US equity markets commenced the trading session in the red, as a report released this afternoon revealed that the embattled American labour market is struggling to recover.

Wall Street managed to recoup its earlier losses within the first hour of trading, however, after AIG announced that it plans to pay back the government. The release of a better-than-expected Philly Fed factory index also fuelled optimism.

By around 3.30pm (London time) the Dow Jones Industrial was up by 30.23 points (+0.33%) to 9309.39 while the more representative S&P 500 was 6.68 points (+0.67%) above its previous close at 1003.14.

The market opened a notch lower today after an official government report revealed that the number of Americans claiming first-time jobless benefits (initial jobless claims) unexpectedly rose by 15,000 to 576,000 in the week ending August 15.

That was the highest level in three weeks and worse than Bloomberg’s expectations for a drop to 550,000 from an originally reported 558,000 the week before. The rise in initial jobless claims suggests that US companies have continued to make redundancies in spite of recent signs of macroeconomic stabilisation.

The four-week moving average of initial claims, a preferred gauge, rose by 4,250 to 570,000 last week, the highest since the week ending July 11. In the meantime, the total number of Americans claiming jobless benefits for more than a week (continuing jobless claims) surprised to the upside as well, coming in 2,000 higher at 6.241 million.

Stock market losses were relinquished on the back of an encouraging announcement from Robert Benmosche, the executive officer of embattled insurer American International Group (AIG), who said he expects the bailed out insurer to repay its debts to the US government and return the company to its former glory.

‘At the end of the day, we believe we will be able to pay back the government and we hope we will be able to do something for our shareholders as well,’ Benmosche said in an interview in Croatia. ‘The government is working with us. They want us to do things that are very prudent…My first charge is to get the company to operate at the level it used to operate, being the world’s best…The fact is we owe the US government a lot of money and we are not going to be able to pay it back just by our profits, so we will sell some of the company off but only at the right time at the right price.’ [1]

AIG’s share price surged 14% to $30.43, not surprisingly. In the meantime, shares of Hartford Financial climbed 2.3% to 19.57 while MetLife added 2.2% to $37.11.

Banks were also in demand, with Citigroup gaining 3.2% to $4.26, Bank of America advancing 1.7% to $17.03 and Wells Fargo up 3% to $27.42.

Also lifting morale this afternoon was the release of the Philadelphia Fed manufacturing index, which unveiled an unexpected expansion in regional manufacturing activity in August. The Federal Reserve Bank of Philadelphia’s general economic index rose to 4.2, the highest in nearly a year, from -7.5 in July.

Bloomberg News was expecting the gauge to rise to -2. Readings below zero signal a contraction, and vice versa. The Conference Board’s leading economic index, meanwhile, a increased by 0.6% last month following a revised 0.8% gain in June, suggesting the US economy recovering from the recession.

There were some other disappointments (apart from the jobless claims data) this afternoon, nevertheless. Sears Holdings, the biggest US department store reported an unexpected second-quarter loss of 17 cents a share (excluding one-off items), substantially worse than Bloomberg’s expectations for a profit of 35 cents a share. Revenues were equally dismal, with sales at stores open at least a year plunging 13%, as difficult US employment conditions led consumer to tighten spending. The company’s share price plunged 11.5% to $65.31 this afternoon.

[1] Source: Bloomberg News (20 August 2009)

By Anthony Grech, Research Analyst, IG Index.

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