Evening Market Update

Tech-Led Rally Leads to Solid Equity Market Gains

The bulls made a strong run to the upside today, as stocks finished near their highs, erasing yesterday’s late-day losses and overcoming some poor domestic economic data. On the equity front, Best Buy issued disappointing 1Q earnings that missed analysts’ expectations on the top and bottom line, while News Corp announced an offer to acquire the remaining stake in British Sky Broadcasting Group that it does not already own for about $11.5 billion, although the offer was rejected. Credit card issuers were also in the headlines, as most of the major firms issued improving delinquency and charge-off rates in May. Treasuries ended the day lower and showed little reaction to today’s domestic economic data, which included a smaller-than-expected increase in a gauge of manufacturing activity in New York, a larger drop in homebuilder sentiment than anticipated and a decline in import prices that was smaller than economists had predicted.

The Dow Jones Industrial Average gained 214 points (2.1%) to close at 10,405, the S&P 500 Index rose 26 points (2.3%) to finish at 1,115, and the Nasdaq Composite gained 62 points (2.8%) to 2,306. In moderate volume, 1.2 billion shares were traded on the NYSE and 2.2 billion shares were traded on the Nasdaq. Crude oil gained $1.99 to $77.11 per barrel, wholesale gasoline gained $0.05 to $2.12 per gallon, and the Bloomberg gold spot price advanced $14.70 to $1,235.95 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—fell 0.9% to 85.94.

Best Buy Co. Inc. (BBY $39) reported 1Q EPS ex-items of $0.36, compared to the $0.50 analysts surveyed by Reuters had expected, with revenues increasing about 7% year-over-year (y/y) to $10.8 billion, below the $10.9 billion that the Street had expected. BBY’s CEO said there were many positive indicators in 1Q, highlighted by the “excellent” performance of its mobile segment, and these indicators, coupled with model changes it is making, give him confidence in the company’s ability to achieve its financial goals this year. Also, the company said, “While our financial results in the fiscal first quarter were below expectations, we remain confident that the strategic investments we are making” will support increased margin expansion during the fiscal year. BBY reiterated its full-year guidance. BBY was solidly lower.

News Corp. (NWS $17) announced that it has made an offer of 7.8 billion British pounds ($11.5 billion) to acquire the 61% stake in British Sky Broadcasting Group Plc (BSYBY $41) that it does not already own. BSYBY has rejected the offer, saying that it undervalues the company, urging NWS to enter into discussions with the objective of achieving an agreed proposal for the mutual benefit of all shareholders. NWS said that both companies have been unable to reach a mutually agreeable price at the current time, but both parties have agreed to work together to proceed with the regulatory process. Shares of both companies traded higher, with BSYBY up over 15%.

Major credit card issuers are reporting monthly figures, with Capital One Financial Corp. (COF $43) reporting that its annualized US charge-off rate in May—the amount of loans the company does not expect to be paid back—declined from 9.68% in April to 9.48% last month. COF also reported that the amount of loans that are 30 days delinquent—an indicator of future charge-offs—fell to 4.80% in May from 5.07% in April. Also, Dow member JPMorgan Chase (JPM $38) announced that its charge-off rate in May was 8.95%, down from 9.03% in April, while its delinquency rate declined from 4.40% to 4.22%. Meanwhile, Discover Financial Services(DFS $14) said its charge-off rate rose to 8.82% in May from 8.42% the previous month, and its delinquency rate fell from 5.20% to 4.95%. Rounding out the reporting was American Express Co. (AXP $42), which announced a charge-off rate of 6.3% in May, down from 6.7% in April, and a delinquency rate that declined from 3.1% to 2.9%. Shares of all four firms were nicely higher.

NY Manufacturing improves less than expected and import prices fall less than forecasted

The Empire Manufacturing Index, a measure of manufacturing in the New York region, ticked higher in June to a level of 19.57, below the estimates of economists surveyed by Bloomberg, which expected an increase to 20.00, from the previous month’s level of 19.11. However, the index remains above the level of zero that suggests conditions are neither contracting nor expanding. Prices paid fell sharply and the employment component of the report dropped from 22.37 in May to 12.35 in June, but the average workweek moved from a 0.00 reading to 8.64. Moreover, new orders and shipments both improved further into expansion territory. The report is the first major piece of data looking at manufacturing conditions in June, and later this week, the Philly Fed Manufacturing Index will be released, expected to decline from 21.4 in May to 20.0 in the current month, providing further insight into the health of the sector.

Elsewhere, the Import Price Index declined 0.6% month-over-month (m/m) for May—the largest monthly drop since July 2009—and compared to the expectation of economists, which called for the index to drop by 1.2%. The US Bureau of Labor Statistics noted that the decrease was led by falling fuel prices, which more than offset a rise in non-fuel prices. Year-over-year, import prices are higher by 8.6%, versus the 7.9% forecast of economists.

In other economic news, the NAHB Housing Market Index, a gauge of homebuilder sentiment, fell to a level of 17 in June, from a reading of 22 last month, and compared to economists’ estimates of 21. Any reading below a level of 50 indicates more respondents feel conditions are poor.

Treasuries were modestly lower on the aforementioned data and strength in the equity markets, as the yield on the 2-year note was up 2 bps to 0.75%, the yield on the 10-year note gained 5 bps to 3.30%, and the 30-year bond yield increased 4 bps to 4.22%.

German ZEW Survey disappoints, Bank of Japan leaves rates unchanged

Sentiment in Europe started off weak after yesterday’s late-day downgrade of Greece’s government bond ratings by Moody’s Investors Service by four notches to a level depicting junk status, and was also dampened by a sharp deterioration in a reading of investor confidence in Germany—Europe’s largest economy. The German ZEW Survey of Economic Sentiment fell from 45.8 in May to 28.7 in June, well below the 42.0 that economists surveyed by Bloomberg had expected. The reading depicts the investor and analyst outlook on conditions six months ahead and it suggests that the euro-area debt crisis has severely impacted sentiment. Despite the news, Europe took a cue from the US and finished higher.

In other European economic news, UK consumer prices rose less than economists forecasted on a month-over-month (m/m) basis in May, and a separate report showed housing prices in the UK improved by a larger amount than forecasted. Also, euro-zone employment came in unchanged quarter-over-quarter (q/q) in 1Q, and the euro-zone trade surplus shrank more than expected.

In Asia/Pacific news, the Bank of Japan left its benchmark interest rate at 0.1%, saying, “Japan’s economy shows further signs of a moderate recovery,” with exports and production increasing and business fixed investment showing signs of picking up. Also, the BoJ noted that the employment and income situation has remained severe, but the degree of severity “has eased somewhat.” Moreover, the BoJ announced that it will aim to maintain the “extremely accommodative financial environment,” and also provide up to 3 trillion yen ($33 billion) in a fund-provisioning measure to “support strengthening the foundations for economic growth.” The BoJ’s measure will supply long-term funds at a low interest rate to financial institutions to encourage lending and investment.

In other central bank news, the Reserve Bank of Australia released the minutes from its most recent monetary policy meeting on June 1st, in which it left its benchmark interest rate unchanged at 4.5%, after increasing rates six times since October. The RBA noted that the situation in Europe had “deteriorated significantly,” and previous interest rate hikes have given it flexibility to determine how the euro-area debt crisis will impact the global economy, as well as assess the outlook for inflation. China’s markets remained closed, but the US Conference Board said on its website today that its Leading Economic Index (LEI) for China increased sharply again due to continued upward momentum for the real estate sector.

Releases on housing, inflation, and production due out tomorrow

A slew of economic data on Wednesday begins with the release of housing starts in May, expected to decline 3.7% month-over-month (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 May after falling a surprising 11.5% in April.

As housing data is currently in flux due to the impact of the expiration of the tax credit, traders will likely be paying more attention to the Producer Price Index (PPI), which is expected to show prices at the wholesale level were down 0.5% 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 1.1% increase at the core level. The release precedes the Thursday report on the Consumer Price Index (CPI), forecasted to show a 0.2% 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.

Just before the regular trading session tomorrow, the May reading of industrial production and capacity utilization will be released, where economists are forecasting industrial production to climb 0.8%, matching a 0.8% increase last month, and capacity utilization is expected to come in at 74.5%, up from a previous reading of 73.7%.

The other release on tomorrow’s US economic calendar is the MBA Mortgage Application Index.

The international economic calendar includes euro-zone CPI, Brazilian retail sales, and the Australian leading index.