Evening Market Update

Events in Greece Send Stocks Reeling

Disappointing US economic data weighed on US equities from the start, but a turn of events in Greece added considerable pressure to the markets and stocks finished the day in a sea of red. Consumer prices came in hotter-than-expected, industrial production was flat, and the month’s first read on manufacturing activity fell sharply to stymie sentiment early. However, European ministers failed to agree on new aid to Greece, while anti-austerity protests in the debt-laden nation erupted, prompting Prime Minister Papandreou to first offer his resignation as a way to find unity, then saying he would reshuffle his government and seek a confidence vote from parliament, sending investors running for the exits. As a result, the US dollar was sharply higher versus the euro, severely pressuring crude oil prices. Treasuries finished markedly higher amid the negative sentiment and data, while housing data was mixed with mortgage applications rising and homebuilder sentiment deteriorating further. Corporate news was light, having little impact on the markets, as Scotts Miracle-Gro Co cut full-year guidance blaming unfavorable weather in the US, and Owens-Illinois warned of lackluster 2Q results, citing higher manufacturing costs.

The Dow Jones Industrial Average dropped 179 points (1.5%) to 11,897, the S&P 500 Index fell 22 points (1.7%) to 1,265, and the Nasdaq Composite plunged 47 points (1.8%) to 2,631. In moderate volume, 1.1 billion shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil was sharply lower, falling $4.56 to $94.81 per barrel, wholesale gasoline tumbled $0.14 to $2.92 per gallon, while the Bloomberg gold spot price rose $7.70 to $1,532.10 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—jumped 1.7% to 75.60.

Scotts Miracle-Gro Co. (SMG $49) reduced its full-year guidance to “reflect the continued challenges of unfavorable weather in most of the United States.” The consumer lawn and garden products company said, “we simply don’t have enough time left in the season” to offset the unusually challenging weather patterns as through mid-June consumer purchases are still below last year’s levels in nearly every major market in the northern and western United States. SMG expects revenues to be inline with its performance last year as it reported sales of $3.1 billion and EPS is expected to be between $3.10-3.20, down from a range of $3.60-3.70 that it had previously estimated. Analysts surveyed by Reuters were expecting the company to report revenues of about $3.0 billion and EPS of $3.40. Shares were solidly lower.

Shares of Owens-Illinois Inc. (OI $26) came under solid pressure after the manufacturer of glass containers said challenging market conditions in Asia/Pacific and higher manufacturing costs will negatively impact its 2Q results. OI said entering the period, it anticipated 2Q results would be inline with the prior year but it now expects 2Q adjusted net earnings will be down from the prior year period.

Consumer prices exceed forecasts, NY manufacturing falls, while production mostly flat

The Consumer Price Index showed prices at the consumer level were up 0.2% month-over-month (m/m) in May, above the forecasts of economists surveyed by Bloomberg, calling for a 0.1% increase, with April’s 0.4% increase unrevised. Meanwhile, the core rate, which strips out food and energy, was 0.3% higher m/m in May, exceeding estimates of a 0.2% increase, with April’s 0.2% increase being left unrevised. On a y/y basis, consumer prices were 3.6% higher in May, up from 3.2% in April, and the core CPI was 1.5% higher y/y, after rising by 1.3% in April. Economists expected headline CPI to come in at 3.4% and a core rate of 1.4% y/y. Food prices rose in May, while energy prices declined, with gasoline costs falling for the first time since last June, offsetting a gain in household energy. Moreover, prices for items excluding food and energy posted its largest increase since July 2008.

Elsewhere, industrial production in May rose 0.1% m/m, slightly below the expectation for a rise of 0.2%, and April’s flat reading was left unadjusted. May’s advance was led by solid increases in production of business equipment—snapping a string of two monthly declines—home electronics, and appliances. The increases offset a 0.5% decline in auto production, due to supply chain disruption from the quake and tsunami in Japan, adding to the sharp drop seen in April. Capacity utilization remained unchanged at a downwardly revised 76.7%, remaining 3.7% below its average rate from 1972 to 2010.

Meanwhile, the Empire Manufacturing Index, a measure of manufacturing in the New York region, fell sharply in June, dropping to -7.79 from May’s level of 11.88, compared to the estimates of economists, which expected a modest improvement to 12.00. A reading below zero denotes a contraction in activity, and the drop was attributed to steep declines in new orders and shipments, which both fell precipitously below zero, while prices paid also posted a solid decline. The report is the first major piece of data looking at manufacturing conditions in June.

In other economic news, the MBA Mortgage Application Index rose solidly, increasing by 13.0% last week as a 16.5% jump in the Refinance Index, was accompanied by a 4.5% gain in the Purchase Index, and the average 30-year mortgage rate declined by 3 basis points (bps) to 4.51%. Additionally, the NAHB Housing Market Index, a gauge of homebuilder sentiment, unexpectedly fell in June, declining to 13 from 16 in May where it was expected to remain, with any reading below 50 indicating more respondents feel conditions are poor.

Treasuries finished higher, accelerating to the upside on the turn of events in Greece, with the yield on the 2-year note 6 bps lower to 0.39%, the yield on the 10-year note dropping 13 bps to 2.97%, and the 30-year bond rate falling 9 bps to 4.20%.

Events erupt in Greece

Sentiment across the pond was negative as concerns about the euro-area debt crisis re-emerged, with the focus on Greece taking center stage. The uneasiness, which stymied yesterday’s broad-based advances that came from improved global economic sentiment on favorable data out of the US and China, came as European officials failed to agree on a plan to provide a second wave of financial aid to the troubled nation of Greece, with the dissension among eurozone finance ministers centered around the involvement of private creditors of Greece. Meanwhile, protests in Greece, in opposition toward the nation’s needed austerity measures to receive eurozone bailout funds, erupted and exacerbated sentiment across the pond, prompting Greek Prime Minister Papandreou to offer his resignation in order to pave the way for a national unity government, according to Reuters. However, later in the day, the Wall Street Journal reported that Papandreou said he will remain as Prime Minister, but will reshuffle the government and seek a confidence vote from parliament tomorrow after talks with opposition parties failed to form a unity government. Moreover, Moody’s Investors Service placed the top three banks of France on review for a possible downgrade, due to their exposure to Greece’s debt crisis.

Elsewhere, economic data took a back seat to the festering debt uneasiness, overshadowing reports that showed UK consumer confidence improved by a larger amount than expected, while eurozone industrial production in April unexpectedly increased. In other economic news, UK jobless claims rose by a larger-than-anticipated amount, and French consumer prices increased inline with forecasts.

In the Asia/Pacific region, the mood was mixed with Japanese markets higher after the Bank of Japan released its monthly economic report, showing that while the nation’s economy continues to face downward pressure from the earthquake and tsunami, it noted that there were some signs of improving economic activity. Elsewhere, Reserve Bank of Australia Governor Stevens said that a rate hike could still be on the table as inflationary pressures persist, while a report showed that consumer confidence in the land down under deteriorated.

Housing market in view tomorrow

Tomorrow’s read on housing starts is expected to rise 4.2% m/m in May to an annual rate of 545,000 units after dropping 10.6% in April, while building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, are forecasted to fall 1.1% m/m at 557,000 units on the heels of April’s 4.0% decline. The housing market continues to be plagued by the overhang of foreclosures, which have pressured prices and hurt the competitiveness of new homes, and homebuilder sentiment is moribund.

Buyer confidence has also remained low due to continued price declines, despite record affordability due to low rates and the fall in prices. A key to improvement in the housing market is likely tied to a healthier jobs market, and the high level of unemployment and combined with over 28% of mortgages under water, is weighing on sentiment. Corporate confidence also remains fragile and likely needs to improve for more significant gains in jobs. In addition to weak demand and increased regulation, the current debate over the debt ceiling is contributing to the uncertainty by corporate managers.

Other releases on the US economic calendar include initial jobless claims, expected to fall to 420,000 from 427,000 the prior week, and the Philadelphia Fed’s Business Activity Index, which is expected to rise to 7.0 in June from 3.9.

International releases will include euro-zone and Italian CPI, UK retail sales, and the Conference Board’s leading index for China. The central bank of Switzerland is expected to keep rates unchanged, while India’s central bank is forecasted to raise the reverse repo rate by 25 bps to 6.50% but keep the cash reserve ratio unchanged at 6.0%, and Brazil’s central bank releases the minutes from their last meeting.