Evening Market Update

Fall in Jobless Claims Fails to Spark Upward Movement

US equities staged a modest rally in the final two hours of the trading day to finish mostly in the green, as an unexpected decline in weekly initial jobless claims pleased investors but failed to produce any significant gains. Sentiment was cooled by a contraction in Mid-Atlantic manufacturing activity for the second-straight month and a hotter-than-forecasted producer price index reading, along with news from across the pond of an unexpected drop in UK retail sales. In equity news, FedEx Corp. missed the Street’s EPS forecast by one penny, but beat expectations on the revenue front, while Pier 1 Imports Inc. beat estimates on the top- and bottom-lines. Outside of earnings, GameStop Corp. announced that it will spend an additional $500 million to buy back its shares and pay down debt, Kroger Co. raised its quarterly dividend 11%, and Williams Cos. lowered its profit outlook through 2011. Treasuries finished the day mostly lower.

The Dow Jones Industrial Average gained 22 points (0.2%) to close at 10,595, the S&P 500 Index was flat at 1,125, while the Nasdaq Composite advanced 2 points (0.1%) to 2,303. In moderately light volume, 905 million shares were traded on the NYSE and 1.8 billion shares were traded on the Nasdaq. Crude oil fell $1.59 to $74.43 per barrel, wholesale gasoline lost $0.04 to $1.92 per gallon, and the Bloomberg gold spot price gained $6.92 to $1,274.97. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—fell 0.3% to 81.24.

FedEx Corp.(FDX $83) reported fiscal 1Q EPS of $1.20, one penny shy of the Reuters estimate, with revenues increasing 18% year-over-year (y/y) to $9.5 billion, just ahead of the $9.4 billion that the Street was forecasting. The package delivery firm said strong demand for its services, due to “improved global economic conditions,” resulted in higher volumes and better revenue per shipment at its express and ground units. Moreover, the company said its earnings increased as a result of strong international growth and a benefit from the net impact of higher fuel surcharges. However, on a conference call with analysts, the company’s CEO said, “We are expecting a phase of somewhat slower growth going forward,” per Dow Jones Newswires. Additionally, the company said it will combine its freight and less-than-truckload operations and its workforce is expected to be reduced by 1,700 full-time employees. FDX issued 2Q EPS guidance that missed estimates, while it increased its full-year EPS outlook. Shares were down solidly.

GameStop Corp.(GME $19) announced that is Board of Directors has authorized $500 million in additional repurchase funds, with $300 million going to be used in its share repurchase program, and $200 million earmarked to retire debt. The video-game retailer said it has confidence in its business to continue to deliver consistent cash flow. Shares finished up over 4%.

Pier 1 Imports Inc. (PIR $8) traded nicely higher after the home furnishing retail firm reported 2Q EPS of $0.12, one cent above the consensus estimate of analysts, with revenues rising 8.1% y/y to $309.9 million, roughly in line with the Street’s expectations. Same-store sales—sales at stores open at least a year—increased 11.2% y/y, compared to a 7.6% drop the company reported the same period a year ago. PIR’s CEO said the company’s “return to profitability and beyond” is firmly on track and they are “extremely upbeat” about short and long-term prospects for the company.

Kroger Co. (KR $22) announced that its board has approved an 11% increase in its quarterly dividend. The boost of one penny to 10.5 cents per share is the fourth dividend increase since 2006, when it started paying dividends, and will cost the supermarket operator an additional $6.4 million per quarter. The decision comes two days after KR reported a surprising 2.8% increase in profit for the 2Q on better-than-expected revenue. Shares of KR moved higher.

Williams Cos. (WMB $18) lowered its earnings forecasts through 2012 to reflect challenging economic and commodity-market conditions. The company has restructured recently in an effort to simplify its structure and focus on exploration and production, rather than gas transportation and processing. Although WMB has benefited recently from high commodity prices, the low cost of natural-gas has hurt the company’s bottom line and led the company to cut 2011 EPS expectations to $0.85-$1.65, down from an earlier estimate of $1.15-$2.50. Shares of WMB were lower.

Jobless claims slip, producer prices increase, and Philly manufacturing contracts again

Weekly initial jobless claims dipped by 3,000 to 450,000, versus last week's figure which was upwardly revised by 2,000 to 453,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to increase to 459,000. The four-week moving average, considered a smoother look at the trend in claims, fell by 13,500 to 464,750, while continuing claims dropped by 84,000 to 4,485,000, compared to the 4,464,000 that was anticipated by economists.

Meanwhile, the Producer Price Index showed prices at the wholesale level rose 0.4% month-over-month (m/m) in August, after increasing 0.2% in July, and above economists’ forecasts, which called for a 0.3% rise. The increase in the month was due to energy prices rising 2.2%, after decreasing in each of the four previous months, while food prices fell 0.3%, the fourth decrease in the last five months. Meanwhile, the core rate, which excludes food and energy, increased 0.1% m/m, matching the forecast of economists. On a year-over-year basis, headline producer prices were 3.1% higher, and the core rate was up 1.3%.

Today’s release precedes tomorrow’s Consumer Price Index (CPI) report, 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 1.1% at the headline level and 1.0% y/y at the core level. Additionally, the preliminary the University of Michigan Consumer Sentiment Index for September will be released, expected to increase to 70.0 from a previous reading of 68.9, although still below the 89 average in the five years leading up to the recession.

The threat of inflation remains low, amid depressed levels of demand from consumers who are saving more and spending within their means, shunning debt, as the use of revolving credit has plunged. As such, companies lack pricing power and have to compete on price in many cases to attract sales. In his Jackson Hole speech at the end of August, Fed Chair Ben Bernanke said that “At this juncture, the risk of either an undesirable rise in inflation or of significant further disinflation seems low.” As such, the Fed remains focused on the other goal of their dual mandate, jobs. Initial jobless claims spiked in mid-August, but have come back down to the mid-400,000 level that has characterized this year. Within the labor department report, payroll increases reported by businesses have been disappointing, but the household survey, which includes small businesses and contractors, tells a different story, growing by 2.3 million jobs over the past eight months.

Additionally, the Philly Fed Manufacturing Index improved by a smaller amount than expected, rising from -7.7 in August to -0.7 in September, compared to the forecast for an increase to 0.5. The report depicts business activity in the mid-Atlantic region contracted for the second-straight month—as a reading of zero is the demarcation point between expansion and contraction—after posting a string of eleven-consecutive months of expansion ending in July. Almost every component making up the index deteriorated, with news orders and shipments contracting further, but the employment component moved back into expansion. Today’s report follows yesterday’s release of the Empire Manufacturing Index, a measure of manufacturing in the New York region, which unexpectedly declined in September to a level of 4.14, compared to the estimated increase to 8.00, from the previous month’s level of 7.10.

In other economic news, the 2Q current account widened to $123.3 billion, from $109.2 billion in 1Q, and compared to the increase to $125.0 billion that was anticipated. The gap is the largest since the end of 2008, after reaching a decade-low $84.4 billion in 2Q of 2009 as imports plunged during the recession. The trade deficit, which accounts for most of the current account imbalance, grew to $131.6 billion in 2Q, up from $114.5 billion in 1Q.

Treasuries were mixed on the day, as the mid-to-long end of the curve moved lower, while the short end was flat. The yield on the two-year note remained at 0.47%, while the yield on the 10-year note increased 4 bps to 2.76%, and the 30-year bond yield gained 5 bps to 3.92.

UK retail sales data disappoints

In European economic news, British retail sales fell 0.4% m/m in August excluding auto fuel, compared to the 0.2% increase that was forecasted by economists, while including auto fuel, sales dropped 0.5% m/m, versus the 0.3% increase that was anticipated. There were some other economic reports that are worth noting, with the euro-zone trade deficit narrowing by a larger amount than forecasted for July, Spain’s 2Q labor costs increasing, Sweden’s unemployment rate falling more than expected, while Switzerland’s industrial production rose by a smaller-than-anticipated amount in 2Q. On the central bank front, the Swiss National Bank kept its 3-month Libor target rate unchanged at 0.25%, as expected.

In Asia/Pacific, New Zealand’s central bank kept its benchmark interest rate unchanged at 3.00% as expected, while India unexpectedly increased its reverse repo rate by 50 basis points to 5.00%, versus the forecast of an increase to 4.75%, while raising its cash reserve ratio by 25 basis point to 6.00% to match expectations.

Tomorrow’s international economic releases include department store sales in Japan and South Korea, German PPI, and Italian industrial orders.