index has been tugged higher in recent sessions, as the market tries to hang onto a traditional year end Santa rally, but any negatives from Europe have the ability to easily send it lower.

Some of the remedies concocted by euro zone officials and the European Central Bank will be put to the test Thursday when Italy auctions some 8.5 billion euros in 3-year, 7- and 10- year notes. That could set the tone for markets, just as an Italian bill auction did early Wednesday. The early reaction to that auction was positive, driving equities markets higher, but stocks and other risk assets soured as the euro turned lower, and negative sentiment about the debt crisis again caught hold.

“It was the fact the 10-year Italian didn’t budge when the 6-month paper was so well received,” said Art Cashin, director of floor operations at UBS. While the bill auction was at sharply lower yields than last month, the yield on the 10-year Italian note again crept to 7 percent, raising concerns about Italy’s ability to fund itself.

The euro rolled over, falling more than a percent, below the key 1.30 level, and hit a near one-year low of 129.10 against the dollar and a 10-year low against the yen. It took its biggest leg down, after data showed euro zone banks were hoarding cash.  ECB data showed that banks deposited a record 452 billion euros with the central bank.

“You have a lot of little stories but nothing really accounts for the selloff in the euro. Sterling sold off almost 2 percent. It’s the thinness of the market conditions and lack of participation in what little orders there are,” said Marc Chandler, chief currency strategist at Brown Brothers Harriman.

“The big thing I’m watching is not just the Italian bond auction,” he said, noting Spain’s new government will be considering austerity Friday. “Despite the good reception for the Italian auction, Spanish bonds are actually doing better.”

While the S&P is negative for the year with a 0.6 percent decline, the Dow is up nearly 5 percent year-to-date. It fell 139 to 12,151 Wednesday. The Nasdaq Composite is down 2.4 percent year-to-date and the Russell 2000 is down 6.2 percent.

“We’ll see if we can get Santa back up out of the back of the sleigh,” said Cashin. “If Europe is weak in any way though, we’ll be right back in the hole.”

Jobs Bright Spot?

Jobless claims, below 400,000 for three weeks, could again come in below that level, signaling a slight improvement in the labor market.

“Our forecast is 385,000 so we’re a little bit above consensus,” said Dean Maki, chief U.S. economist at Barclays. “We do think the trend is downward but we think the last couple of weeks might be overstating the rate of decline in claims so we have thought there’d be a bit of a backup this week. The four week moving average is in a downward trend. That’s at 380,000.”

Maki said there are signs the labor market is improving. “That’s seen across the board. And you’re starting to see it in confidence surveys, for instance the Conference Board yesterday,” he said.

Other data Thursday includes Chicago PMI at 9:45 a.m. and pending home sales at 10 a.m. The Fed’s balance sheet and money supply are released at 4:30 p.m.

Oil Drill

Crude, pumped up this week by events in Iran, could slide Thursday after the API inventory data late Wednesday showed a surge in oil supply.

Oil  finished Thursday just below $100 a barrel, after rising above $101 Wednesday on Iran’s threat to close the Strait of Hormuz, a key shipping channel that transports nearly 20 percent of the world’s oil.

“The euro breaking 1.30 was a big deal,” said John Kilduff of Again Capital. He said oil prices could remain under pressure, especially with the API reporting an increase in crude inventories that were almost as large as the decline reported last week.

“Oil prices are showing some Iran fatigue. Hostilities are not imminent, so the security premium ebbed going into the long weekend,” he said.

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