Evening Market Update

Bulls Lack Conviction

Despite a surprisingly positive April new home sales report and starting the day on the plus side, traders’ confidence wavered and US equities lost steam throughout the session to finish mostly lower. Equity news, while largely positive, was unable to provide much of a boost to the markets, as Deere & Co upped its quarterly dividend, AutoZone and GT Solar International both posted better-than-expected profits and revenues, while J.M. Smucker Co raised coffee prices by an average of 11%. Treasuries finished higher amid the divergent economic data, as the Richmond Fed Manufacturing Index fell to a level depicting contraction for the first time in eight months.

The Dow Jones Industrial Average fell 25 points (0.2%) to 12,356, the S&P 500 Index declined 1 point (0.1%) to 1,316, and the Nasdaq Composite lost 13 points (0.5%) to 2,746. In moderate volume, 868 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.89 to $99.59 per barrel, wholesale gasoline gained $0.05 to $2.96 per gallon, and the Bloomberg gold spot price rose $7.54 to $1,524.64 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—fell 0.3% to 75.89.

Deere & Co. (DE $83) reported that its Board of Directors has approved an increase of the farm and construction machinery’s quarterly dividend by about 17% to $0.41 per share. The company said it remains committed to funding the company’s organic growth while also returning cash directly to shareholders. Shares were slightly higher.

AutoZone Inc. (AZO $293) announced fiscal 3Q earnings of $5.29 per share, topping the $4.98 consensus estimate of analysts surveyed by Reuters, with revenues growing 8.6% year-over-year (y/y) to $2.0 billion, above the $1.9 billion that the Street had anticipated. The auto parts retailer posted 5.3% y/y growth in same-store sales—sales for stores open at least one year. AZO traded solidly to the upside.

GT Solar International Inc. (SOLR $12) reported fiscal 4Q EPS of $0.41, above the $0.34 that the Street had expected, with revenues increasing 3.3% y/y to $272 million, exceeding the $224 million estimate of analysts. The solar production technology and materials firm also raised its current full-year guidance. SOLR was nicely higher.

J.M. Smucker Co. (SJM $77) announced that it increased the list prices for the majority of its coffee products sold in the US, including brands such as Folgers and Dunkin’ Donuts, by an average of 11%. This was the fourth increase in coffee prices in the past year and the company said the increase is driven by “sustained increases in green coffee costs.” Shares were higher.

New home sales unexpectedly increase and regional manufacturing surprisingly contracts

New home sales unexpectedly increased, rising 7.3% month-over-month (m/m) to an annual rate of 323,000 units in April, from an annual rate of 301,000 units in March, which was revised higher by 1,000 units. Economists surveyed by Bloomberg expected a rate of 300,000. The median home price rose 1.6% m/m to $217,900, and was up 4.6% y/y. Inventory of new homes for sale declined 2.8% m/m to 175,000 units, representing 6.5 months of supply at the current sales rate, down from 7.2 months in March and the lowest in a year. April’s sales growth came as a 15% m/m increase out of the West paced broad-based gains in every region in the country. New home sales are considered a timely indicator of conditions in the housing market as it is based on contract signings, while existing home sales, which unexpectedly declined in April, uses closings.

Although sales during the month surprised to the upside, enthusiasm may be tempered by the fact that sales remain depressed, near the 278,000 unit record low sales pace that was set in February and new home sales make up a small portion of the total housing market. However, the data suggests that the spring selling season may be off to a decent start, and the second-straight reduction in monthly supply despite the intense competition from the existing homes on the market amid the flood of foreclosures, bodes well for the outlook on prices.

However, the Richmond Fed Manufacturing Index showed manufacturing activity in the southeast fell to a level depicting contraction for the first time since September, dropping from 10 in April to -6 in May, compared to the decline to 9 that was expected by economists. A reading above zero depicts expansion. The drop in the index came as new orders volume, shipments, and order backlog all fell well below zero, while the number of employees remained unchanged at 14.

Treasuries were higher following the mixed data, with the yield on the 2-year note down 2 bps to 0.51%, the yield on the 10-year note also 2 bps lower at 3.11%, and the 30-year bond rate declined 3 bps to 4.24%.

Europe rebounds slightly

Sentiment across the pond recovered from yesterday’s slump, courtesy of some better-than-expected economic data in the region, but lingering eurozone debt uneasiness kept the mood in check. Business confidence in Germany—Europe’s largest economy—failed to decline as economists forecasted in May, with the Ifo Business Climate remaining at 114.2, compared to the decline to 113.7 that was projected. Moreover, March industrial new orders in the eurozone were higher than projected y/y, but fell more than anticipated compared to February. Additionally, German 1Q GDP was left unrevised at a 1.5% quarter-over-quarter (q/q) rate of expansion, as expected, as exports, capital investment and government spending rose more than forecasts, offsetting softer-than-anticipated construction investment and private consumption. In other economic news, while UK retail sales fell for the first time in three months in May, the decline was smaller than economists forecasted, while a separate report showed the UK budget deficit came in above expectations in April, fostering some concerns about the nation being able to achieve its deficit-reduction target for the year. Keeping the euro-area debt crisis in the mix, Moody’s Investors Service warned that a default by Greece could result in credit downgrades in other peripheral eurozone nations.

Further east, while economic news was non-existent, sentiment was mixed as investors continued to grapple with increased global economic uncertainty in the face of the festering euro-area debt crisis as well as signs of slowing growth in China.

Economic news slows a bit

Tomorrow, we will get a read on durable goods orders, products intended to last at least three years, forecasted to decline 2.5% m/m in April, after rising by the same amount in March. Excluding transportation, orders are expected to increase 0.5%, while orders for non-defense capital goods excluding aircraft, considered a good proxy for business spending, are anticipated to fall 2.1%. Although this report is typically volatile, due to large swings in orders for transportation and defense, the data can give an indication of manufacturing activity and capital purchases by businesses, while foreshadowing underlying demand for labor.

Also on tomorrow’s US economic docket is the MBA Mortgage Applications Index.

The international economic calendar will be light as well with Italy reporting retail sales and the UK providing GDP numbers, while the only economic report out of the Asia/Pacific region will be Japan’s trade balance.