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Interest rate cuts in China and the Euro zone and monetary policy measures by The Bank of England were of no help to the US markets on Thursday. Investors’ fears of lingering global financial woes and a dismal domestic services sector reading dragged the benchmarks down. Separately, initial claims showed signs of decline while the ADP report added more-than-expected jobs. However, expectations from US nonfarm payrolls, slated for release on Friday, were anything but optimistic.
The Dow Jones Industrial Average (DJI) slipped 0.4% and closed at 12,896.67. The Standard & Poor 500 (S&P 500) was down 0.5% and finished yesterday’s trading session at 1,367.58. The tech-laden Nasdaq Composite Index added a negligible 0.03 points to finish at 2,976.12, close to the level it started the day with. The fear-gauge CBOE Volatility Index (VIX) moved up 5.0% and settled at 17.50. Volumes were once again low as consolidated volumes on the New York Stock Exchange, the American Stock Exchange and Nasdaq amounted to roughly 5.19 billion shares, sharply lower than last year's daily average of 7.84 billion. Decliners outnumbered advancing stocks on the NYSE; as for 54% stocks that declined, 42% stocks moved up.
While domestic investors’ hopes for a third round of quantitative easing remained afloat, central banks in Europe and China stepped up measures, but both these developments failed to excite investors. The European Central Bank slashed interest rates to a record low of 0.75%, while the deposit rate was brought down to zero. However, the rate-cut action was followed by grim comments by ECB President Mario Draghi, which weighed on the investors’ minds. Draghi said: "The risks surrounding the economic outlook for the euro area continue to be on the downside…Beyond the short term, we expect the euro area economy to recover gradually, although with momentum dampened by a number of factors. In particular, tensions in some euro area sovereign debt markets and their impact on credit conditions”.
Separately, in a move aimed at supporting the ailing Chinese economy, People's Bank of China announced a 31-basis point cut to the nation’s benchmark lending rate, which slipped to 6%. Deposit rates were also slashed by 25 basis points and declined to 3%. The Chinese central bank had cut the rates earlier this year as well, on June 7. Thus, this decision marks the second such cut in two months. The rate cuts will be effective from Friday. Amidst these rate cuts, the Bank of England did not follow the same route, but announced a £50 billion expansion of its quantitative easing plan.
Despite the actions by these central banks, investors hardly found any reason for cheer as their fears about global financial woes remained intact. Mario Draghi’s comments, as mentioned earlier, added to the gloom. Things were not too bright on the home front either, as economic activity in the non-manufacturing sector was slower-than-expected and was also at the lowest level since January 2012. According to the Institute for Supply Management’s Non-Manufacturing Business Survey Committee: "The NMI registered 52.1 percent in June, 1.6 percentage points lower than the 53.7 percent registered in May…The Non-Manufacturing Business Activity Index registered 51.7 percent, which is 3.9 percentage points lower than the 55.6 percent reported in May”. The growth in NMI also fell short of consensus estimates of a growth rate of 52.8%.
However, jobs data came in positive yesterday as initial claims dropped and Automatic Data Processing, Inc.’s (NASDAQ:ADP) National Employment Report suggested job additions in June. Looking at the initial claims data, the U.S. Department of Labor reported that the advance figure for seasonally adjusted initial claims dropped to 374,000, down 14,000 from the prior-week's revised figure of 388,000. The drop was larger than expected, as consensus estimates expected initial claims to be recorded at around 385, 000. As for the ADP report, it noted: “Employment in the U.S. nonfarm private business sector increased by 176,000 from May to June, on a seasonally adjusted basis. The estimated gain from April to May was revised up slightly, from the initial estimate of 133,000 to a revised estimate of 136,000”.
Both the jobs reports were positive and they come ahead of crucial nonfarm payroll data to be released by the U.S. government. However, while reported figures were better-than-expected, market analysts are remain wary of the pending nonfarm data. Expectations are that payroll data would show an addition of 100,000 jobs, up from 77,000 in April and 69,000 in May. However, the unemployment rate will still linger around 8.2%, and thus investors did not find any reason for cheer.
Additionally, yesterday, retail chains came out with their reports on June sales, which were largely discouraging. These included the likes of Costco Wholesale Corporation (NASDAQ:COST), Target Corporation (NYSE:TGT) and The Buckle, Inc. (NYSE:BKE) and their shares dropped 0.4%, 1.1% and 3.0%, respectively. Macy's, Inc. (NYSE:M), Kohl's Corporation (NYSE:KSS) and The Wet Seal, Inc. (NASDAQ:WTSLA) also reported dismal June sales, but their shares gained 2.7%, 6.3% and 4.4%, respectively.