Evening Market Update

Stocks Struggle For Direction As Rates Left Unchanged

The US equity markets moved higher on the announcement that the Federal Reserve will keep rates unchanged, but relinquished those gains later in the afternoon and finished mostly flat. The Fed maintained that economic conditions continue to warrant exceptionally low levels of the fed funds rate, as expected, but made no new asset purchase announcements, saying that it will keep its existing policy of reinvesting principal payments from its securities. Some believe the announcement opens the door for more quantitative easing, where the Fed buys assets to pump more cash into the system, which caused the US dollar to fall and gold to climb higher. Stocks received early support following a better-than expected read on housing starts and building permits. On the equity front, ConAgra Foods missed the Street’s earnings forecast, while AutoZone and Carnival Corp managed to beat bottom-line expectations. Elsewhere, Dow member Hewlett-Packard and Oracle reached an agreement pertaining to Oracle’s hiring of former HP CEO Mark Hurd, and Atlas Air Worldwide Holdings raised its full-year earnings forecast. Treasuries finished higher.

The Dow Jones Industrial Average gained 7 points (0.1%) to close at 10,761, the S&P 500 Index was 3 points (0.3%) lower at 1,140, while the Nasdaq Composite fell 6 points (0.3%) to 2,349. In moderate volume, 1.0 billion shares were traded on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil declined $1.34 to $73.52 per barrel, wholesale gasoline was $0.03 lower at $1.92 per gallon, and the Bloomberg gold spot price advanced $10.15 to $1,288.50 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—fell 1.0% to 80.46.

ConAgra Foods Inc. (CAG $22) reported fiscal 1Q EPS ex-items of $0.34, below the $0.39 Reuters estimate, with revenues declining 2.4% year-over-year (y/y) to $2.8 billion, also missing the Street’s forecast, which called for revenues at the agriculture firm to come in at $3.0 billion. The company said its margins and EPS were lower than planned because of “an intense promotional environment and inflation that outpaced cost savings.” Additionally, the company lowered its full-year EPS guidance, but raised its annual dividend by 15% to $0.92 per share. CAG was down solidly.

AutoZone Inc. (AZO $217) reported fiscal 4Q EPS of $5.66, compared to the $5.45 that analysts were expecting, with revenues growing 9.5% y/y to $2.4 billion, roughly inline with the Street’s expectations. Domestic same-store sales—sales at stores open at least a year—at the auto parts retailers rose 6.7% y/y during the quarter. Despite the results, shares finished lower, possibly some profit taking as the stock sits near a record high.

Carnival Corp. (CCL $38) announced 3Q EPS $1.62, compared to the $1.47 that analysts were expecting, with revenues increasing 7% y/y to $4.4 billion, matching the consensus estimate of the Street. The cruise line company said despite ongoing economic concerns, cruise ticket prices remained strong and its North American brands experienced a “significant rebound” in peak season revenue yields, and its ongoing cost control efforts continued to “bear fruit.” CCL traded higher.

Atlas Air Worldwide Holdings Inc. (AAWW $53) sharply raised its full-year earnings forecast, as the company has benefited from improved freight demand, high utilization by aircraft outsourcing customers and strong demand in the commercial charter business. AAWW now sees 2010 adjusted earnings exceeding $5.30 per share, up from a previous view of approximately $4.35. Shares of AAWW climbed over 7%.

Meanwhile, Dow member Hewlett-Packard Co. (HPQ $40) and Oracle Corp. (ORCL $27) announced that they have resolved litigation pertaining to ORCL’s hiring of former HPQ CEO Mark Hurd. The terms of the agreement were not disclosed but the companies said Mark Hurd “will adhere to his obligations to protect HP’s confidential information while fulfilling his responsibilities at Oracle.” The companies also said the agreement reaffirms HPQ and ORCL’s commitment to work together. HPQ was higher but ORCL moved lower.

Housing starts and permits rise more than expected

Housing starts (chart) for August came in above expectations, rising 10.5% month-over-month (m/m) from a downwardly revised 541,000 annual rate of units in July to a rate of 598,000 units, and compared to expectations of economists surveyed by Bloomberg, which called for starts to come in at 550,000. Additionally, building permits rose more than expected m/m in August, increasing 1.8% to an annual rate of 569,000, while July’s figure was downwardly revised by 6,000 to 559,000. The expectation was for permits to dip to 560,000 units. Treasuries are higher, adding modestly to early gains following the release.

Today’s report easily exceeded expectations and stocks received some support as the outlook for housing market activity had been matted down by a warning of a new home orders shortfall from Beazer Homes USA Inc. (BZH $4) on lackluster resilience following the expiration of the Federal homebuyer tax credit, and a double-digit drop in orders at Lennar Corp. (LEN $15). Also, the National Association of Home Builders noted yesterday that homebuilders in general, “haven’t seen any reason for improved optimism in market conditions over the past month,” which painted a pessimistic picture of the housing front. However, some of the infusion of optimism toward the health of the housing sector that came initially following today’s report may have been a bit overblown after taking a deeper look into the data. The US Census Bureau revealed that the driver of the solid increases in both starts and permits was multi-family structures. Housing starts for structures with more than one unit jumped over 32% m/m, and permits of these structures were aided by a near 10% increase. Meanwhile, single family starts rose 4.3% m/m but permits decreased 1.2%.

Today’s housing report showed the growing need for more multi-family structures, suggesting that the fallout from the recently ended recession continues turn out more property renters at the expense of owners, possibly helping keep the Fed on the offensive.

Fed leaves rates unchanged, but no new quantitative easing announced

We got a glimpse of where the Fed stands today as the headlining economic event for the week was likely the afternoon conclusion of the one-day Federal Open Market Committee (FOMC) meeting and statement release. As expected, no changes were made to the fed funds target rate, currently at a level between 0-0.25%, and the Committee said it will also maintain its existing policy of reinvesting principal payments from its securities holdings. The Fed noted that information since the last meeting in August indicates that the pace of recovery in output and employment has slowed in recent months. However, stocks initially rose and the US dollar fell as the Fed slightly tweaked their view on inflation, saying “measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability.” Some are taking this change as a sign that the Fed opened the door for more quantitative easing, where the Fed buys assets and expands its balance sheet to get more cash into the system. Also, the Fed’s statement said, “The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”

Thomas M. Hoenig was the lone dissenter for the sixth-straight meeting, who judged the economy continues to recover at a moderate pace. Hoenig believes that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and will lead to future imbalances that undermine stable long-run growth. In addition, given economic and financial conditions, Hoenig did not believe that continuing to reinvest principal payments from its securities holdings was required to support the Committee’s policy objectives. Treasuries finished higher following the release, but did briefly pare gains initially after the announcement. The yield on the two-year note was 3 bps lower at 0.42%, while the yield on the 10-year note decreased 12 bps to 2.58%, and the 30-year bond yield lost 9 bps to 3.79%.

Canadian prices decline, UK budget deficit expands

The economic calendar in Europe was relatively light, but a report showed the UK budget deficit widened by an amount that exceeded economists’ estimates, and was the largest for any month of August since records began in 1993, per Bloomberg. Other reports out today included: Spain’s trade deficit narrowing, Switzerland’s trade surplus shrinking, and Ireland’s producer prices increasing.

Back in the Americas, Canada’s consumer price index unexpectedly fell 0.1% in August, versus economists’ expectations of a flat reading and down from the 0.5% increase in July. The decline may take some pressure off the Canadian central bank to continue raising interest rates, which it has done three times since the beginning of June. Meanwhile, Mexico’s retail sales increased 2.2% in July, above the 2.0% increase that was expected.

In Asia/Pacific, the Reserve Bank of Australia released the minutes from its most recent monetary policy meeting earlier this month, which showed that further rate increases could be in the offing. The RBA kept its benchmark interest rate unchanged at 4.5% for the fourth month in a row, but RBA members noted that the Australian economy has solid momentum, due to significant increased investment spending expected over the period ahead and positive prospects in the resource sector. They concluded that high levels of resource utilization were likely to put pressure on inflation and the likely scenario is that the Australian economy will grow at trend pace, or a bit above, over the next few years, and if this scenario should come to pass, it was likely that higher interest rates would be required. In other economic news in the region, Japan’s Leading Index improved from its initial reading for July, and the nation’s machine tool orders remained at a y/y growth rate of 170.0% for August, while Hong Kong’s consumer prices rose by a smaller amount than expected for August.

The lone report on the US economic calendar tomorrow will be MBA Mortgage Applications, which declined 8.9% last week.

The international calendar will include Canadian leading indicators and retail sales, euro-zone and Brazilian consumer confidence, and the Bank of England will release the minutes from its last policy meeting.