Evening Market Update

Stocks Tick Lower After Digesting Full Plate of Data

Stocks moved modestly lower on the day, as traders were hit with a plethora of economic data that produced choppy trading and mixed sentiment. Highlights of the economic docket were an unexpected narrowing of the US trade deficit, a larger-than-expected jump in US jobless claims, a downward revision to the Philly Fed Manufacturing Index and an increase in producer prices that exceeded forecasts. On the international economic front, focus was on the meeting and comments of the European Central Bank and Bank of England, as well as a successful bond auction in Spain. Treasuries finished higher after a volatile session, while the US dollar faced broad-based pressure. In equity news, Dow member Merck & Co said the result of a panel study would end one of its clinical trials, while after the close, fellow Dow component Intel Corp beat the Street’s EPS and revenue expectations. Additionally, AIG announced that it expects to complete its restructuring plan by tomorrow, paving the way to repay the American taxpayer, and Marathon Oil reported plans to spin off its refining business.

The Dow Jones Industrial Average fell 24 points (0.2%) to 11,732, the S&P 500 Index was 2 points (0.2%) lower at 1,284, and the Nasdaq Composite lost 2 points (0.1%) to 2,735. In moderate volume, 931 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. Crude oil fell $0.89 to $90.97 per barrel, wholesale gasoline fell $0.01 to $2.45 per gallon, while the Bloomberg gold spot price declined $13.95 to $1,373.90 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—fell 1.0% to 79.21.

Dow member Merck & Co Inc. (MRK $35) was under solid pressure after the drug company said a panel studied combined data for two major clinical trials for its investigational medicine vorapaxar for the prevention of cardiac events and recommended changes to its study of the treatment. MRK said it has agreed to the recommended changes, ending one study entirely, while it will discontinue the tests on 25% of the patients enrolled in the other study, but will continue to test on patients who had experienced a previous heart attack or peripheral arterial disease.

After the close, fellow Dow member Intel Corp. (INTC $21) reported 4Q EPS of $0.59, which beat analysts’ estimates of $0.53. Revenue came in at $11.46 billion, which also exceeded the Street’s $11.37 billion expectation.

American International Group Inc. (AIG $57) announced that the conditions to the previously announced dividend of about 75 million warrants, determined between the company and the US government, which has control of the insurer due to the bailout it received during the financial crisis, have been satisfied and it expects to close its previously announced recapitalization plan tomorrow. AIG said assuming no material change in the relevant facts, circumstances and conditions, the recapitalization plan will consist of the company repaying the Federal Reserve Bank of New York’s near $21 billion credit facility, paving the way for an orderly exit of the US government’s interests. Also, AIG will be retiring its outstanding preferred shares held by the US Treasury by exchanging 1.655 billion shares of AIG common stock for the $49.1 billion of preferred shares, resulting in the Treasury owning approximately 92% of the company’s common stock. Over time, the Treasury is expected to sell its shares in the open market. Shares traded lower after giving up early gains.

Marathon Oil Corp. (MRO $43) finished higher after the energy firm announced its Board of Directors approved moving forward with plans to spin off MRO’s refining business as a separate, publicly traded company named Marathon Petroleum Corporation under the ticker symbol MPC. MPC is expected to be the fifth largest US refiner. Meanwhile, Marathon Oil Corp will continue to trade with symbol MRO, comprised of the company’s crude oil production and exploration business.

Producer prices and jobless claims top forecasts, but trade deficit unexpectedly narrowed

The Producer Price Index showed prices at the wholesale level rose 1.1% month-over-month (m/m) in December, after increasing 0.8% in November, and above the forecast of economists surveyed by Bloomberg, which called for a 0.8% rise. Meanwhile, the core rate, which excludes food and energy, rose 0.2% m/m, inline with economists’ forecasts. On a year-over-year (y/y) basis, headline producer prices were 4.0% higher, and the core rate was up 1.3%, compared to economists’ forecasts calling for the headline rate to increase to 3.8% and the core rate to come in at 1.4%.

The inflation figures likely did not cause economists to be alarmed by the hotter-than-expected headline rate as energy prices have jumped recently and food prices have gained ground, and were the major contributors to the higher prices seen today. Also, the core rate—more closely followed by the Federal Reserve—remains subdued, and on a y/y basis, continues to sit below the “2% or a bit less” range that Federal Reserve Vice Chairman Janet Yellen noted over the weekend that is judged to be consistent over the longer run. However, the headline rate’s upward momentum—it has posted gains for six-straight months—does warrant some attention as it could foreshadow pressure on consumer discretionary income and rising costs being passed through to businesses, which may wind up making their way to the consumer, the heartbeat of the US economy. Yesterday, the Fed’s Beige Book, a summary of economic conditions across the nation’s Fed Districts that policymakers use a tool in forming monetary policy, noted that both retailers and manufacturers is most Districts said that costs were rising, but indicated that competitive pressures had led to only modest pass-through into final prices. Tomorrow, we will get a look at the price pressures facing consumers in the form of the  Consumer Price Index, forecasted to rise 0.4% on the headline rate, and a rise of 0.1% for the core rate.

Elsewhere, weekly initial jobless claims increased by 35,000 to 445,000, versus last week's figure which was upwardly revised by 1,000 to 410,000, and the level that economists had expected it to remain. Also, the four-week moving average, considered a smoother look at the trend in claims, increased by 5,500 to 416,500, but continuing claims tumbled by 248,000 to 3,879,000, below the forecast of economists, which called for continuing claims to come in at 4,088,000.

In other economic news, the trade deficit unexpectedly narrowed, declining from a favorably revised $38.4 billion in October to $38.3 billion in November, versus the estimate of economists, which called for the deficit to come in at $40.5 billion.

Meanwhile, the Philly Fed Manufacturing Index was downwardly revised from its initial report in December 16, from 24.3 to 20.8 for December, as new orders, prices paid, shipments, and employment were all revised lower, but all the components remained at levels depicting expansion. This was the second downward revision to a regional manufacturing report as the Chicago Purchasing Managers Index (chart) was also changed to a lower reading on Monday.

Treasuries moved higher in choppy trading after showing little reaction to the inflation, employment, and trade data. The yield on the two-year note lost 2 bps to 0.58%, the yield on the 10-year note was 7 bps lower at 3.30% and the 30-year bond yield fell 4 bps to 4.49%.

ECB and BOE rate decisions in focus

The Bank of England kept its benchmark interest rate unchanged at a record low of 0.50% and made no changes to its asset purchase program as expected by economists. Moreover, the European Central Bank also expectedly maintained the level of its key interest rate at 1.00%, and traders paid close attention to the customary press conference by ECB President Jean-Claude Trichet, looking for any new plans by the central bank that could help combat the euro-area’s debt crisis. Trichet noted that there are signs of short-term upward pressure on overall inflation due mainly to higher energy prices, but he said this has not so far affected its assessment that price developments will remain inline. Though the ECB head did say “very close” monitoring of price developments is warranted and “We are permanently alert, we are never pre-committed not to move interest rates and our level of interest rates is designed to deliver price stability,” per Bloomberg. However, Trichet reiterated that its benchmark interest remains “appropriate.” On the European Union’s bailout fund, Trichet said the fund should be increased and given “maximum flexibility,” according to Bloomberg.

In other European economic news, Spain completed an auction of 5-year bonds, which saw an interest rate increase from previous auctions, but was still below expectations. This was the second successful debt auction of a troubled euro-area nation in as many days, as Portugal’s favorable auction yesterday helped spark a global rally in the equity markets. Additionally, Spain’s Vice President of the Spanish Government and Finance Minister told CNBC that its banking sector does not need more government support and the nation will not need a bailout from the European Union. Additionally, UK industrial production increased at a smaller rate than expected, while a separate report showed UK manufacturing production rose more than anticipated. Elsewhere, growth in German wholesale prices accelerated and France’s consumer prices came in hotter than anticipated.

Headlines on the Asia/Pacific economic front included a report showing Japanese machine orders unexpectedly fell in November, while growth in the nation’s machine tool orders decelerated in December, Australia added fewer jobs than expected in December, and the Bank of Korea unexpectedly increased its benchmark interest rate by 25 basis points to 2.50%, to combat inflation.

Consumer and manufacturing in view tomorrow

Advance retail sales will be announced tomorrow, forecasted to rise 0.8% m/m in December, the same rate as in November, while sales ex-autos are estimated to grow 0.7% after advancing 1.2% in November. Same-store sales results - sales at stores open at least a year - reported by retailers last week were lower than expected, as some spending was seen to have taken place earlier than normal, in November, and the East Coast snowstorm affected after-Christmas sales. The retail sales report includes spending at supermarkets and gas stations.

Additionally, Friday also brings the December reading on industrial production, expected to rise 0.5% m/m after gaining 0.4% in November, and capacity utilization is forecasted to increase to 75.6% from 75.2% in November. Factory utilization remains 5.4% below its average rate from 1972 to 2009, illustrating the excess slack in the economy that analysts cite as the reason inflation should remain subdued. As discussed above, tomorrow also brings the Consumer Price Index (CPI) report.

Other releases on the US economic calendar include the preliminary December reading on the University of Michigan Consumer Sentiment Index, which is expected to rise to 75.5 from 74.5, and business inventories, forecasted to increase 0.7% in December, the same rate as in November.

International reports include euro-zone CPI, UK PPI, Japan’s leading index, and China’s leading indicator.