Evening Market Update

Housing and Auto Sales Jump to Help Soothe Bulls’ Lumps

Stocks moved solidly to the upside, more than gaining back yesterday’s solid decline that came on a disappointing late-day slide, as the bulls found some energy in the form of favorable housing data, as well as steep US sales from major automakers. Pending home sales jumped more than economists forecasted, helping add some pep to bulls’ step, and traders overlooked the fact that sales were boosted by a rush to take advantage of the homebuyer tax credit. Treasuries moved solidly lower amid the strong advance in the equity markets, which eased some of the recently ramped up risk aversion, and despite a thirteen-year low in home purchase applications, which contributed to the modest increase in the MBA Mortgage Application Index. In other equity news, Amgen received FDA approval to market its bone strengthening drug in the US and Collective Brands Inc posted better-than-expected earnings but its sales came in below the Street’s forecast. Overseas, Japan’s Prime Minister resigned, and the political uncertainty pressured the yen, dominating the headlines from the international front.

The Dow Jones Industrial Average gained 226 points (2.3%) to close at 10,250, the S&P 500 Index rose 28 points (2.6%) to finish at 1,098, and the Nasdaq Composite increased 59 points (2.6%) to 2,281. In moderate volume, 1.4 billion shares were traded on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil gained $0.28 to $72.86 per barrel, wholesale gasoline rose $0.05 to $2.03 per gallon, and the Bloomberg gold spot price declined $2.30 to $1,223.35 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.2% to 86.72.

In auto industry news, General Motors reported that US sales of its four remaining brands—Chevrolet, Buick, GMC and Cadillac—jumped 32% year-over-year (y/y) in May, making it the eighth-straight month of sales gains for its remaining brands. Meanwhile, Ford Motor Co. (F $12) announced that its US sales rose 23% y/y, the sixth-straight month where its sales rose more than 20%. Toyota Motor Corp. (TM $72) announced that its sales grew 6.7% y/y, but said the Memorial Day weekend resulted in its best selling weekend of the year. Elsewhere, Chrysler reported that its sales jumped 33% y/y, and Honda Motor Co. (HMC $30) said its sales rose 19.1% y/y. F, TM, and HMC all finished higher.

Amgen Inc. (AMGN $56) moved nicely higher after the company received FDA approval in the US to market its bone-strengthening drug Prolia for postmenopausal women with osteoporosis. Prolia is the first drug likely to be prescribed by primary physicians instead of specialists, and today’s action follows the May 28 approval by European regulators.

Collective Brands Inc. (PSS $20) reported 1Q EPS of $0.83, above the $0.76 that Wall Street analysts were expecting, with revenues increasing 1.8% y/y to $879 million, falling short of the $890 million that the Street was looking for. Same-store sales—sales at stores open at least a year—declined 1.2% y/y. The parent of Payless shoe stores said it benefitted from “strong earnings growth globally,” but some customer segments are still being negatively impacted by the economy. Shares traded solidly lower.

Refi applications rise and purchase applications fall, pending home sales surge

The US MBA Mortgage Application Index rose 0.9% last week, after the index, that can be quite volatile on a week-to-week basis, jumped 11.3% in the previous week. The increase came amid a 4.1% decrease in the Purchase Index to the lowest level since April 1997 after gaining 3.3% the week before, and a 2.4% increase in the Refinance Index, which surged 17.0% the prior week. The share of applications filed to refinance rose to the highest level of the year to 73.8% of total applications from 72.2% the previous week. The increase in the overall index came after a 3 basis-point increase in the average 30-year mortgage rate to 4.83%, above the record low of 4.61% reached at the end of March 2009.

Elsewhere, pending home sales posted another solid gain, rising 6.0% month-over-month (m/m) in April, compared to the 5.0% gain that economists had expected. Moreover, March’s 5.3% jump in the gauge of the pipeline of existing home sales was revised to an advance of 7.1%. The rush to take advantage of the homebuyer tax credit continues to boost sales figures in the housing sector. However, some of the optimism toward the strong housing data has been tempered by uncertainty regarding how the sector will fair without the assistance of the government stimulus efforts. This sentiment may be exacerbated by the fact that purchase applications have fallen to a thirteen-year low since the end of the homebuyer tax incentive in April.

Treasuries were solidly lower after moving lower following the better-than-expected pending home sales data and amid some alleviated risk aversion as the equity markets advanced. The yield on the 2-year note was up 4 bps to 0.81%, while the yield on the 10-year note gained 8 bps to 3.34%, and the 30-year bond yield increased 6 bps to 4.24%.

Japanese Prime Minister resigns, yen declines

With euro-area debt crisis concerns relatively subdued, today, international economic news was dominated by Asia, headlined by the announcement that Japanese Prime Minister Hatoyama resigned after less than nine months in power on declining confidence among voters and his own party. The move comes ahead of mid-term elections next month for the upper chamber of parliament. The yen traded solidly lower versus the dollar and most major currencies after the announcement amid uncertainty regarding who will replace Hatoyama and what that could mean for the nation’s economic policies going forward. The Democratic Party of Japan will choose a new leader June 4, who would become prime minister due to the party’s majority in the lower house of parliament.

In other international economic news, Australian 1Q GDP rose by 0.5% q/q, inline with expectations, while the 4Q figure was upwardly revised to 1.1%, and the y/y growth rate of 2.7% was above the estimate of 2.5%. The report comes after the Reserve Bank of Australia left its benchmark interest rate unchanged yesterday.

Elsewhere, UK mortgage approvals rose to a four-month high as warmer weather and the ending of a transaction tax on house purchases for some first-time home buyers helped boost demand, and amid a shortage of supply of homes for sale. Moreover, a measure of producer prices in Europe accelerated to the fastest pace in more than a year in April, by 0.9% m/m and 2.8% year-over-year (y/y) as a weaker euro raised import prices and energy costs increased.

Read on services sector and job report preview on tap

The ISM Non-Manufacturing Index will be released tomorrow, and is forecasted to increase to 55.6 in May from 55.4.in April, which would mark the seventh month in the past nine months above the 50.0 level that separates expansion from contraction. The report is generally considered a measure of economic strength in the service sector and is the companion to the ISM Manufacturing Index, which was released on Tuesday and posted a decline to 59.7 in May, indicating a slowing rate of growth.

The services PMI has lagged the manufacturing index, as the higher cyclicality of the manufacturing sector leads changes in the overall economy, and increased production has resulted in job gains, resulting in a positive feedback cycle that results in consumer spending that further propels production increases given the severe reduction in inventories that businesses allowed during the recession.

Due to the importance for job growth to sustain the economic recovery, traders will also be eyeing the ADP Employment Change Report where the forecast is that private sector employers added 70,000 jobs in May after expanding by 32,000 jobs in April. The Bloomberg survey of economists is expecting Friday’s broader nonfarm payrolls report will show an increase of 515,000 in May, after increasing 290,000 in April, while excluding government hiring, private sector payrolls are expected to increase 175,000, after expanding by 231,000 in April, due to the outsized impact of temporary hiring for the Census on the headline number.

The other releases on tomorrow’s economic calendar include the final reading on nonfarm productivity, expected to rise 3.4% in 1Q, weekly initial jobless claims, forecasted to decline to 455,000 from 460,000 the week prior, and factory orders for April, anticipated to increase 1.8% after a 1.3% rise in March.

International economic releases will include Japanese capital spending, euro-zone and UK service PMIs, euro-zone retail sales, UK housing prices, and India’s service PMI.