Evening Market Update

Stocks Rally Despite US Data

Easing euro-area debt concerns were able to take the sting out of some disappointing US economic data, as stocks began the holiday-shortened week on the positive side, closing near the highs of the day. The S&P/Case-Shiller Home Price Index showed that US home prices hit a new recession low, consumer confidence unexpectedly declined, while the Chicago and Dallas manufacturing reports were well below expectations. However, traders focused on a Wall Street Journal report that boosted optimism that Greece may be able to avoid debt restructuring, pressuring the US dollar versus the euro, and supporting a solid gain in crude oil prices. News on the equity front was light, as Ashland agreed to acquire chemical maker International Specialty Products for $3.2 billion in cash, General Dynamics received a modified ship contract from the US Navy, while shares of Nokia suffered after the cellphone maker issued a 2Q profit warning. Treasuries finished higher following the disappointing US data.

The Dow Jones Industrial Average jumped 128 points (1.0%) to 12,570, the S&P 500 Index rose 14 points (1.1%) to 1,345, and the Nasdaq Composite gained 38 points (1.4%) to 2,835. In heavy volume, 1.5 billion shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq. WTI crude oil rose $2.11 to $102.70 per barrel, wholesale gasoline gained $0.02 to $3.05 per gallon, while the Bloomberg gold spot price fell $2.91 to $1,535.55 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.4% lower at 74.60.

Ashland Inc. (ASH $68) announced that it has reached an agreement to acquire privately-held chemical maker International Specialty Products Inc. for $3.2 billion in all cash, in an effort to expand its position in personal care, pharmaceutical and energy markets. ASH said the transaction is anticipated to close prior to the end of the September quarter and is expected to be immediately accretive to its EPS. Shares of ASH traded sharply higher.

General Dynamics Corp. (GD $74) was solidly higher after the shipbuilder announced that it has received from the US Navy a $744 million modification to its contract to fully fund construction of the first two mobile landing platform ships. The contract also includes an option for the construction of a third ship which, if exercised, will increase the total contract value to about $1.3 billion.

Nokia Corp. (NOK $7) was over 14% lower after the company issued a 2Q profit warning, due to lower-than-expected sales at its devices and services unit. The cellphone maker also said it is no longer in a position to provide financial guidance for the rest of the year and previous forecasts for 3Q and 4Q are no longer valid.

Home prices decline, while consumer confidence and regional manufacturing activity fall

The S&P/Case-Shiller Home Price Index showed a decline in home prices of 3.61% year-over-year (y/y) in March, compared to the 3.40% drop that economists surveyed by Bloomberg had expected. Month-over-month (m/m), home prices were 0.23% lower, compared to forecasts, which called for a decline of 0.24%. Prices for twelve of the twenty cities covered by the report posted new index lows in March, with nineteen of the twenty being down y/y, and Washington DC was the only city where home prices increased on both a monthly and annual basis. The report also revealed that in 1Q, US homes prices hit a new recession low, posting an annual decline of 5.1% versus 1Q 2010. The Chairman of the Index Committee at S&P David Blitzer said, “This month’s report is marked by the confirmation of a double-dip in home prices across much of the nation.” He added that the rebound in prices in 2009 and 2010 was largely due to the first-time home buyers tax credit and excluding this, “there has been no recovery or even stabilization in home prices during or after the recent recession.”

Meanwhile, the  Consumer Confidence Index unexpectedly deteriorated, falling from an upwardly revised 66.0 in April to 60.8 for May, compared to the improvement to 66.6 that economists anticipated. The disappointing read on sentiment came as consumers’ assessment of the short-term outlook on business conditions and the current situation both declined. However their appraisal of jobs being “plentiful” improved, while their view that jobs are “hard to get” also increased. Moreover, the inflation outlook component of the report showed consumers expect inflation to rise to 6.6% twelve months from now, up from 6.3% in projected in April.

Elsewhere, in regional manufacturing activity, the Chicago Purchasing Managers Index fell much more than expected, dropping from 67.6 in April to 56.6 in May, with most of the components of the index decelerating, led by production, new orders, and order backlogs. A reading above 50 depicts expansion. However, inventories moved higher and prices paid declined. Finally, the employment component decreased from 63.7 in April to 60.8 for May. Also, the Dallas Fed Manufacturing Index fell to a level depicting contraction, dropping from 10.5 in April to -7.4 for May. A reading below zero denotes contraction.

Treasuries overcame early losses and were modestly higher following the data, with the yield on the 2-year note 2 bp lower at 0.47%, the yield on the 10-year note fell 2 bps to 3.07%, and the 30-year bond yield was 3 bps lower at 4.22%.

Diminished debt worries fuel global gains

Concerns over the euro-area debt crisis eased somewhat, after the Wall Street Journal reported that Germany—which has objected to further bailout aid recently—is considering making concessions to its demands that Greece reschedule its debt before receiving new aid. Germany has not commented on the report. The head of the eurozone finance ministers, Jean-Claude Juncker said that European leaders will decide on a new aid package for Greece by the end of June, and ruled out a “total restructuring” of the nation’s debt, per Bloomberg. Also, European Union Economic and Monetary Affairs Commissioner Olli Rehn said that a restructuring of Greek debt is “not on the table.”

The improved sentiment came despite some disappointing data in the region that showed French consumer spending unexpectedly fell, while German retail sales rose at a level that missed expectations and the nation’s unemployment change declined by a smaller amount than projected. However, the eurozone May consumer price estimate unexpectedly declined, decreasing from a 2.8% year-over-year (y/y) forecasted in April to a 2.7% rise.

The positive mood over the lessened euro-area debt worries carried over to the Asia/Pacific region as well, aided by a report on industrial production out of Japan that boosted optimism about the recovery of the nation, which was hit by the massive earthquake and tsunami in March. Industrial production in Japan rose 1.0% m/m in April, after falling 15.5% in March, compared to the 2.0% increase that economists had forecasted. However, the report revealed that production in May and June are expected to be solidly higher. The report overshadowed the announcement that Moody’s Investors Service placed the nation’s sovereign credit ratings on review for a possible downgrade. Elsewhere in the region, retail sales in Hong Kong rose more than expected, but South Korea’s industrial production unexpectedly fell and business optimism decelerated for June, while India’s 1Q GDP grew at a 7.8% y/y rate, compared to the 8.3% expansion seen in the previous quarter, and the 8.1% growth that was expected.

Back in the Americas, the Bank of Canada concluded its monetary policy meeting, keeping its overnight rate at 1.00%, as expected, while adding language to its press release hinting at a potential rate increase, saying that as the economy improves, “some of the considerable monetary policy stimulus currently in place will be eventually withdrawn.”

Manufacturing in focus tomorrow

Tomorrow’s US economic calendar will yield the ISM Manufacturing Index for May, forecasted to decline to 57.2 from 60.4, and the prices paid component is expected to fall to 81.8 from 85.5. Also on tap, vehicle sales from the nation’s automakers will be reported as well as MBA Mortgage Applications.

Overseas, the economic docket will include PMI Manufacturing reports out of the eurozone, France, Germany, Italy, Spain and the UK, while France will also release unemployment figures and the UK will provide mortgage approvals. Further east, Australia will report its trade balance.