Evening Market Update

Bulls Cheer Positive Durable Goods Report

Equity markets ended the week on a high note on Friday after a durable goods report showed strong demand for goods-after stripping out volatile components-and favorable revisions to July's numbers. The rally in stocks came despite a larger-than-expected decline in the headline figure and an unchanged reading in new home sales. On the equity front, Nike bested the Street's earnings forecast and KB Home reported a narrower loss to aid the positive sentiment. Elsewhere, Advanced Micro Devices' disappointing 3Q revenue guidance was overshadowed by comments from Oracle’s CEO Larry Ellison about the firm’s possible interest in acquiring a chip company, while athletic apparel firm Finish Line missed the Street's top- and bottom-line forecasts. Treasuries finished the day lower amid the rally in equities.

The Dow Jones Industrial Average jumped 198 points (1.9%) to close at 10,860, the S&P 500 Index gained 24 points (2.1%) to 1,149, and the Nasdaq Composite added 54 points (2.3%) to 2,381. In moderate volume, 1.1 billion shares were traded on the NYSE and 2.0 billion shares were traded on the Nasdaq. Crude oil increased $1.31 to $76.49 per barrel, wholesale gasoline gained $0.03 to $1.94 per gallon, and the Bloomberg gold spot price advanced $3.90 to $1,296.35 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-fell 1.0% to 79.29. For the week, including dividends, the DJIA increased 2.4%, the S&P 500 Index gained 2.1%, and the Nasdaq Composite rose 2.8%.

Nike Inc.  (NKE $80) reported fiscal 1Q EPS of $1.14, above the $1.01 Reuters estimate, with revenues increasing 8% year-over-year (y/y) to $5.18 billion, compared to $5.22 billion consensus estimate of analysts. The athletic apparel and footwear company said its worldwide futures orders for its merchandise scheduled for delivery from September 2010 through January 2011 are 10% higher y/y at $7.1 billion. On a conference call with analysts, the company's CEO said the World Cup and World Basketball Festival aided results, but he sees a "slow and steady" economic recovery with some near-term uncertainty, as rising freight, labor and oil costs are likely to add pressure to future results, according to Dow Jones Newswires. Shares were higher.

However, athletic apparel retailer Finish Line Inc. (FINL $14) reported 2Q EPS of $0.31, four cents below the Street's forecast, with revenues increasing 0.8% y/y to $301.1 million, also short of the $316 million that analysts were expecting. Shares were sharply lower.

Advanced Micro Devices Inc.  (AMD $7) announced that it expects revenue for 3Q ending September 25, to be in the range of down 1-4% versus revenue of $1.65 billion in 2Q. The chipmaker said the sequential decrease is due to weaker-than-expected demand, particularly in the consumer notebook market in Western Europe and North America. Analysts were expecting the company to report 3Q revenues of $1.72 billion. AMD was higher despite the revenue outlook as the semiconductor industry received a boost on comments from Oracle Corp's (ORCL $27) CEO Larry Ellison, who said the firm would be interested in buying a chip company. ORCL traded lower.

KB Home (KBH $12) announced that its 3Q loss narrowed from $0.87 per share in the same period a year ago to a $0.02 per share shortfall, compared to the $0.15 per share loss that was anticipated by analysts. Revenues increased 9% y/y to $501 million, above the $488 million that was expected, and the first time in nearly four years that it has generated y/y revenue growth, led by a 4% y/y increase in homes delivered and a 6% y/y increase in the average selling price. Shares were higher.

Durable goods orders generate enthusiasm, offsetting unexpectedly flat new homes sales

Durable goods orders fell 1.3% month-over-month (m/m) in August, more than the 1.0% decline that was expected by economists surveyed by Bloomberg, while July's figure was upwardly revised from a 0.3% increase to a gain of 0.7%. Ex-transportation, orders rose 2.0%, compared to the expectation of a 1.0% increase, while July was adjusted from a 3.8% drop to a decline of 2.8%. Non-defense capital goods excluding aircraft, considered a good proxy for business spending, rose by 4.1% in August, compared to the 3.0% increase that was anticipated, and after July's figure was favorably revised by 270 bps to 5.3%. Meanwhile, shipments of these goods, used in calculating gross domestic product, gained 1.6% in August and July's figure was upwardly revised to a 0.1% gain from an initially reported drop.

New home sales were unchanged m/m in August at an annual rate of 288,000 units, as July's figures were upwardly revised, while the expectation was for a 6.9% increase to a 295,000 annual rate. The annualized pace of sales is the second-lowest since data began in 1963, and the median home price fell to the lowest level in since December 2003. The median price of a new home fell 1.2% year-over-year (y/y) to $204,700, and declined 0.6% m/m. Inventory of new homes for sale fell 1.4% to 206,000 units, the lowest since August 1968 according to Bloomberg, and represents 8.6 months of supply at the current sales rate,

Treasuries finished lower on the economic data and amid the strength in the equity markets. The yield on the two-year note rose 2 bps to 0.44%, the yield on the 10-year note added 6 bps to 2.61%, and the 30-year bond yield gained 7 bps to 3.80%.

German business sentiment surprises to the upside

The German Ifo Business Climate Index unexpectedly increased, rising from 106.7 in August to 106.8 in September, the highest level since June 2007 and above the decline to 106.4 that economists had expected. In other economic news in the region, France’s 2Q GDP was revised to a better-than-expected 0.7% expansion from the 0.6% previously reported, and retail sales in Italy came in flat m/m, compared to the 0.2% decline forecasted. Inflation reports were prevalent in the region, with German import prices rising by a smaller amount than forecasted, and August producer prices increased 0.1% m/m in Spain, while Sweden’s producer prices fell by a larger-than-expected 0.5% m/m in August. Finally, France reported that jobseekers-number of unemployed persons actively looking for work-in the nation unexpectedly rose in August.

Further east, some major markets returned to action followingThursday's holiday, but markets in mainland China remained closed and the economic calendar was void of any major releases. However, there were some items of note in the region, notably on speculation the Japanese government intervened in the currency markets to weaken the yen, which has experienced a recent surge versus most major currencies, hitting a fifteen-year high against the US dollar. The Japanese government declined to comment on the conjecture, but Japanese Finance Minister Noda reiterated that the government will take "bold" measures if needed. Moreover, speculation that China enacted an embargo on rare earth materials to Japan continued, amid a spat between the two nations regarding Japan's detention of a Chinese fishing-boat captain. However, Bloomberg reported that China denied any such embargo.

Stocks finish the week strong on economic data but picture remains murky

The US equity markets finished with solid gains to continue the strong advance for September, which has historically been an unfriendly month for the stock markets. Despite unexpected flat readings of new home sales and homebuilder sentiment, housing data was a key driver of positive economic sentiment, with upbeat reports on existing home sales, housing starts and building permits, as well as favorable quarterly results from homebuilders Lennar Corp. (LEN $15) and KB Home. However, given an unexpected increase in US weekly initial jobless claims and softer-than-forecasted euro-area manufacturing and services data, the stat sheet for equities may have been much less stellar than posted if it were not for Friday's strong August durable goods report and the US Federal Reserve fueling ramped up expectations that they are prepared to provide for further stimulus if needed.

In the Federal Open Market Committee's (FOMC) monetary policy statement following the conclusion of Tuesday's one-day meeting, in which it left its benchmark interest rate unchanged as expected, the Fed appeared to leave the door open for further quantitative easing, where the Fed buys assets to pump more cash into the system. 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." The US dollar fell and gold climbed higher following the announcement, where policymakers also said they will continue to monitor the economic outlook and financial developments and are prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.


Highlight next week likely US and China September manufacturing reports

The week starts off slow, with Tuesday's July reading of the S&P/CaseShiller Home Price Index, which lags the sales data by a month, forecasted to rise 3.15% year-over-year (y/y), while falling 0.10% month-over-month (m/m).

Thursday brings the final reading of 2Q gross domestic product (GDP), expected to be unrevised at a 1.6% quarter-over-quarter annualized rate, after expanding by 3.7% in the first quarter. The final report on GDP typically does not change much from the second reading, and economists are expecting personal consumption to remain at 2.0% and no adjustments to inflation readings, with the GDP Price Index at 1.9%, and the core PCE Index, which excludes food and energy, at 1.1%.

The week concludes with the September release of the ISM Manufacturing Index, expected to decline to 54.5 from 56.3 in August, The level that separates expansion from contraction is 50.0. The ISM Non-Manufacturing Index will be released the following week, and is forecasted to increase to 52.4 from 51.5.

Other releases on the US economic calendar include the Richmond Fed Manufacturing Index, the MBA Mortgage Applications Index, weekly initial jobless claims, the Chicago Purchasing Manager survey of manufacturing and services sectors, personal income and spending, construction spending, and the final University of Michigan Consumer Sentiment Index for September.

Elsewhere in the Americas, Canada releases July GDP and Brazil announces industrial production, manufacturing PMI, and Brazil's central bank meets to discuss monetary policy.

In Europe, releases include euro-zone business and consumer confidence, final manufacturing PMI, and employment, German CPI, employment and retail sales, French consumer spending and confidence, and PPI. Reports out of the UK include final 2Q GDP, mortgage approvals, consumer confidence, and housing prices.

In Asia/Pacific, Japan is slated to announce the Tankan survey of business sentiment, retail trade, industrial and vehicle production, vehicle sales, housing starts, construction orders, CPI, employment, and household spending. Australia will report its leading index, new home sales, building approvals, and CPI. Additionally, India, China and South Korea will announce manufacturing PMIs, China and South Korea release their leading indexes, and South Korea reports on industrial production, as well as consumer prices and confidence.