Evening Market Update

Bulls Battle Back to the Flatline

The US equity markets showed some resiliency in today’s session, as the bulls were able to overcome early pressure that followed larger-than-expected declines in housing starts and building permits, along with a cautious outlook by FedEx. Stocks received some support from a tame reading on inflation, a jump in mortgage applications, and stronger-than-anticipated industrial production and capacity utilization. Treasuries finished higher amid the mixed bag of economic data. In other equity news, AT&T suspended pre-ordering of Apple’s latest iPhone, Coca-Cola Enterprises raised its growth forecast, while Fannie Mae and Freddie Mac announced intentions to delist from the New York Stock Exchange. Overseas, Nokia lowered its device unit and profit guidance, while BP Plc—whose management met with President Obama—pared losses and moved higher in US trading after it agreed to set aside $20 billion in an escrow fund for Gulf oil spill claims, and suspend its dividend following Obama’s pledge to make the company “pay” for its “recklessness.”

The Dow Jones Industrial Average gained 5 points (0.05%) to close at 10,409, the S&P 500 Index dipped 1 point (0.06%) to finish at 1,115, and the Nasdaq Composite was flat at 2,306. In modest volume, 1.2 billion shares were traded on the NYSE and 1.9 billion shares were traded on the Nasdaq. Crude oil gained $0.73 to $77.67 per barrel, wholesale gasoline gained $0.03 to $2.15 per gallon, and the Bloomberg gold spot price declined $3.70 to $1,230.45 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—increased 0.1% to 86.14.

FedEx Corp (FDX $78) announced 4Q earnings of $1.33 per share, one cent better than analyst estimates, as revenues rose 20% year-over-year (y/y) to $9.43 billion, while the Street forecast was for revenues of $9.06 billion. FedEx said that results in the quarter were due to sequential growth in volume and the ability to leverage its networks to take advantage of a recovering economy. However, shares finished lower after the company issued guidance below consensus estimates, saying full-year EPS would be between $4.50-5.00, while the Street was at $5.05, and 1Q EPS would be $0.85-1.05, while analysts were expecting $1.03. In its outlook, FDX said that resumed growth in industrial production and global trade was increasing demand for its services, but that increases in compensation, pension and healthcare costs, as well as volume-related aircraft maintenance expenses would constrain profits.

Shares of BP Plc (BP $32) moved nicely higher in late-day action of US trading after the company announced that it has agreed to set aside $20 billion in an escrow account for claims resulting from the Gulf of Mexico oil spill. The account will be funded by periodic payments over a 3 ½ year period, and the announcement followed BP’s management meeting with US President Obama to discuss arrangements to ensure claims will be paid in relation to the oil spill, after he vowed to make BP “pay” for all damages caused by its “recklessness.” BP also announced that it will not issue further dividends this year.

Apple Inc. (AAPL $267) was solidly higher after Dow member AT&T Inc. (T $26) said it is suspending pre-ordering of AAPL’s iPhone 4—set to be available on June 24th—in order to fulfill the orders it has already received, and given “unprecedented” demand and its current expectations for its inventory levels of the device. T, which is the exclusive US service provider for the iPhone, said pre-order sales were 10-times higher than the first day of pre-ordering for the iPhone 3G S last year. Shares of T were modestly lower after paring early losses.

Coca-Cola Enterprises (CCE $27), slated to be acquired by Dow component Coca-Cola Co. (KO $52), increased its forecast of 2010 profit growth before currency effects, to 10-12%, while the previous estimate was for 10% growth. The company said that at current rates, currency is expected to have a negative full-year impact on earnings of approximately $0.10 per share. In commenting on the increased forecast, management said a strong first quarter and positive second quarter trends, which include inline expectations in North America and “a modestly improving outlook in Europe, give us increased confidence in the full year outlook,” while also crediting company specific strategies and initiatives. CCE and KO finished higher.

Fannie Mae (FNM $0.60) was sharply lower after it notified the New York Stock Exchange (NYSE) and the Chicago Stock Exchange (CSE) of its intent to delist its common and preferred stock. FNM said the action was in response to the June 15 notification from the NYSE that it no longer met the continued listing standards relating to the minimum price of FNM’s common stock, and a directive issued by the Federal Housing Finance Agency (FHFA). Freddie Mac (FRE $0.80 ¹) also notified the NYSE of its intent to delist its common stock and 20 listed classes of its preferred stock. Shares of FRE also came under heavy pressure.

Nokia (NOK $9) fell sharply after lowering its forecast for its devices and services unit below prior views, as well as decreasing its 2Q and full-year earnings guidance, citing lower average selling prices and volumes. NOK also said it expects its mobile device value market share to be slightly lower in 2010, versus 2009, primarily due to the competitive situation at the high-end of the market and shifts in product mix.

Housing starts disappoint, inflation subdued, and production positively surprises

Housing starts for May fell more than expected, by 10.0% month-over-month (m/m), to an annual rate of 593,000 units, from a downwardly revised 659,000 in April, and compared to economists’ expectations, which called for starts to come in at 648,000. Single-family starts fell by 17.2%, the largest amount since 1991. Building permits also fell, by 5.9% m/m, to an annual rate of 574,000, while April was slightly upwardly revised to 610,000 from 606,000. The expectation was for permits to increase to 625,000 units. While the inventory of new homes for sale in April was the smallest since 1968 according to Bloomberg, the inventory of existing homes rose 11.5% in April, as a stabilizing housing market and nearing end of the tax credit increased household confidence about the timing of putting a house on the market, and mortgage delinquencies added to supply.

Elsewhere, the Producer Price Index showed prices at the wholesale level dipped 0.3% m/m in May, after decreasing 0.1% in April. The average economist forecast surveyed by Bloomberg called for prices to fall by 0.5%. The decline was due to a 1.5% fall in energy prices, while food prices decreased 0.6%. Meanwhile, the core rate, which excludes food and energy, rose 0.2% m/m, more than the forecast of economists, which called for the core rate to increase 0.1%. On a y/y basis, headline producer prices were 5.3% higher, and the core rate was up 1.3%. Tomorrow, the economic calendar will yield the compliment to today’s wholesale inflation report, with the release of the Consumer Price Index, forecasted to show prices at the consumer level fell 0.2% m/m in May, while excluding food and energy, the core rate is expected to increase 0.1%.

On the bullish side of the ledger, the May reading of industrial production (chart) and capacity utilization was better than expected, as industrial production rose 1.2% m/m, above the 0.9% increase forecasted, while April’s figure was revised 0.1% lower, and capacity utilization rose to 74.7%, ahead of the 74.5% estimate, up from a previous reading of 73.7%, while remaining 5.9% below its average from 1972 to 2009. The increase in production was strong across the board, but the continued strength in business equipment was notable. Treasuries finished higher, although paring gains experienced immediately following the inflation and housing releases, with the yield on the 2-year note declining 2 bps to 0.73%, while the yields on the 10-year note and the 30-year bond dipped 4 bps to 3.26% and 4.18%, respectively.

While early recovery economic data was nearly unanimous in projecting growth, we’ve likely entered a “soft patch,” where the pace of growth slows and economic data is more mixed. The decline in the homebuilder sentiment survey yesterday likely represents the expectation of a near-term pause due to the end of the tax credit, as well as a weak May jobs report, leaving the future path of housing demand uncertain. Additionally, the Fed has noted an “unusually high” level of uncertainty regarding their projections for economic activity and inflation, and subdued inflation pressure is keeping the Fed on hold.

In other economic news, the US MBA Mortgage Application Index jumped 18% last week, after the index that can be quite volatile on a week-to-week basis, dropped 12.2% in the previous week. The increase came after refinancing rose to the highest level in a year and purchases increased for the first time in six weeks. The Purchase Index rose 7.3% after declining 5.7% the week prior to the lowest level since 1997, while the Refinance Index surged 21% after falling 14.3% the week prior, with refinance applicants rising to 74.8% of overall applications. The increase in the overall index came despite a 1 basis-point increase in the average 30-year mortgage rate to 4.82%, near the record low of 4.61% that was reached at the end of March 2009.

Deficit moves in focus across the pond

With European economic news light, as a 0.1% rise in the euro-zone CPI in May, inline with estimates, and a larger-than-expected drop in UK jobless claims being the lone reports that were released today, plans to reduce deficits dominated today’s euro-area events. Spain’s Prime Minister announced a labor-law overhaul, and France announced pension reform that raises the retirement age to 62 from 60. However, concerns continued in the market, with spreads on the bonds of Spain rising despite the European Union denying a report that the IMF, EU and the US were putting together a 250 billion euro ($307 billion) credit line for Spain.

Economic data in Asia was also light, with the Japanese Trade Ministry saying demand for services rose for the first time in three months, and Australia’s Westpac Leading Index coming in unchanged for the month of April. Volume in Asia was lighter than usual with markets in Hong Kong, China and Taiwan closed for a holiday.

In addition to tomorrow’s CPI report, other US economic data set for release include, weekly initial jobless claims, forecast to dip by 6,000 to 450,000, the Philadelphia Fed Business Activity Index, expected to decrease from 21.4 to 20.0, the current account deficit, anticipated to widen from $115.6 billion to $121.9 billion, and the Index of Leading Economic Indicators, forecasted to increase 0.4%.

On the international front, the final reading of the Japanese Leading Indicators, UK retail sales, and euro-zone construction output.