Evening Market Update

Late Kick Helps Equity Markets Close Out Week in the Green

Stocks rallied late Friday, led by strength in the technology sector and a larger-than-expected increase in a reading of consumer sentiment, which along with a modest increase in business inventories, overshadowed a disappointing retail sales report. In equity news, Dell announced that it will record a $100 million liability to establish a reserve for the potential settlement of an ongoing SEC investigation, Research in Motion and Motorola reached a settlement over patent disputes, and National Semiconductor reported better-than-expected top and bottom line results. Elsewhere on the equity front, Novartis AG received backing from a FDA panel on its pill to treat multiple sclerosis, Banco Santander said current year net profit should match 2009, and the board of BP is reportedly voting next week to defer its second-quarter dividend payment. Treasuries finished the day higher.

The Dow Jones Industrial Average gained 39 points (0.4%) to close at 10,211, the S&P 500 Index rose 5 points (0.4%) to finish at 1,092, and the Nasdaq Composite increased 25 points (1.1%) to 2,244. In moderately light volume, 1.0 billion shares were traded on the NYSE and 1.9 billion shares were traded on the Nasdaq. Crude oil lost $1.24 to $74.24 per barrel, wholesale gasoline fell $0.02 to $2.06 per gallon, and the Bloomberg gold spot price gained $10.25 to $1,226.80 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-rose 0.3% to 87.40. For the week, including dividends, the DJIA gained 2.8%, while the S&P 500 Index rose 2.5%, and the Nasdaq Composite increased 1.1%.

Dell Inc. (DELL $13) announced that it will record a $100 million liability, related to ongoing discussions with the US Securities and Exchange Commission (SEC), to establish a reserve for the potential settlement by the company of a previously reported SEC investigation. The potential settlement would be for alleged violations of certain federal securities laws, related to certain accounting and financial reporting matters. As a result of the liability, the company downwardly revised its unadjusted 1Q EPS by $0.05, to $0.17. DELL also announced that its Chairman and CEO Michael Dell and staff at the SEC have recently commenced discussion of a settlement framework relating to Mr. Dell that would resolve allegations relating to the company's disclosures and alleged omissions prior to fiscal 2008 regarding certain aspects of the company’s commercial relationship with Dow member Intel Corp. (INTC $21). Dell overcame an early loss to finish slightly higher, and shares of INTC gained as well.

Research in Motion Ltd. (RIMM $60) and Motorola Inc. (MOT $7) announced that they have settled a patent dispute over technology that is used in their smartphones. RIMM will make a one-time payment and will pay ongoing royalties to MOT in the agreement to end the litigation. The companies said the agreement will benefit both firms due to a long-term, intellectual property cross-licensing arrangement, including patent rights relating to 2G, 3G, 4G technologies and wireless email. Shares of both firms were higher.

National Semiconductor Corp. (NSM $14) reported fiscal 4Q EPS of $0.33, five cents above the Reuters estimate, with revenues increasing 42% year-over-year (y/y) to $399 million, above the $384 million that analysts were expecting. The chip maker said increased demand for its analog products for the wireless handset and industrial markets drove revenue growth in the quarter, and it sees these two end markets continuing to drive more revenue growth opportunities. NSM issued fiscal 1Q revenue guidance that topped analysts' forecasts. Shares traded nicely higher.

Shares of Novartis AG (NVS $48) were nicely higher, after the company received the backing of a US Food and Drug Administration panel for its first-of-a-kind pill to treat multiple sclerosis (MS). The drug, which the company has proposed selling under the brand name Gilenia, is viewed as the most important product in Novartis' pipeline and some estimates predict sales could reach an annual level of $1 billion if the drug is approved. MS currently affects 400,000 Americans and 2.5 million people world-wide.

Banco Santander SA (STD $11) issued an upbeat outlook for the remainder of 2010, saying it expects to have a similar net profit to 2009, despite the ongoing economic concerns in Spain. The largest bank in the euro-zone by market value said emerging markets like Brazil and Mexico would drive the bank's earnings in coming years, helping to offset weakness in Spain. The bank's chairman said it has been grabbing market share from weaker banks in recent months, leading to additional deposits of 30 billion euros in Spain alone, and 75 billion euros across Europe.

The Times of London and The Financial Times are reporting that the board of directors of BP Plc (BP $34) will meet next Monday to make a formal decision on whether to defer its 2Q dividend, although reports suggest the board has already decided to defer the payment. A spokeswoman for BP said that no decision on the dividend has been made and that options remain open. No announcement will be made public until BP executives meet with U.S. President Barack Obama on Wednesday. Shares of the company have rebounded from its recent tumble on the fallout from the massive oil leak in the Gulf of Mexico. BP gained ground even as US government scientists have doubled their estimates of the amount of oil leaking into the Gulf.

Retail sales unexpectedly fall, sentiment jumps to highest since January 2008

Advance retail sales for May fell 1.2%, compared to the Bloomberg forecast of economists that called for an increase of 0.2%, but April's 0.4% gain was revised to a 0.6% advance. Sales ex-autos declined 1.1%, compared to expectations, which called for sales to increase by 0.1%, but April’s 0.4% rise was also upwardly revised to a 0.6% gain. Sales ex-autos and gas dropped 0.8%, versus the 0.2% rise that was anticipated, and its April figure was also revised to a better-than-expected reading of a 0.6% advance, from an initial 0.4% gain. Treasuries moved higher on the report, as the yield on the 2-year note was down 5 bps to 0.73%, the yield on the 10-year note lost 8 bps to 3.24%, and the 30-year bond yield declined 8 bps to 4.15%.

The decline in the headline figure was the first since September 2009 and the drop after excluding the volatile component of autos was the first since July 2009, pressured by lower sales in clothing and accessories, which fell 1.3%, and a 1.1% drop in general merchandise. But the bulk of the decline came as building materials and garden equipment tumbled 9.3%, after an 8.4% jump in April, helping supply the bulk of the uneasy sentiment that immediately followed the report. The sharp decline in the building materials and garden equipment category was attributed to the impact of government programs, such "cash for appliances," coming to end, doing little to help soothe concerns about whether the economic recovery can continue even amid the absence of government stimulus efforts.

However, there were some positive aspects of the report that could help make today's report a little bit easier to stomach, such as the upward revisions to April's figures, gains in sales of electronics and appliances, as well as in mail order and online sales, along with the fact that sales on the headline level are up 6.9% y/y. Moreover, Federal Reserve Chairman Ben Bernanke noted in his testimony, in which he offered some reassuring economic commentary, that "incoming data suggest that gains in private final demand will sustain the recovery in economic activity."

Meanwhile, the disappointment from the retail sales report was also helped by today's better-than-expected preliminary report of the University of Michigan Consumer Sentiment Index, which increased from 73.6 in May to 75.5 in June-the highest since January 2008-compared to the increase to 74.5 that economists had expected. The current economic conditions component of the report ticked higher from 81.0 to 82.9, and the index of expectations six months from now increased to 70.7 from 68.8.

In other economic news, business inventories rose 0.4% m/m in April, just shy of the 0.5% increase that economists had expected, and March's 0.4% increase was upwardly revised to a 0.7% gain. Sales advanced 0.6% m/m, resulting in the inventory-to-sales ratio-the amount of time it would take to deplete inventories at the current sales pace-dropping from 1.24 to 1.23 months in April.

Full cup of world data released on Friday

There was a plethora of economic reports that garnered some attention in the euro-area, dominated by inflation data, with German wholesale prices rising more than economists anticipated, along with a consumer price report out of Spain, while France's gauge of prices at the consumer level rose by a smaller amount than forecasted. Also, the UK announced a few key pieces of data, with its producer price reports coming in mixed with respect to input and output pricing, while separate reports showed UK industrial production and manufacturing production both unexpectedly fell.

The Asian economic calendar remained in focus as China reported a slew of key reports, highlighted by inflation data, with producer prices rising 7.1% y/y in May, versus the 6.8% that was expected by economists, and consumer prices increasing 3.1% y/y, compared to the 3.0% reading that was anticipated. The consumer price information was part of the data that was leaked earlier this week as sources told Reuters that a Chinese government official announced the stronger-than-expected inflation data, along with export and yuan loan figures, at an investor conference so the reaction may have been stunted in the region. Moreover, separate reports showed retail sales in China rose more than expected, while industrial production, which still increased a solid 16.5% y/y in May, came in below the 17.0% growth that economists were forecasting. Rounding out the busy economic day in China, the government announced that fixed asset urban investment rose slightly more than anticipated, money supply increased roughly inline with forecasts, while new yuan loans were 639.4 billion in May, above the 600 billion yuan loans that were expected. Elsewhere in the Asian region, India reported that industrial production increased by larger amount than expected.

Fed events keep equity markets out of the red

Jittery sentiment continued this week, with the final hour of trading in several sessions providing the bulk of the days' moves as traders continued to grapple with the state of the economic recovery. The backdrop of elevated concerns about the euro-area debt crisis, and a potential self-induced hard landing of the Chinese economy continued to stymie conviction in the equity markets and last Friday's disappointing US labor report exacerbated sentiment early and the equity markets seemed poised for another disappointing week. However, Federal Reserve Chairman Ben Bernanke provided some balm to bulls' wounds, providing reassuring commentary on the economy in two separate days, highlighted by comments that the economy should be able to prosper even as government support dries up, and categorizing the probability of a double-dip recession as unlikely. The Federal Reserve also contributed to the economic optimism with the release of its Beige Book-a summary of economic conditions in all twelve Fed districts across the nation-that showed that economic conditions "continued to improve" since the last report. The major stock markets managed to rebound from early pressure and finish higher for the week, despite disappointing retail sales and a smaller-than-expected drop in weekly initial jobless claims.

The international front also aided the markets resiliency this week, due mainly to data out of Asia, such as a favorable revision to Japan's 1Q GDP, a surge in China's exports, and stronger-than-anticipated employment data in Australia. Moreover, euro-area sentiment was also relatively stable to help the global markets advance, as European markets posted gains in the face of no new announcements of further measures from the Bank of England and the European Central Bank, which some had hoped for, to help restore stability to the area's financial markets. Both the BoE and ECB left their benchmark interest rates unchanged at 0.5% and 1.0%, respectively.

Upcoming economic data includes PPI, CPI, housing starts and industrial production

Wednesday's release of the Producer Price Index (PPI) is expected to show prices at the wholesale level were down 0.5% month-over-month (m/m) in May, on the heels of a 0.1% decrease in April, while the core rate, which excludes food and energy, is expected to rise a mere 0.1% after increasing 0.2% the prior month. On a year-over-year (y/y) basis, the PPI is expected to show a 4.9% increase on a headline basis, but only a 1.2% increase at the core level. The release precedes the Thursday report on the Consumer Price Index (CPI), forecasted to show a 0.1% m/m decrease and 2.0% y/y increase, while ex-food and energy, it is expected to rise 0.1% m/m and 0.9% y/y.

Wednesday also yields the release of housing starts for May, expected to show a decrease of 3.6% m/m to an annual rate of 648,000 units, after increasing 5.8% in April, while building permits, one of the leading indicators tracked by the Conference Board, are forecasted to be 2.5% higher m/m in April after falling a surprising 11.5% in April. This report has been volatile in recent months, distorted by the initial expiration of the buyer tax credit, as well as seasonality and weather. Rounding out the busy Wednesday will be the May reading of industrial production and capacity utilization, which are both expected to improve slightly, after lackluster increases in April. Economists are looking for industrial production to climb 0.8%, matching a 0.8% increase last month, while capacity utilization is expected to come in at 74.5%, up from a previous reading of 73.7%.

Other releases on the US economic calendar include the import price index, the Empire Manufacturing Index, the NAHB Housing Market Index, MBA Mortgage Applications, initial jobless claims, the Philadelphia Fed's Business Activity Index, and the Conference Board's Index of Leading Indicators.

The international economic calendar in Europe includes the German ZEW survey and PPI, euro-zone industrial production, CPI, and trade balance, UK CPI, consumer confidence, jobless claims, and retail sales, as well as Italian CPI and industrial orders.

Economic releases in Asia/Pacific next week include Japanese industrial production, capacity utilization, and leading index, as well as the Australian leading index.

In central bank action, the Bank of Japan will begin a two-day policy meeting on Monday and will release the minutes from its May meeting on Thursday.