Evening Market Update

Stocks Fall Sharply on Global Recovery Fears

The US equity markets finished a forgettable day solidly in the red and at session lows, as a plethora of economic releases followed a growing trend of missing expectations and disappointing investors. The sentiment-sinking data today came in the form of a larger-than-forecasted deceleration in US manufacturing and a smaller-than-expected rise in the ADP private sector payroll report, which also cast doubt on the expectations for Friday’s broader nonfarm payrolls release. Treasuries moved higher on the data, which also included a decline in mortgage applications and a rise in construction spending. The US equity front was highlighted by a strong same-store sales report from Macy’s Inc, a better-than-forecasted profit report from Phillips-Van Heusen, and an earnings miss from Dollar General Corp. The major automakers reported their May US sales results, with most US manufacturers reporting declines that met expectations, while Japanese companies saw a sharp decline. In M&A news, Marathon Oil reached an agreement to purchase Eagle Ford shale assets in Texas from Hilcorp Resources Holdings for about $3.5 billion, while Sealed Air agreed to acquire Diversey Holdings for about $2.9 billion.

The Dow Jones Industrial Average plunged 280 points (2.2%) to 12,290, the S&P 500 Index fell 31 points (2.3%) to 1,315, and the Nasdaq Composite declined 66 points (2.3%) to 2,769. In heavy volume, 1.2 billion shares were traded on the NYSE and 2.3 billion shares changed hands on the Nasdaq. WTI crude oil fell $2.53 to $100.17 per barrel, wholesale gasoline fell $0.05 to $3.00 per gallon, while the Bloomberg gold spot price rose $2.42 to $1,538.15 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.4% higher at 74.79.

Macy’s Inc. (M $28) reported that May same-store sales—sales at stores open at least a year—rose 7.4% year-over-year (y/y) as it continued to see “very strong sales results in May” as every region met or exceeded its aggressive expectations. Analysts surveyed by Reuters had forecasted the department store to achieve a 5.6% increase in sales. The company raised its 2Q same-store sales guidance. M traded lower amid the broad-based decline in the equity markets. Most of the nation’s other retailers will release their May same-store sales tomorrow.

Phillips-Van Heusen Corp. (PVH $66) reported 1Q EPS ex-items of $1.23, above the $1.16 consensus estimate of analysts, with revenues jumping 121% y/y to $1.4 billion, above the $1.3 billion that the Street was looking for. The revenue increase included $715 million in sales from its Tommy Hilfiger unit, which it acquired in 2Q 2010, while its Calvin Klein business saw “strong performance across virtually all product categories.” PVH raised its full-year outlook and issued 2Q guidance that exceeded analysts’ forecasts. Shares were modestly higher.

Dollar General Corp. (DG $32) reported 1Q earnings ex-items of $0.48 per share, compared to the $0.58 projection of analysts, with revenues increasing 10.9% y/y to $3.5 billion, exceeding the $3.4 billion that the Street had anticipated. 1Q same-store sales rose 5.4% y/y. The discount retailer reaffirmed its full-year outlook. Shares finished solidly lower.

General Motors Co. (GM $31) reported a 0.5% y/y decline in May US sales of its core brands—Buick, GMC, Cadillac, and Chevrolet, and Ford Motor Co. (F $14) announced that its May sales dipped 0.1% y/y. Meanwhile, Chrysler reported a 10.1% increase in May sales, due mainly to strong sales in its Jeep brand. Shares of all three retailers finished lower.

Japanese automakers fared far worse in May, as inventory shortages from the March earthquake had a substantial affect on sales in the US. Toyota Motor Corp. (TM $82) reported a 33.4% y/y decline in May sales, while Honda Motor Co. (HMC $38) and Nissan Motor Co. (NSANY $20) reported declines of 16% and 9.1%, respectively.

In M&A news, Marathon Oil Corp. (MRO $53) announced that it has reached a definitive agreement with Hilcorp Resources Holdings to purchase its assets in the Eagle Ford shale formation in Texas for about $3.5 billion. Hilcorp Resources Holdings is a partnership between Hilcorp Energy Co. and KKR & Co. (KKR $17). MRO traded lower, while KKR was modestly higher. Elsewhere, Sealed Air Corp. (SEE $24) reported that it has entered into a definitive agreement to acquire global cleaning and sanitization company Diversey Holdings Inc. for cash and stock valued at about $2.9 billion. Shares of SEE moved lower.

Manufacturing and employment data disappoints, while construction spending increases

The ISM Manufacturing Index fell sharply in May to 53.5 from 60.4 in April, the lowest level in the past 12 months and below the decline to 57.1 that was forecasted. However the index remains above the 50 level that denotes expansion, and indicates the overall economy continues to grow. The decline came as new orders fell to 51.0 from 61.7, production decreased to 54.0 from 63.8, and employment fell to 58.2 from 62.7. There were no components within the report that rose during the month, but most remained in expansion territory. Inventories fell, but at a slower pace than new orders, indicating a sluggish environment. While the prices paid component fell to 76.5 from 85.5, below the 81.5 forecasted, the Committee that compiles the survey said that manufacturers continue to experience “significant cost pressures from commodities and other inputs.”

Meanwhile, the  ADP Employment Change Report showed private sector payrolls rose by 38,000 jobs in May, versus the forecast of economists surveyed by Bloomberg, which called for a 175,000 increase, and April’s 179,000 job gain was revised to a rise of 177,000 jobs. The release does not include government hiring and firing and comes ahead of Friday’s broader nonfarm payrolls report, where economists expect an increase of 170,000 jobs in May, after posting a 244,000 increase in April. Excluding government hiring, May private sector payrolls are expected to increase 185,000, after expanding by 268,000 in April.

In other economic news, construction spending  rose more than expected in April, rising 0.4% month-over-month (m/m), versus the 0.3% increase forecasted by economists, but March’s initially reported increase of 1.4% was revised to a 0.1% gain. Residential spending led the advance, increasing 3.1%, more than offsetting a 0.8% decline in nonresidential spending.

Finally, the  MBA Mortgage Application Index declined by 4.0% last week, after the index that can be quite volatile on a week-to-week basis, rose by 1.1% in the previous week. The decrease snaps a four-week winning streak and came as the Refinance Index fell 5.7%, while the Purchase Index was unchanged and the average 30-year mortgage rate declined by 11 basis points (bps) to 4.58%.

Treasuries moved higher on the deluge of disappointing economic data, as the yield on the 2-year note fell 3 bps to 0.44%, the yield on the 10-year note declined 11 bps to 2.95%, and the 30-year bond lost 9 bps to 4.14%.

International data disappoints, Moody’s downgrades Greece further into junk territory

In European economic news, the euro-zone PMI Manufacturing Index was revised lower from 54.8 in the preliminary report for May, to 54.6, compared to an unrevised expectation of economists. The downward revision to the gauge of manufacturing activity came as figures out of Germany and France were adjusted to the downside, while Italy’s manufacturing report showed a larger-than-forecasted deceleration. Adding to the soured sentiment, the UK PMI Manufacturing Index declined by a larger amount than anticipated. In other economic news, UK mortgage approvals rose at a smaller rate than projected, while France’s unemployment rate increased unexpectedly in 1Q. Late in the US trading day, Moody’s announced that it has downgraded Greece’s local and foreign bond ratings to Caa1 from B1, and assigned a negative outlook to the ratings. The rating agency cited an increased risk of debt restructuring, “highly uncertain” growth prospects and missed targets in budget reforms as reasons for the downgrade further into junk territory. In response, the Greek government said the downgrade did not take into account efforts made to meet targets and expedite privatizations.

In Asia/Pacific, Australia reported that its 1Q GDP contracted by 1.2% quarter-over-quarter (q/q), after expanding by an upwardly revised 0.8% in 4Q, compared to the 1.1% decline that economists anticipated. Year-over-year, the nation’s output grew 1.0%, matching expectations. Elsewhere, reports out of China showed that manufacturing activity slowed in May, with the PMI Manufacturing Index decelerating from 52.9 in April to 52.0, while HSBC’s separate release showed manufacturing slowed from 51.8 to 51.6. Finally, South Korea’s automakers posted sales in May that declined, while a separate report showed South Korean exports rose at a smaller-than-estimated rate.

The US economic calendar will slow down tomorrow after a busy day today, with the headline release being April factory orders, expected to fall 1.0% after rising 3.0% in March. Weekly initial jobless claims will also be reported, with expectations of a decline to 417,000 from 424,000.

The international economic docket will be quiet tomorrow, as the only releases are Japanese capital spending, Australia’s trade balance and retail sales, Brazil’s CPI and UK PMI construction.