Evening Market Update

Markets Rise Above Turmoil

Despite the continued conflict in Egypt, the US equity markets finished higher as traders found some solace in a near 23-year high in a Midwest business activity report, increases in both personal income and spending, and a favorable 4Q earnings report from Dow member Exxon Mobil. Treasuries ended the day lower amid the data, which overshadowed a decline in the Dallas Fed Manufacturing Index. In other equity news, Dow component Intel cut 1Q revenue guidance after it discovered a design flaw with one of its chips, while Alpha Natural Resources announced that it has reached a definitive agreement to acquire Massey Energy for $7.1 billion.

The Dow Jones Industrial Average rose 68 points (0.6%) to 11,892, the S&P 500 Index gained 10 points (0.8%) to 1,286, and the Nasdaq Composite added 13 points (2.5%) to 2,700. In moderate volume, 1.2 billion shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. Crude oil jumped $2.85 to $92.19 per barrel, wholesale gasoline gained $0.01 to $2.50 per gallon, while the Bloomberg gold spot price tumbled $11.20 to $1,330.05 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—rose 0.9% to 77.90.

Dow member Exxon Mobil Corp. (XOM $81) reported 4Q EPS of $1.85, above the $1.63 consensus estimate of analysts surveyed by Reuters, with revenues of $105.2 billion, exceeding the $99.1 billion that the Street had expected. XOM’s upstream—exploration and production—earnings rose $1.7 billion y/y on higher crude oil and natural gas realizations, while its downstream—refining—earnings increased by $1.3 billion, driven by higher industry refining margins. Shares were higher.

Fellow Dow component Intel Corp. (INTC $21) was lower after it announced that it has discovered a design issue in a recently released Intel 6 Series support chip, known as Cougar Point.The chipset is used in PCs with the company’s latest second generation core processors, code-named Sandy Bridge. The chip company said it has stopped shipments of the affected chip, has implemented a fix, and will start making a new version of the chip to remedy the issue. INTC said in 1Q it expects this issue to reduce revenue by about $300 million, while full-year revenue is not expected to be materially affected by the issue.

In M&A news, Alpha Natural Resources Inc. (ANR $54) reached a definitive agreement to acquire Massey Energy Co. (MEE $63) for $69.33 per share or $7.1 billion. Under the terms of the deal, MEE stockholders will receive 1.025 shares of ANR plus $10.00 per share in cash. Upon completion of the deal, which is subject to customary closing conditions including stockholder approval of both companies, ANR and MEE shareholders will own approximately 54% and 46% of the combined company, respectively. ANR traded solidly lower, while MEE was sharply higher.

Personal income and spending rise as expected, regional business activity reads mixed

Personal income rose 0.4% month-over-month (m/m) in December, matching the expectation of economists surveyed by Bloomberg, and November’s 0.3% increase was revised to a gain of 0.4%. Personal spending was 0.7% higher m/m in December, compared to expectations of a 0.5% advance, but November’s 0.4% rise was revised to a 0.3% increase. The savings rate moved lower to 5.3% in December, after an upwardly revised 5.5% for November.

Also, the  PCE Price Index, which is released with the income and spending data, was up 1.2% year-over-year (y/y) in December, below expectations calling for a 1.3% advance, after November’s 1.0% increase was revised to a 1.1% gain. The core PCE Price Index, which excludes food and energy, was flat m/m, compared to economists’ expectations of a 0.1% gain, while y/y core prices moved 0.7% higher, below the consensus 0.8% estimate.

Meanwhile, we received a look at some regional business activity reports, with the Chicago Purchasing Managers Index unexpectedly rising, increasing from an unrevised 66.8 in December, to 68.8 in January—the highest since July 1988—compared to the decline to 64.5 that economists had expected. Although prices paid rose solidly to help the surprising advance in the index, new orders and production posted respectable gains, along with increases in order backlogs and employment. However, the Dallas Fed Manufacturing Activity Index fell from an upwardly revised 15.8 in December to 10.9 in January, compared to the 15.0 level that economists forecasted, but the index showed activity continued to increase, depicted by a reading above zero. Today’s reports join recent releases out of New York and Philadelphia in continuing to show economic expansion in the manufacturing sector, while key components of new orders, shipments, and number of employees all showed accelerated expansion, boosting confidence regarding the economic recovery. Tomorrow’s ISM Manufacturing Index, a national read on manufacturing sector activity, is forecasted to improve from 57.0 in December to 58.0 in January, but the prices paid component is forecasted to increase to the highest level since May, which could limit some of the enthusiasm as inflationary pressure have begun to emerge, fostering some uneasiness.

Treasuries finished lower following the data and strength in the equity markets. The yield on the two-year note was up 2 bps at 0.57%, the yield on the 10-year note gained 6 bps to 3.39%, and the 30-year bond yield rose 6 bps to 4.59%.

Mixed sentiment overseas on turmoil in Egypt, assorted economic data

Continued political unrest in Egypt, exacerbated by a call by protesters for one million people to march Tuesday, demanding that President Mubarak step down, tempered sentiment overseas. Moreover, Moody’s downgraded the credit rating of the Middle Eastern nation to Ba2 from Ba1 on increased “political risk.” Economic data in Europe offered little help, with reports showing retail sales in Germany—Europe’s largest economy—unexpectedly dropped in December, while euro-zone consumer prices rose more than economists had forecasted, prompting concerns toward the rising inflationary pressures that could hamper growth in the region if monetary policy tightening actions result, possibly threatening the euro-zone recovery. However, not all economic data was disappointing, as Italian business confidence improved more than forecasted.

In the Asia/Pacific region, concerns over Egypt overshadowed a number of positive economic reports, as Japan reported favorable readings on industrial production, construction orders, and housing starts, all of which easily exceeded economists’ estimates. Meanwhile, there were some GDP reports that deserve a mention, with India’s output expanding 8.0% y/y in 2010, after growing 6.8% in 2009, Taiwan’s 4Q GDP increased 6.5% y/y, above the 6.0% rate of expansion forecasted, and the Philippines posted 7.3% y/y growth in GDP, above the 7.0% that was anticipated.

Back in North America, Canada’s GDP grew more than expected in November, increasing 0.4% m/m, compared to the 0.3% expansion that was forecasted, and the 0.2% expansion that was seen in October.

Tomorrow, the only other item joining the ISM Manufacturing Index on the US economic docket will be construction spending, forecast to be flat m/m in December, following a 0.4% m/m increase in November. The international economic calendar, on the other hand, will offer a plethora of reports, including manufacturing PMI figures out of France, Italy, Germany and the euro-zone, French PPI, mortgage approvals in the UK and eurozone employment numbers. Further east, South Korea and India will release their respective trade balances, China will report two reads on manufacturing PMI, Japan will disclose auto sales, and Hong Kong will report retail sales. Also, the Reserve Bank of Australia concludes its monetary policy meeting where it is expected to keep its benchmark interest rates steady.