Evening Market Update

Bulls Take Charge

In the wake of better-than-expected economic data out of China and the US, stocks found their legs and sprinted to solid gains for the day. Industrial production and fixed asset investment out of China came in strong, soothing concerns of a hard landing for the Asian economy that has led the global economic recovery, and overshadowing a near three-year high in consumer inflation. Moreover, May US retail sales declined at a lower-than-expected rate and prices at the wholesale level were inline with economists’ forecasts. On the equity front, shares of J.C. Penney Co surged after announcing that Apple’s former retail executive will become its new CEO, and Best Buy bested the Street’s revenue and earnings forecasts. Meanwhile, the FDA warned cereal maker Kellogg following an inspection of a Georgia plant, and GT Solar International upped its guidance. Treasuries finished lower amid the sharp gains in stocks, largely ignoring a dip in small business sentiment and the business inventories report, but accelerating to the downside following remarks from Fed Chairman Ben Bernanke.

The Dow Jones Industrial Average gained 123 points (1.0%) to 12,076, the S&P 500 Index rose 16 points (1.3%) to 1,288, and the Nasdaq Composite added 39 points (1.5%) to 2,679. In moderate volume, 915 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil rose $2.07 to $99.37 per barrel, wholesale gasoline gained $0.06 to $3.06 per gallon, and the Bloomberg gold spot price rose $10.47 to $1,526.13 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.1% lower at 74.39.

J.C. Penney Co. Inc. (JCP $35) finished sharply higher after the department store retailer announced that Ron Johnson, the former retail Vice President at Apple Inc. (AAPL $332), has been named the company’s next Chief Executive Officer, effective on November 1, 2011. Johnson will replace Mike Ullman, III, and he will join the company’s Board of Directors in August.

Best Buy Co. Inc. (BBY $30) reported 1Q earnings of $0.35 per share, above the $0.33 consensus estimate of analysts surveyed by Reuters, with revenues increasing 1.0% year-over-year (y/y) to $10.9 billion, topping the $10.7 billion that the Street had anticipated. However, the electronics retailer said its 1Q same-store sales—sales at stores open at least 14 months—declined 1.7% y/y. The company said it continued to see double-digit growth in online sales, and “strong growth” of mobile phones. BBY gained solid ground following the report, which also included the company’s affirmation of its full-year guidance.

Kellogg Co. (K $55) was lower after the food company received a warning letter from the US Food and Drug Administration (FDA) after an inspection conducted in February revealed food bacteria known as listeria was found in a manufacturing plant in Augusta, Georgia. The FDA did not specify the type of food that is made at the facility but it said Kellogg responded to the findings of the inspection by outlining steps the company took to try to eliminate the contamination. Kellogg has not commented on the matter.

GT Solar International Inc. (SOLR $13) raised its fiscal 1Q guidance to a level above analysts’ projections as the solar-equipment company said it finished upgrades faster than expected, resulting in the accelerated completion of orders that were expected to be recognized in 2Q. Also, the company said given the “significant” number of orders it has received thus far, it expects backlog at the end of the year to be well above its previous forecast. Shares were higher.

Retail sales better than forecasted, while wholesale prices match expectations

Advance retail sales for May declined 0.2% month-over-month (m/m), compared to the 0.5% decline that was forecasted by economists surveyed by Bloomberg, but April’s 0.5% gain was revised to a 0.3% advance. May sales ex-autos rose 0.3%, above expectations of a 0.2% increase, while April’s 0.6% rise was revised to a 0.5% gain. Sales ex-autos and gas advanced 0.3% in May, versus the 0.2% increase that was anticipated, and its April figure was revised from a 0.2% increase to a 0.3% gain.

Purchases excluding autos, gasoline and building materials, the figure used to calculate gross domestic product, increased 0.2%, the smallest increase this year, after increasing 0.3% in April. Six of the thirteen categories declined, paced by a 2.9% fall in the auto and parts sector. Consumer spending has suffered a dent from rising energy prices, and purchases at gasoline stations are up 22.3% y/y.

Elsewhere, the Producer Price Index showed prices at the wholesale level rose 0.2% m/m in May, after increasing by an unrevised 0.8% in April, and slightly above the forecast of economists, calling for a 0.1% rise. Food prices fell 1.4% m/m, while energy rose 1.5%, and the core rate, which excludes food and energy, gained 0.2% m/m, matching forecasts, after increasing an unadjusted 0.3% in April. On a year-over-year basis, headline producer prices were 7.3% higher, versus the 6.8% increase that was projected, and the core rate was up 2.1%, inline with expectations. Inflation can have a significant impact on consumer spending and corporate profits and tomorrow’s Consumer Price Index (CPI) report will round out the inflation picture, forecasted to show a 0.1% m/m increase in May after rising 0.4% in April, while ex-food and energy it is expected to rise 0.2%.

In other economic news, the NFIB Small Business Optimism Index declined by a smaller amount than expected, decreasing from 91.2 in April to 90.9 in May, compared to the expectation of economists, which called for the index to decline to 90.5. The decrease came as the number of firms reporting expectations of higher sales dipped, along with plans to increase capital spending, while plans to increase inventory and hiring both declined and are in negative territory. The deterioration in the above components was partially offset by improvements in expectations of higher selling prices and expectations of a better economy.

Finally, business inventories increased 0.8% m/m in April, compared to the 0.9% gain that was expected, while March’s 1.0% growth was revised to a 1.3% advance. Sales ticked 0.1% higher, causing the inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—to increase to 1.26 months, from an upwardly revised 1.25 months in March.

Federal Reserve Chairman Ben Bernanke spoke at the annual conference of the Committee for a Responsible Federal Budget. In his speech, Bernanke reiterated the need for fiscal sustainability, in which the ratio of federal debt to national income is stable and moving lower over the longer term. Bernanke said that maintaining the status quo was not an option and that while fiscal adjustments to stabilize the budget are necessary, using the debt-limit deadline as a tool to force the necessary fiscal policy adjustments was wrong. He added that, “Failing to raise the debt ceiling in a timely way would be self-defeating,” and could cause severe market disruptions and “damage the special role of the dollar and Treasury securities in global markets.”

Treasuries finished lower following the data, accelerating to the downside following Bernanke’s speech. The yield on the 2-year note was up 6 bps to 0.46%, the yield on the 10-year note was 12 bps higher at 3.10%, and the 30-year bond yield advanced 10 bps to 4.30%.

International markets boosted by US and Chinese economic data

A plethora of economic data out of China soothed concerns that recent monetary policy tightening by the Chinese government could induce a hard landing of the Asian economy. The Asian nation’s industrial production gained 13.3% y/y in May, after increasing 13.4% in April, and above the 13.1% rise that economists had expected. Moreover, separate reports showed retail sales gained 16.9% y/y in May, roughly inline with expectations, while fixed asset investment rose 25.8%, above the 25.2% increase that was anticipated. Finally, inflation data released showed consumer prices were up 5.5% y/y in May, an increase from the 5.3% rise that was seen in April and the highest rate in almost three years, inline with expectations, while producer prices remained 6.8% higher than the same period a year ago, exceeding the 6.5% that was anticipated.

However, the stronger-than-expected industrial production, fixed asset investment, and elevated inflation data prompted the Chinese central bank to announce after the close of trading that it will increase its bank reserve requirement—the amount of funds the nation’s largest banks will need to keep out of the financial system—by 50 basis points to 21.5%, the ninth increase in the reserve requirement since last October. Elsewhere in the Asia/Pacific region, the Bank of Japan left its benchmark interest rate near zero, as widely expected, and India’s wholesale prices rose more than expected in May.

In Europe, the favorable data out of the US and China also boosted sentiment, despite the overhanging euro-area debt crisis, which was exacerbated by Standard & Poor’s cutting Greece’s sovereign debt rating by three levels yesterday, citing “a significantly higher likelihood of one or more defaults.” S&P also maintained a negative outlook for Greece. Economic news across the pond was light, with a report showing UK consumer prices rose mostly inline with expectations, but the core rate came in slightly cooler than economists estimated, while a separate reading showed UK home prices deteriorated more than forecasted.

Industrial production and manufacturing data on tap tomorrow

In addition to tomorrow’s hard data on retail inflation, we will also get key reads on manufacturing activity and a gauge of potential inflationary pressures that may be in the pipeline. The Empire Manufacturing Index is expected show activity in the New York Region accelerated slightly from 11.88 in May to 12.00 in June, with a reading above zero depicting expansion. Moreover, we will get the release of industrial production and capacity utilization for May, with production forecasted to increase 0.2% m/m and utilization to tick higher from 76.9% in April to 77.0%, still nearly 3.5 percentage points below its average from 1972-2010. 

Internationally, the economic calendar will yield CPI figures from France, home prices out of Spain, employment numbers from the UK, and eurozone industrial production. Further east, Japan will report machine tool orders.