Evening Market Update

Oil Surges to the Detriment of Stocks

A near seven-year high in the US ISM Manufacturing Index was unable to catalyze stocks in today’s trading, as a solid rise oil prices and the resulting heightened inflationary concerns, pressured equities, notching a triple-digit loss for the DJIA. Even comments from Fed Chair Bernanke in his testimony before the Senate Banking Committee that the pace of economic activity will likely accelerate in 2011 and that inflation remains low did little to sway investors to the positive. Legal matters on the corporate front also sapped sentiment, after the Securities and Exchange Commission said it has charged a former board member of Goldman Sachs and Dow member Procter & Gamble with insider trading, while Las Vegas Sands disclosed its own issues with the SEC, saying that the agency has requested documents relating to compliance with the Foreign Corrupt Practices Act. On the positive side of the ledger, AutoZone bested the Street’s earnings and revenues forecasts, while automakers posted solid February US auto sales. Treasuries ended higher amid the downdraft in stocks and after construction spending fell more than expected.

The Dow Jones Industrial Average fell 168 points (1.4%) to 12,058, the S&P 500 Index lost 21 points (1.6%) to 1,306, and the Nasdaq Composite tumbled 45 points (1.6%) to 2,737. In moderate volume, 1.1 billion shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. Crude oil climbed $2.66 to $99.63 per barrel, wholesale gasoline jumped $0.09 to $2.98 per gallon, while the Bloomberg gold spot price gained $22.75 to $1,434.23 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies— was 0.2% higher at 77.05.

The SEC announced that it has charged a Connecticut-based business consultant who served on the boards of directors at Goldman Sachs Group Inc. (GS $161) and Dow member Procter & Gamble (PG $63) for providing insider information to a hedge fund manager about quarterly earnings at both firms and an impending $5 billion investment by Berkshire Hathaway (BRK/B $87) in Goldman Sachs. None of the companies have commented on the report, while the Wall Street Journal is reporting that the person will step down from PG’s board. GS and BRK/B were lower, while PG was modestly higher.

In other legal news from the corporate sector, shares of Las Vegas Sands Corp. (LVS $44) were solidly lower after the hotel and casino operator reported in a filing that it received a subpoena from the SEC requesting documents relating to compliance with the Foreign Corrupt Practices Act. LVS also said it has been advised by the Department of Justice that it is conducting a similar investigation and it believes the investigations relate to allegations from the company’s former CEO, alleging breach of contract. LVS said it intends to “vigorously defend this matter,” and it intends to cooperate with the investigations.

In earnings news, AutoZone Inc. (AZO $264) reported fiscal 2Q EPS of $3.34, above the $3.06 consensus estimate of analysts surveyed by Reuters, with revenues growing 10.3% year-over-year (y/y) to $1.7 billion, compared to the $1.6 billion that the Street was looking for. The auto parts retailer said its US same-store sales—sales at stores open at least a year—rose 7.1% y/y. AZO was higher.

Elsewhere, General Motors Co. (GM $33) kicked off the industry’s February’s US auto sales reports, posting a 49% y/y gain in sales of its four core brands—Buick, GMC, Cadillac, and Chevrolet. Meanwhile, other reports from the major automakers are pouring in, with Ford Motor Co. (F $15) posting a 13.8% increase in sales—including fleet sales—and Chrysler GroupNissan Motor Co.Honda Motor Co. (HMC $44) posting a 22% rise, and Toyota Motor (TM $93) achieving a 41.8% gain in sales during the same period. The reemergence of strength in oil prices pressured shares of the automakers, however NSANY was able to buck the trend, finishing modestly higher. reporting a 12.6% gain in sales. Foreign automakers fared just as well with (NSANY $21) reporting a February US sales increase of 31.6%,
ISM manufacturing read near seven-year high, Fed Chairman testifies on Capitol

The ISM Manufacturing Index improved to a level that exceeded expectations of economists surveyed by Bloomberg, rising from 60.8 in January to 61.4 in February—matching the May 2004 high, a level not eclipsed since 1983. A reading above 50.0 depicts expansion and the index has posted nineteen-straight months above that mark. New orders rose slightly from 67.8 to 68.0, production and employment both rose 2.8 points to 66.3 and 64.5, respectively, while the Prices Paid Index ticked higher from 81.5 to 82.0, compared to the 83.0 reading that was expected.

Meanwhile, Federal Reserve Chairman Ben Bernanke gave his semiannual testimony before the Senate Banking Committee on the Fed’s monetary policy, noting that the combination of rising household and business confidence, accommodative monetary policy, and improving credit conditions seems likely to “lead to a somewhat more rapid pace of economic recovery in 2011 than we saw last year.” However, Bernanke is reiterating that job growth “remains relatively weak and the unemployment rate is still high,” with the housing sector remaining “exceptionally weak.” On inflation, the Fed Chairman continued to stress that overall inflation remains low and the risk of deflation has become “negligible,” while acknowledging significant increases in some highly visible prices, including those of gasoline and other commodities, exacerbated by the unrest in the Middle East in the past few weeks. But Bernanke suggested that, “the most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in US consumer price inflation.”

Employment and inflation data will likely command the most attention in tomorrow’s release of the Federal Reserve’s Beige Book, wherein Fed staffers summarize anecdotal economic data from all twelve Federal Reserve districts in preparation for the next Federal Open Market Committee (FOMC) meeting scheduled for March 15 (economic calendar).

In other economic news, construction spending fell more that expected in January, dropping 0.7% month-over-month (m/m), versus the 0.4% decline seen by economists, and following a decrease of 1.6% seen in December, which was favorably revised from the 2.5% drop that was originally reported. Residential spending rose, but was offset by a decline in nonresidential spending, leading to the larger-than-forecasted drop in construction outlays.

Treasuries finished higher amid the decline in stocks, with the yields on the two-year note, the 10-year note and the 30-year bond all 3 bps lower at 0.66%, 3.40% and 4.47%, respectively.

In addition to the release of the Federal Reserve’s Beige Book, the ADP Employment Change will be reported tomorrow, where 175,000 jobs are expected to have been added to the private sector during February.

European data mostly positive, Chinese manufacturing activity slows

Traders received a slew of economic data from overseas, with data out of Europe’s largest economies coming in better than what economists had forecasted. Germany’s unemployment change fell by 52,000 in February, compared to the decline of 18,000 that was anticipated, while a separate report showed manufacturing activity was unexpectedly revised higher. The German manufacturing data headlined a plethora of activity reports across the pond, with Italy, France, and the UK all posting higher levels of expansion in the sector. Elsewhere, Italy reported a stronger-than-forecasted annual GDP and hotter-than-anticipated consumer prices. Meanwhile, the UK provided some favorable housing data, with the region’s mortgage approvals rising by an amount that exceeded expectations. However, inflation concerns fostered some uneasiness with the euro-zone Consumer Price Index increasing at a rate of 2.4% y/y in February. Moreover, while the European Commission increased its 2011 economic growth forecast, it said that higher oil and commodity prices could keep inflation above the European Central Bank’s limit for most of the year, according to Bloomberg.

In the Asia/Pacific region, the economic calendar was focused on manufacturing activity, mainly out of China, with two separate reports showing decelerations as China has deployed several measures to control inflation and the formation of asset bubbles. Despite the slowing activity, the reaction was mostly positive as the data suggested the government may not remain as aggressive with its policy tightening measures. Moreover, India’s manufacturing activity showed a solid increase, while Australia’s 4Q trade deficit was wider than expected and its retail sales grew at a slower pace than forecasted.

In central bank news, the Bank of Canada left its benchmark overnight rate unchanged at 1.00%, as widely expected, while also saying that any reduction in monetary stimulus in the future would “be carefully considered” in light of an the economic recovery that is “proceeding slightly faster than expected.”

Tomorrow, the international calendar will be lighter, with the euro-zone reporting PPI, Spain providing unemployment and consumer confidence, while Australia will release 4Q GDP and new homes sales, South Korea offers CPI figures, and China will report two reads on services PMI.