Evening Market Update

Equities Falter As Fed Chairman Begins to Speak

After spending most of the day in the green, stocks finished lower, losing steam as Federal Reserve Chairman Ben Bernanke began speaking just minutes before the closing bell. Bernanke reiterated the Fed’s stance on monetary policy, while continuing to say that inflation and the economic slowdown, while concerning, appear to be transitory. In equity news, International Paper launched a hostile bid to acquire all of the outstanding shares of Temple-Inland for $30.60 per share in cash, or about $3.3 billion, Ford Motor Co is expected to announce an upbeat worldwide sales forecast, while Cablevision System’s board approved the spin-off of one of its units. Treasuries pared losses following the late-afternoon release of consumer credit, which showed its seventh monthly increase, and accelerated to the upside on the Fed Chairman’s speech. 

The Dow Jones Industrial Average lost 19 points (0.2%) to 12,071, the S&P 500 Index declined 1 point (0.1%) to 1,285, and the Nasdaq Composite also fell by 1 point (0.0%) to 2,702. In moderate volume, 935 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.08 to $99.08 per barrel, wholesale gasoline rose $0.04 to $2.99 per gallon, while the Bloomberg gold spot price fell $0.85 to $1,543.73 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.5% lower at 73.57.

International Paper Co. (IP $30) announced that it has proposed to acquire all of the outstanding shares of Temple-Inland (TIN $29) for $30.60 per share in cash, or about $3.3 billion, representing a premium of 46% compared to yesterday’s closing price. The Board of TIN rejected that offer, saying the proposal “grossly undervalues the company,” and IP said it is “very disappointed” with the response and is prepared to consider all alternatives to successfully complete this transaction. IP was nicely higher, while TIN gained over 40%.

Ford Motor Co. (F $14) moved higher as the automaker is expected to reveal at its annual investor meeting a forecast for 50% growth in worldwide sales in the next four years, with a majority of the growth coming from China and other Asian countries. Also, the company is expected to say that small vehicle sales will represent about 55% of its total sales by 2020, with nearly a third coming from the Asia-Pacific/Africa region. Separately, Ford announced that May sales in China rose 14% year-over-year (y/y). Meanwhile, fellow US automaker, General Motors Co. (GM $29) announced that its May China sales declined 2.7% y/y. GM also traded higher.

Cablevision Systems Corp. (CVC $36) announced that its Board of Directors approved the spin-off of its Rainbow Media unit as a separate publicly-traded company to be named AMC Networks Inc. by the end of June. AMC Networks will include channels such as the Sundance Channel and AMC, which is home to the Emmy-award winning drama Mad Men. CVC founder Charles Dolan will become the executive chairman of the new firm, while current Rainbow Media CEO Josh Sapan will become president and CEO of AMC Networks. Shares of CVC traded higher on the news.

Fed Chief Bernanke speaks, consumer credit rises

Federal Reserve Chairman Ben Bernanke spoke at the International Monetary Conference in Atlanta, regarding the outlook for the US economy. In his speech he noted that economic growth “looks to have been somewhat slower than expected” and that “supply chain disruptions associated with the earthquake and tsunami in Japan are hampering economic activity.” However, he added that the effects of the Japanese disaster will likely diminish going forward, and with some moderation in gasoline prices, the economy looks to “pick up somewhat in the second half of the year.” On inflation, the Chairman said that while the recent increase in inflation was of concern, there is a lack of evidence that it is becoming broad-based with increases in the price of gasoline to blame for the bulk of the recent increase in consumer price inflation, and that the rise in prices appears to be transitory. Bernanke also reiterated the Fed’s stance on monetary policy, saying accommodative monetary policies are still needed and “until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established."

Consumer credit was released in the final hour of trading, showing that consumer borrowing rose by $6.25 billion during April, above the $5.0 billion expected by economists surveyed by Bloomberg, and the seventh consecutive monthly increase. March’s figure was revised downward to a $4.82 billion increase from an initially-reported $6.02 billion gain. Revolving debt, which includes credit cards, declined by $944 million, while non-revolving debt, which includes loans for cars and mobile homes, rose $7.19 billion.

Treasuries pared losses following the last-hour consumer credit report and moved higher as Bernanke began to speak, with the yield on the 2-year note 3 bps lower at 0.40%, the yields on the 10-year note and 30-year bond were down 1 bp to 2.99% and 4.25%, respectively.

Europe higher on some positive data, but Greek debt anxiety remains

Sentiment in Europe was mostly positive, courtesy of some upbeat economic data, but uncertainty surrounding Greece’s debt situation continued to limit conviction. The economic docket across the pond provided some optimism amid the growing global economic recovery uneasiness, despite a report that showed UK home prices increased at a smaller rate than expected, highlighted by a report that showed factory orders in Germany—Europe’s largest economy—rose 2.8% month-over-month (m/m) in April, after falling a favorably revised 2.7% in March, and compared to the 2.0% increase that economists had anticipated. The April year-over-year (y/y) growth rate in German factory orders came in at a 10.5% increase, versus the 9.0% gain that was projected. Also, a separate report showed eurozone retail sales rose 0.9% m/m in April, well above the 0.3% increase that was estimated, with the y/y rate coming in 1.1% higher, compared to the flat reading that economists anticipated.

Meanwhile, investors continued to grapple with an acceptable plan to help the debt-laden nation of Greece solve its financial crisis, with uncertainty remaining as to whether bondholders may be forced to share in the losses if any restructuring occurs, even as European Central Bank (ECB) President Jean-Claude Trichet noted yesterday that he is against imposing losses on creditors, per Bloomberg. However, a senior official at the International Monetary Fund (IMF) warned that a restructuring scenario for Greek debt, including a reprofiling or rollover of the debt, could lead to a situation that “we really do not know whether we will be able to control,” according to the Dow Jones Newswires. The IMF official suggested that the preferred method for Greece to get out of its debt burden is by continuing with its fiscal and economic reforms.

Economic news in Asia was very light, with Japan reporting that its Leading Index declined slightly more than expected for April. Meanwhile, the Reserve Bank of Australia kept its benchmark interest rate unchanged at 4.75% for the sixth-straight meeting, noting that inflation will be close to target over the next twelve months.

Fed Beige Book slated for tomorrow

Tomorrow, the US economic calendar will be relatively busier, as the Federal Reserve will release its 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 June 21-22. In the April report, moderate economic improvement was noted, but some contacts voiced uncertainties about the future outlook due to the disruptions out of Japan, the geopolitical climate and “ambiguity about US government spending plans.” We should get a better idea of the magnitude of the Japanese disruptions in tomorrow’s report, and after Friday’s dismal labor data, we will likely get more evidence suggesting whether this was a hiccup in job creation or symptoms of a soft patch in the economy. The job report last week severely missed economists’ expectations, which may have been boosted by the strongest part of April’s Beige Book and the commentary regarding jobs, with four Districts citing examples of concern among contacts about “being able to obtain certain types of skilled workers,” and most Districts reporting signs of improvement in at least some parts of their labor markets.

Tomorrow’s US economic calendar will also include MBA Mortgage Applications.

Overseas, the economic docket will remain fairly light and include eurozone retail sales and GDP, France’s trade balance, Germany’s industrial production and trade balance, and home loan figures out of Australia.