Evening Market Update

Modest Gains Amid Lackluster News

Stocks were modestly higher today, as US economic and company-specific news were generally uninspiring. Readings on the status of manufacturing in the US were mixed, as August industrial production was inline with forecasts, but a regional report on activity in September indicated a slowdown, mortgage applications dropped and Treasuries were mixed. The headline for the day came from Asia, where the Japanese government intervened in the currency market to weaken the yen, and the US dollar rose. In equity news, MasterCard announced a $1.0 billion stock repurchase plan, Yahoo denied rumors it was selling its stake in Chinese internet company Alibaba, and Savient received FDA approval for a gout treatment. In earnings news, filtration company Pall Corp beat estimates, while Beazer Homes USA Inc lowered its new order forecast.

The Dow Jones Industrial Average gained 46 points (0.4%) to close at 10,573, the S&P 500 Index rose 4 points (0.4%) to 1,125, while the Nasdaq Composite advanced 12 points (0.5%) to 2,301. In moderate volume, 901 million shares were traded on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil fell $0.78 to $76.02 per barrel, wholesale gasoline lost $0.01 to $1.96 per gallon, and the Bloomberg gold spot price fell $1.30 to $1,266.85. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—rose 0.3% to 81.22.

MasterCard Inc. (MA $210) reported that its Board of Directors has approved a share repurchase program of up to $1.0 billion of Class A common stock in open market transactions, effective immediately. The credit card transaction processor said the stock repurchase program is a result of a periodic review of its capital structure and is enabled by its strong and consistent cash flow. The company also said that it expects net income growth of about 20% this year, putting its estimate roughly inline with analysts’ forecasts. Shares were higher.

Shares of Yahoo (YHOO $14) were nicely higher after CEO Carol Bartz said the company is keeping its 39% stake in Chinese internet company Alibaba, settling speculation that the company was set to reduce its ownership. Bartz said that she will “probably” join Alibaba’s board when Yahoo gets a second seat later this year, but that she hadn’t fully decided. Alibaba is reported to be exploring going public, although Bartz indicated that there was “almost no win” for Yahoo to take action with its stake now.

Meanwhile, Savient Pharmaceuticals Inc. (SVNT $20) was up 35% after the US Food & Drug Administration (FDA) approved its drug KRYSTEXXA for the treatment of chronic gout in adult patients. SVNT said the drug is the first FDA approved treatment to show significant clinical improvement within six months of therapy.

Pall Corp. (PLL $40) was up nicely after the filtration and purification firm reported fiscal 4Q EPS ex-items of $0.72, above the $0.64 that analysts were expecting, with revenues increasing 4.1% year-over-year (y/y) to $678.6 million, topping the $676.6 million that the Street was forecasting. The company said overall orders were up 19%, with its industrial business continuing to rebound. PLL issued full-year EPS guidance that exceeded expectations.

Beazer Homes USA Inc. (BZH $4) was down solidly after the homebuilder warned that due to a slower-than-anticipated improvement in new home orders after the April expiration of the government’s home-buyer tax incentive, this year’s performance in new home orders may come up short of last year’s figure. BZH had forecasted previously that it will exceed last year’s home orders result. BZH also said it expects its land & land development spending to be below its previous forecast for the year.

Industrial production matches forecasts, NY activity decelerates, import prices rise

Manufacturing activity was in focus, headlined by the August reading of industrial production (chart), which rose 0.2% month-over-month (m/m), inline with the expectations of economists surveyed by Bloomberg, but July’s strong 1.0% growth reading was downwardly revised to a 0.6% increase. Manufacturing was supported by increases in construction and business equipment, but consumer goods output fell. Capacity utilization came in at a lower-than-forecasted 74.7% from a downwardly revised 74.6% in July, versus the expectation that called for an increase to 75.0%. Utilization remains 5.9% below its average from 1972 to 2009.

Meanwhile, a key regional read, and one of the more timelier looks at the manufacturing sector came in the form of the Empire Manufacturing Index, a measure of activity in the New York region, which unexpectedly fell in September, dropping to a level of 4.14, compared to the estimates of an increase to 8.00, from the previous month’s level of 7.10. But the index remains above the level of zero, the demarcation point between contraction and expansion. Within the report, new orders and employment components of the survey both improved, while the July figure of industrial production was revised down. The report is the first major region to report on manufacturing conditions in September, and tomorrow, the Philly Fed Manufacturing Index will be released, expected to increase to 0.3 from -7.7 in August, providing further insight into the health of the sector.

Today’s reports were mixed, with the data continuing to depict expansion in the manufacturing sector. Also, the still below normal levels of capacity utilization continues to keep the inflation outlook stable and allow the Federal Reserve to focus on the other side of its dual mandate of promoting full employment adding some ammunition to the bulls’ case. Moreover, the fact the business equipment manufacturing continued to grow, suggests that businesses may be becoming more comfortable with the outlook for the economy and are willing to spend on capital to prepare for future demand, which could mutate into companies beginning to beef up their workforce adding help to the still weak employment picture.

Elsewhere, the Import Price Index rose 0.6% m/m for August, compared to the expectation of economists, which called for the index to increase by 0.3%. Year-over-year (y/y), import prices are higher by 4.1%, versus the 3.8% forecast of economists.

In other economic news, the US MBA Mortgage Application Index declined 8.9% last week, after the index that can be quite volatile on a week-to-week basis, slipped 1.5% in the previous week. The decrease came as the Refinance Index dropped 10.8%, accounting for the bulk of the decline, as the Purchase Index dipped 0.4%. The fall in the overall index came despite a 3 basis-point decrease in the average 30-year mortgage rate to 4.47%, near the record low of 4.43% reached on August 27.

Treasuries were mixed amid the manufacturing, inflation, and housing reports. The yield on the two-year note lost 2 bps to 0.48%, while the yield on the 10-year note increased 4 bps to 2.72%, and the 30-year bond yield gained 7 bps to 3.87.

Overseas, Japanese government intervenes to weaken yen

The Japanese government stepped in to try to arrest the recent surge in the yen versus the US dollar and other major currencies, prompting the Japanese Nikkei 225 Index to surge 2.3%, as prior yen strength was reducing the prospects of exporters. The yen hit a fifteen-year high versus the US dollar and nine-year high versus the euro just before the intervention. Japan’s Finance Minister said the country unilaterally sold the yen, intervening in the foreign exchange markets for the first time since 2004. The move comes on the heels of an election win by Prime Minister Kan in a vote yesterday. While Kan had previously said intervention was unnecessary, in conjunction with the intervention, Kan told reporters that the yen had reached a level “we couldn’t ignore,” and his Chief Cabinet Secretary said that the finance ministry “seems to think” 82 yen per dollar to be the line of defense.

While the size of intervention was not disclosed, the Nikkei newspaper reported it to have exceeded 100 billion yen ($1.2 billion), without citing sources, although amounts of 1 trillion yen ($11.7 billion) and higher were reported by traders. While the finance ministry makes decisions on intervention, the Bank of Japan (BoJ) carries out the transaction. BoJ board member Noda indicated that sterilization efforts to soak up extra funds were not going to be undertaken by saying that the BoJ would “provide abundant liquidity to the financial market.” Traders question the effectiveness of the intervention, as coordinated moves are viewed as necessary to make lasting changes in trends, pointing to failure of the Swiss National Bank in weakening their currency this year, after spending large sums to do so. The lack of growth in the Japanese economy has been exacerbated by recent yen strength, and the stock market has been among the worst performers this year. While the Chinese recently lifted its two-year peg of the renminbi (also known as the yuan) versus the dollar, US officials remain concerned that the Chinese currency is artificially low, boosting the competitiveness of Chinese exports. As such, the US House Ways and Means Committee is set to begin two days of hearings on the potential manipulation of the Chinese currency by Beijing. Today’s move by Japan will likely bolster China’s case, as it adds another country to the list of those intervening, which include many Asian nations.

Elsewhere in Asia/Pacific, Australia’s consumer confidence in September declined, and its 2Q dwelling starts came in well below expectations, while South Korea’s unemployment rate declined from 3.7% in July to 3.4% in August.

In European economics, the UK releasing a disappointing employment report, which showed jobless claims unexpectedly rose and average weekly earnings increasing by a smaller-than-forecasted amount. In other labor data, euro-zone employment growth was flat in 2Q. Also, inflation numbers continued to pour in, with euro-zone and Italian consumer prices rising in August m/m to match expectations, but the y/y core rate of consumer prices in the euro-zone rose more than forecasted.

Inflation and jobs readings due out tomorrow

Tomorrow’s release of the Producer Price Index (PPI) is expected to show prices at the wholesale level advanced by 0.3% m/m in August, on the heels of a 0.2% increase in July, while the core rate, which excludes food and energy, is expected to rise a mere 0.1% after increasing 0.3% the prior month. On a year-over-year (y/y) basis, the PPI is expected to show a continued deceleration, to 3.0% in August versus 4.2% the prior month on a headline basis, and a 1.3% increase at the core level, down from a 1.5% increase in May. The release precedes Friday’s report on the Consumer Price Index (CPI), forecasted to show a 0.3% m/m increase, after increasing by the same rate in July, while ex-food and energy, it is expected to post another rise of 0.1% m/m. On a y/y basis, the CPI is expected to increase 1.2% at the headline level and 1.0% y/y at the core level.

Small businesses have been the key contributor of job growth over the past decade, but the NFIB has noted their hiring outlooks remain subdued, as they continue to report weak sales trends. The NFIB’s August survey showed that small businesses continue to have to lower prices, and have done so for twenty-one straight months. However, the general price level of the economy has remained in positive territory.

The other releases on tomorrow’s US economic calendar are initial jobless claims, forecasted to increase to 458,000 from 451,000, and the previously mentioned Philadelphia Fed’s Business Activity Index.

Releases on the international calendar will include UK retail sales and the euro-zone trade balance, while the Reserve Bank of India meets to discuss monetary policy, where the expectation is that the central bank will increase the reverse repo rate to 4.75% from 4.50%, but keep the cash reserve ratio at 6.00%.