Evening Market Update

Stocks Eke Out Gains Despite Philly-Fed Pains

Stocks appeared poised to finish lower after the equity markets fell following a much larger-than-expected drop in the Philly Fed Manufacturing Index, which added to early uneasiness that came from an unexpected rise in jobless claims. However, resiliency reigned and the bulls battled back to finish with modest gains, following an advance in Europe, which was boosted by a successful debt auction in Spain. Treasuries remained higher, preserving gains that came from the disappointing manufacturing and employment data, showing little reaction to a tame inflation report, a rise in the Index of Leading Economic Indicators, and a smaller-than-anticipated US current account deficit. In equity news, J.M. Smucker announced strong earnings and guidance and Kroger Co and consulting services and data provider IHS reported profits ahead of the Street, while homebuilder Toll Brothers provided a market update saying that deposits and traffic are down from a year ago.

The Dow Jones Industrial Average gained 25 points (0.2%) to close at 10,434, the S&P 500 Index rose 1 point (0.1%) to finish at 1,116, and the Nasdaq Composite was 1 point higher (0.05%) at 2,307. In modest volume, 1.2 billion shares were traded on the NYSE and 1.7 billion shares were traded on the Nasdaq. Crude oil lost $0.68 to $78.04 per barrel, wholesale gasoline gained $0.01 to $2.15 per gallon, and the Bloomberg gold spot price rose $16.47 to $1,245.46 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—decreased 0.6% to 85.67.

J.M. Smucker Co (SJM $62) reported 4Q earnings ex-items of $1.07 per share, much better than the analyst forecast of $0.80, as revenues rose 0.1% year-over-year (y/y) to $1.07 billion, ahead of the $1.04 billion estimate. The maker of jams, Jif peanut butter, Folgers coffee as well as Pillsbury products said that sales in its largest unit, US retail coffee, fell 1.4%, and profit declined 15% as marketing costs rose, while revenues in its US retail consumer market division rose 5.2% and profit gained 20% on lower costs. SJM gave EPS guidance for the next fiscal year of $4.50-4.60 per share on revenue growth of 3%, while the Street was at $4.42 earnings per share. Shares finished nicely higher.

Kroger Co. (KR $21) reported 1Q EPS of $0.58, four cents above the Street’s forecast, with revenues—including fuel sales—increasing 8.7% y/y to $24.8 billion, besting the $24.2 billion that analysts were expecting. The grocery store company said its same-store sales—sales at stores open at least a year—rose 2.4%, excluding fuel sales. KR said it continues to build momentum and grow market share, “throughout the difficult operating environment.” The company reiterated its full-year EPS guidance, and shares were solidly higher.

IHS Inc (IHS $58) reported 2Q earnings ex-items of $0.78 per share, ahead of the $0.74 Street forecast, as revenues grew 13% y/y to $266.5 million, ahead of the $263 million estimate. The provider of data and consulting services to the energy, engineering, security and environmental industries said that its subscription business, which provides 77% of total revenue, grew 12% and 5.5% organically, while consulting revenue fell 0.4%. The company raised its full-year earnings guidance to $2.90 per share from $2.87 per share, while the analyst estimate was for EPS of $2.89. Shares traded higher.

Toll Brothers (TOL $18) provided a market update ahead of a conference appearance, saying that buyer decisions are more driven by consumer confidence than the tax credit, and that recent stock market volatility and the job market “continue to weigh on the nation’s psyche,” as have the crisis in Europe and the Gulf oil spill. Additionally, deposits and traffic are lower than the year-ago period, and despite demand in recent weeks being “quite choppy,” the company believes that once the employment picture begins to brighten and the economy stabilizes, confidence will improve and the housing market should begin a “steadier recovery.” TOL was solidly lower.

Consumer prices subdued but jobless claims and Philly Fed disappoint

The Consumer Price Index showed prices at the consumer level were down 0.2% month-over-month (m/m) in May, inline with the forecast and after falling 0.1% in April, while the core rate, which strips out food and energy, rose 0.1% m/m in May after being unchanged in April, and was also inline with estimates. On a year-over-year basis, consumer prices were up 2.0% in May, moderating from the 2.2% rate in April, and the core CPI was 0.9% higher y/y.

This was the second-straight monthly decline in the headline rate and the Bureau of Labor Statistics said the decrease was due to a drop in the energy index, which fell 2.9%, and was bogged down by a 5.2% decline in the gasoline index. Moreover, the report revealed that the food index was unchanged and the slight increase in the core rate was only the second increase this year. The report supports the current monetary policy stance at the Fed that economic conditions, which include subdued inflation trends, are likely to warrant “exceptionally low” levels of the fed funds rate for an “extended period.”

Meanwhile, weekly initial jobless claims increased 12,000 to 472,000, versus last week's figure which was upwardly revised by 4,000 to 460,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to decrease to 450,000. The four-week moving average, considered a smoother look at the trend in claims, fell by 500 to 463,500, but continuing claims increased by 88,000 to 4,571,000, compared to the rise to 4,500,000 that was anticipated.

But the most impactful release today came in the form a sharp drop in the Philly Fed Manufacturing Index, which fell from 21.4 in May to 8.0 in June, and the forecast was for slight decrease to 20.0. The report depicts business activity in the mid-Atlantic region and a reading of zero is the demarcation point between expansion and contraction. Within the report, shipments declined slightly, while the employment index fell below zero.

Digging into the Philly Fed report, prices paid fell from 35.5 in May to 10.0 in June, which contributed to a large portion of the decline, and suggests that easing pricing pressures on companies will limit the urge for firms to pass along higher prices to the economically critical consumer. Also, new orders actually rose from 6.1 to 9.0, suggesting demand continues to increase and could end up helping the employment picture, and earlier this week, another major regional manufacturing report of the Empire Manufacturing Index, a measure of manufacturing in the New York region, ticked higher in June. Finally, the Conference Board released the Index of Leading Economic Indicators(LEI) for May, which rose 0.4% matching economists’ forecasts, getting back on the growth track after April’s unexpected fall, which snapped a twelve-straight monthly winning streak. The increase was paced by positive contributions from the average workweek, money supply, and a favorable yield curve.

In other economic news, the 1Q current account deficit increased to $109.0 billion, versus 4Q’s $100.93 billion, which was revised to a narrower deficit, and compared to the increase to a $121.9 billion deficit that economists had forecasted.

Treasuries remained higher, extending early gains after the disappointing Philly Fed release that followed the inflation and jobless claims reports. The yield on the 2-year note was down 2 bps to 0.70%, the yield on the 10-year note lost 6 bps to 3.20%, and the 30-year bond yield declined 5 bps to 4.14%.

Successful Spain debt sale helps euro-area sentiment

European sentiment improved today and stocks finished higher despite the disappointing US economic data, due in large part to a successful bond auction in Spain. The Spanish government sold 3.5 billion euros ($4.3 billion), the maximum amount set for the auction, in 10-year and 30-year maturities, prompting yields of Spanish bonds to decline. The Bank of Spain also said yesterday that it will publish the stress tests it is conducting on its lenders. Additionally, after European markets closed yesterday, CNBC reported that Europe would be releasing individual bank results from the stress tests in coming weeks, citing ECB Executive Board member Lorenzo Bini Smaghi.

In other economic news, the Swiss central bank met and kept its benchmark interest rate unchanged at 0.25% and softened its stance on fighting franc gains by buying euros to stem the increase in the franc, saying that the risk of deflation has “largely disappeared.” Moreover, UK retail sales rose more than expected in May by 0.5% month-over-month (m/m) ex-auto fuel, while euro-zone construction output fell 0.3% m/m after gaining 6.5% in April.

Tomorrow, there are no major US economic reports scheduled for release, but there are some international releases that deserve a mention, beginning with the Bank of Japan policy meeting minutes, German producer prices, Italian industrial orders, UK mortgage approvals and house prices, and leading indicators from Canada.