Evening Market Update

Higher Oil Prices and Slowing Growth Weigh

Stocks fell in today’s trading, as investors continue to weigh slowing economic growth reported by the Fed’s Beige Book in midday trading, as well as Fed Chair Bernanke’s speech late yesterday, along with the threat of higher oil prices as the OPEC meeting unexpectedly concluded with no hike in production quotas. Treasuries rose as a result of the weakened read on the economy and fall in stocks, while a drop in mortgage applications had little impact on trading. In equity news, Dow member McDonald’s Corp announced disappointing May same-store sales, Ciena Corp missed expectations and lowered guidance, and Citigroup Inc announced an agreement to sell a portfolio of private equity assets to European insurer AXA SA for $1.7 billion. Elsewhere, financials were pressured after a proposal to delay new rules for debit-card fees was defeated.

The Dow Jones Industrial Average lost 21 points (0.2%) to 12,049, the S&P 500 Index declined 5 points (0.4%) to 1,280, and the Nasdaq Composite dropped 26 points (1.0%) to 2,675. In moderate volume, 1.0 billion shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil gained $1.65 to $100.74 per barrel, while wholesale gasoline fell $0.01 to $2.98 per gallon, and the Bloomberg gold spot price fell $6.64 to $1,537.49 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.6% higher at 73.95.

Dow member  McDonald’s Corp. (MCD $81) reported May global same-store sales—sales at stores open at least thirteen months—increased 3.1% year-over-year (y/y), which was below analysts’ projections, as US and European sales both rose by smaller-than-estimated 2.4% and 2.3%, respectively. Elsewhere, the world’s largest fast-food chain said its Asia/Pacific, Middle East and Africa unit saw a sales gain of 4.3%. Shares closed higher, overcoming early losses.

Shares of Ciena Corp. (CIEN $20) fell over 15% after the networking equipment provider reported an adjusted fiscal 2Q net loss of $0.24 per share, compared to the loss of $0.11 per share that analysts surveyed by Reuters had expected. Also, the company’s revenues of $418 million were below the $428 million that the Street had forecasted. Moreover, the company issued 3Q revenue guidance that missed analysts’ projections.

Citigroup Inc. (C $38) announced that it has reached an agreement to sell a $1.7 billion portfolio of limited partnership interests in private equity buyout funds and a portfolio of direct stakes in companies to European insurer AXA SA’s (AXAHY $21) AXA Private Equity unit. Citigroup said the sale marks the completion of a significant share of Citi Holdings’ proprietary private equity investments and demonstrates the progress it is making in reducing non-core assets on its balance sheet. C was down slightly.

A proposal to delay the implementation of new debit-card transactions fee rules was defeated tin the US Senate in mid-day trading, causing banks and shares of Visa Inc (V $77) and MasterCard Inc (MA $270) to fall, but shares closed off the lows of the day. As a result, the fees banks charge merchants are set to decline when they go into effect next month as scheduled.

Mortgage applications dip, oil rises, and Beige Book notes moderate slowing

The MBA Mortgage Application Index decreased slightly, dipping by 0.4% last week, after the index that can be quite volatile on a week-to-week basis, declined by 4.0% in the previous week. The decrease came as a 1.3% increase in the Refinance Index, with the average 30-year mortgage rate declining by 4 basis points (bps) to 4.54%, offsetting a 4.4% drop in the Purchase Index.

In other economic news, crude oil prices reversed early losses and moved higher after the meeting of ministers from the Organization of Petroleum Exporting Countries (OPEC) concluded without a decision on production quotas due to disagreements, while the market was expecting a quota increase. As a result, OPEC said it will maintain its current output, while Saudi Arabia said it would “meet demand” regardless of OPEC’s decision. Oil prices remained higher after the Department of Energy (DOE) announced that crude oil inventories fell more than expected, while gasoline stockpiles rose more than forecasted. Gas prices pared early gains and fell modestly.

The Federal Reserve Beige Book was released mid-day, 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. The report noted that economic activity generally continued to expand since the last report, though a few Districts indicated some deceleration. Manufacturing activity was seen as continuing to expand in most parts of the country, but a number of Districts noted some slowing, while the non-financial service sector activity expanded at a steady pace, led by information technology and business and professional services. On consumer spending, the reaction across the nation was mixed, with signs of steady-to-modestly increased activity, while elevated food and energy prices, as well as unfavorable weather in some parts of the country, were said to be “weighing on consumers’ propensity to spend.” The auto sector saw widespread supply disruptions—primarily related to the disaster in Japan—that “substantially” reduced auto inventories, which “held down sales in some Districts.” Also, two Districts reported that disruptions in Japan “had adverse effects on business” in the high-tech industry.

On employment, most Districts reported “gradual improvement in labor market conditions,” with demand for permanent and temporary-to-permanent hiring increasing in four Districts, and six Regions indicating that conditions have “tightened for workers with specialized technical skills.” Wage pressures were reported to be largely contained in most Districts, as abundant labor availability has continued to limit the pace of wage growth. Regarding inflation, input prices continued to increase, although the pace slowed in Chicago and Kansas City. Also, while Boston noted firms were able to pass along price increases, several Districts noted only a limited ability to pass through higher input costs to their customers, with manufacturing being more successful than retail or construction firms. Additionally, lending activity was categorized as mixed or slightly improved since the last report, and credit standards were reported as mixed but, on balance, a bit easier in recent weeks. Finally, the real estate market showed continued weakness in most Districts, with home prices declining since the last report.

While the Beige Book was inline with comments from Fed Chair Bernanke yesterday, Treasuries rose as stocks fell, with the yield on the 2-year note down 2 bps to 0.38%, the yield on the 10-year note falling 5 bps to 2.95%, and the 30-year bond yield declining 7 bps to 4.19%.

German data disappoints while Japan a bright spot, progress reported on Greece

Economic data in Europe was focused on some disappointing data out of Germany—Europe’s largest economy—as German exports fell more than expected in April, while a separate report showed the nation’s industrial production unexpectedly declined month-over-month (m/m) in April. In other economic news, 1Q eurozone GDP was left unrevised at a 0.8% quarter-over-quarter (q/q) rate of expansion, matching economists’ expectations. Euro-area debt concerns remained to stymie stocks across the pond, with interest rates in debt-laden Greece moving higher as traders continued to grapple with the impact of a possible restructuring of the country’s debt holdings. The German Finance Minister called for an extension of maturities of outstanding Greek sovereign bonds by seven years, according to a report in a German newspaper that was confirmed by Dow Jones Newswires, and several major international banks voiced support for the maturity extension. Additionally, Dow Jones Newswires reported that a new package to provide an additional 100 billion euros over the next three years was being discussed, according to officials familiar with the matter. The official said that the plan would include 40 billion euros from new European Union (EU) and International Monetary Fund (IMF) sources, 30 billion euros from privatization of state assets, and 30 billion euros from the extension of Greek bond maturities. The final package is expected at a meeting of EU finance ministers on June 20.

The highlight in Asian economics was a positive survey of economists in Japan, which showed sentiment toward the current and future economic environment in Japan improved. Elsewhere, South Korea revised its 1Q GDP figure slightly lower from an initial 1.4% q/q rate of growth to a 1.3% pace of expansion.

Tomorrow’s economic data to focus on central banks globally

Monetary policy globally will be the focus tomorrow as the central banks of New Zealand, Brazil, Indonesia, the Bank of England and the European Central Bank (ECB) all meet to discuss policy. Only Brazil is expected to raise rates but many traders will be paying close attention to ECB President Trichet’s comments at the press conference after the ECB meeting, to see if he mentions a “strong vigilance” stance towards inflation that most ECB watchers see as a precursor to an imminent increase in rates.

Releases on the US economic calendar include initial jobless claims, the trade balance, and wholesale inventories, while elsewhere in the Americas, Mexico releases its trade balance and consumer prices. Other international releases scheduled include French non-farm payrolls, the UK trade balance, Japan’s final 1Q GDP and consumer confidence and Australia’s employment.