Evening Market Update

Bulls Lose Steam

A higher-than-expected read on US consumer confidence and a larger-than-forecast increase in home prices aided sentiment and helped to keep stocks in the green for most of the day. However, the afternoon release of the minutes from the Fed’s August 10 monetary policy meeting, which showed that while policymakers believed growth would continue, some members saw increased downside risks, pushed stocks into negative territory and the indices finished mixed and near the flatline. Treasuries ended higher and near the day’s highs after initially paring gains amid the favorable US data, which more than offset a decline in a gauge of business activity in the Midwest. In equity news, Dollar General bested the Street’s profits expectations and guided its full-year outlook higher, and HJ Heinz preannounced 1Q EPS that were above forecasts, while Monsanto narrowed its full-year forecast.

The Dow Jones Industrial Average edged 5 points (0.1%) higher to 10,015, the S&P 500 Index was flat at 1,049, while the Nasdaq Composite lost 6 points (0.3%) to 2,114. In moderate volume, 1.4 billion shares were traded on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil lost $2.48 to $71.92 per barrel, wholesale gasoline shed $0.05 to $1.86 per gallon, and the Bloomberg gold spot price jumped $11.58 to $1,248.55 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was flat at 83.13.

Dollar General Corp. (DG $27) reported 2Q EPS ex-items of $0.42, above the $0.38 Reuters estimate, with revenues increasing 10.8% year-over-year (y/y) to $3.2 billion, roughly matching the consensus analyst estimate. Same-store sales—sales at stores open at least a year—rose 5.1% y/y, aided by customer traffic and average transaction amounts. The company increased its full-year guidance and same-store sales outlook, but said the state of the macroeconomic environment, including sustained rates of high unemployment, continues to pressure the consumer in general. DG was lower.

Ahead of tomorrow’s expected earnings report, H.J. Heinz Co. (HNZ $46) reported that it posted fiscal 1Q EPS of $0.75, as the condiment company said it is “off to a good start,” with emerging markets expected to drive its results, and organic sales—sales excluding the impact of foreign exchange as well as acquisitions and divestitures—growing of 22%. Analysts forecasted the company to post 1Q EPS of $0.72 on revenues of $2.5 billion. HNZ also reaffirmed its full-year guidance. HNZ traded higher.

Agriculture firm Monsanto Co. (MON $53) narrowed its full-year EPS guidance from a previous outlook of between $2.40-2.60 to a range of $2.40-2.45, compared to the $2.50 that analysts were expecting the firm to report. The company said it expects strong quarterly seed and trait sales in Latin America and other international markets and solid 4Q performance of its crop-protection business. But MON had to lower prices of its Roundup and other herbicides earlier this year in key geographies to bring them more in line with generics. MON was solidly lower.

Home prices rise above forecasts, Fed meeting details about to set sail

The release of the S&P/Case-Shiller Home Price Index, which lags the sales data by a month, rose 4.2% y/y in June and 0.3% month-over-month (m/m), above the 3.5% y/y and 0.2% m/m forecasted. Similar to existing sales, the report is based on closings, while new home sales are based on contract signings. With the initial April expiration of the tax credit extended to June 30 to accommodate closings for the large numbers of contracts in the pipeline, the June price index still benefitted from the incentive program. Meanwhile, existing home sales plunged 27.2% in July, which may mean price increases could moderate going forward.

Meanwhile, the Conference Board released its consumer confidence report, which increased to a level above expectations, rising to 53.5 in August, compared to the expectation of a slight increase to 50.7, and July’s reading was upwardly revised from 50.4 to 51.0. The headline number gained as respondents’ gauge of the present economic situation being “bad” fell and those saying conditions are “normal” increased. But those saying jobs are “hard to get” ticked higher, and those saying jobs are “not so plentiful” remained unchanged. The report also revealed that expectations of improvement for the next six months in business conditions and employment increased.

Elsewhere, the Chicago PMI fell slightly more that expected, dropping from 62.3 in July to 56.7 in August, compared to the decline to 57.0 that was forecasted. The index of business activity in the Midwest continued to grow as a reading of 50 is the demarcation point between expansion and contraction, but the index posted the lowest level since November 2009. Although the pace slowed, the employment component of the report continued to expand, along with increases in production, new orders, and order backlogs, while inventories contracted as the component fell below the 50 mark.

Treasuries finished higher on the day. The yield on the two-year note was 2 bps lower at 0.47%, the yield on the 10-year note fell 6 bps to 2.47%, and the 30-year bond yield declined 6 bps to 3.52%. The global economic uneasiness that has persisted this week and is fostering some flight-to-safety buying has almost erased Friday’s jumps in yields on the mid-to-long end of the curve.

Fed to respond if outlook weakens “appreciably” further

The midday release of the minutes from the August Federal Open Market Committee (FOMC) meeting showed that while participants viewed the recovery as progressing at a slower-than-expected pace, the Fed continued to believe growth would continue and gather strength in 2011. However, members saw both employment and inflation as likely to fall short of levels consistent with the dual mandate for longer than anticipated, and some saw increased downside risks. As a result of declining mortgage rates and resulting principal repayments, the Fed’s balance sheet was set to decline. Most members felt that the resulting tightening of financial positions, as private investors would have to hold more securities as the Fed’s balance sheet ran off, would make longer-term interest rates “somewhat higher than they would be otherwise,” and believed this would be inappropriate given the economic outlook. Additionally, while current reinvestments were directed into longer-term Treasuries, members believed that reinvesting into MBS might become desirable “if conditions were to change.”

Most of the report was already previewed by Bernanke’s Jackson Hole speech and a Wall Street Journal article that indicated seven of the seventeen policymakers at the meeting either spoke against the proposal or had reservations, despite Hoenig being the only formal dissenting vote. A few members worried that maintaining the size of the balance sheet could send an “inappropriate signal” to investors about the Committee’s readiness to resume large-scale asset purchases. Several members emphasized that the Committee would need to consider steps it could take to provide further stimulus if the economic outlook were to “weaken appreciably further,” but the minutes did not quantify this and in his speech last week, Bernanke said that the FOMC has not agreed on specific criteria or triggers for further action.

Busy day of of economic news overseas

There were a number of economic reports in Europe today, beginning with Germany’s unemployment change, which fell by a smaller-than-expected 17,000, and the unemployment rate in Europe’s largest economy was steady at 7.6%, matching forecasts. The euro-zone also offered jobs figures, showing its unemployment rate remained at 10%, inline with expectations, while the National Statistics Institute’s estimate of consumer prices in the euro-area showed that the pace of price increases slowed slightly to 1.6% y/y in August, from 1.7% y/y in July. Elsewhere on the European economic docket, consumer prices in Italy unexpectedly rose both on a m/m and y/y basis, and the nation’s unemployment rate declined from 8.5% to 8.4%, business confidence increased more than expected, and retail sales ticked 0.3% higher, above economists’ estimates. In the UK, mortgage approvals increased by a larger-than-expected amount, consumer credit surprisingly rose, and consumer confidence unexpectedly improved.

Further east, Japan offered up a slew of reports, as industrial production increased 0.3%, above expectations of a 0.2% decline, retail trade bested economists’ expectations, housing starts grew at a larger-than-forecasted pace, small business confidence improved, but vehicle production in the nation slowed. Elsewhere, industrial production and retail sales in South Korea were better than forecasts and building approvals in Australia jumped 2.3%, whereas economists were anticipating a 0.7% shortfall. Meanwhile, India’s 2Q GDP expanded at the fastest pace since 2007, per Bloomberg.

In other North American economic news, Canada’s GDP increased 0.2% m/m in June, matching expectations, while on a quarterly annualized basis in 2Q, the nation’s GDP expanded 2.0%, down from 5.8% in 1Q and short of the 2.5% growth that was expected.

Another full day of economic news tomorrow

Key economic reports will continue tomorrow, as construction spending, MBA Mortgage Applications, and the ADP Employment Change are all slated to be released. But the report that will likely come under the most scrutiny will be the August release of the Institute for Supply Management (ISM) Manufacturing Index, expected to decline from 55.5 in July to 52.8 in August. Although the pace has slowed, the index has depicted expansion of economic activity in the manufacturing sector for twelve consecutive month—as illustrated by a reading above 50—and growth in the overall economy for the fifteenth-straight month—indicated by a level above 42—helping provide a key data point in the argument for the continued economic recovery. With the headline figure of the report expected to show the trends of manufacturing expansion and growth in the overall economy are intact, the components of the release will likely garner the most attention given the resurfacing economic concerns and the acute focus on the employment picture. Although new orders have expanded for thirteen-straight months, the pace has slowed, and could continue to show deceleration in August, as all major regional manufacturing reports such as today’s report out of Chicago posted declines, with reads on activity out of New York and Philadelphia showing new orders contracted for the month. However, the employment component of the ISM has expanded for eight-consecutive months and the rate of change increased in July, with ten of the eighteen industries reporting growth in employment. Another favorable employment read could help soothe sentiment and possibly boost some optimism ahead of Friday’s US labor report.

Internationally, the economic docket will be chock full of reports, including: retail sales in Germany, 2Q GDP from Switzerland, while the UK, Italy, France, Germany and the eurozone will all report manufacturing PMI figures. In Asia/Pacific, South Korea and India will report their respective trade balances, China will provide manufacturing and services PMI, and Australia releases 2Q GDP numbers.