Evening Market Update

Stocks Take a Late Dip as Fed Acknowledges Slowing Recovery

The US equity markets finished lower today, after showing little initial reaction to the conclusion of the Federal Reserve’s two-day policy meeting, in which the Central Bank maintained its current policy stance. Stocks lost ground late in the afternoon, following the now-customary press conference by Fed Chair Ben Bernanke, and after the Fed cut its 2011 growth expectations, while increasing unemployment projections. Treasuries rebounded following the Fed release and press conference to finish the day unchanged, while the only report from the domestic economic front was a decline in US mortgage applications. In equity news, FedEx beat the Street’s 4Q estimates and issued favorable guidance, Adobe Systems missed bottom-line expectations and offered a weak 3Q outlook, while CarMax exceeded the 1Q projections of analysts. On the M&A front, UK-based AstraZeneca Plc agreed to sell its dental implants unit to US-based DENTSPLY International for $1.8 billion in cash. The US dollar moved slightly higher, as international focus continued to be on the Greek debt crisis, following yesterday’s confidence vote in favor of the country’s leadership.

The Dow Jones Industrial Average fell 80 points (0.7%) to 12,110, the S&P 500 Index lost 8 points (0.6%) to 1,287, and the Nasdaq Composite declined 18 points (0.7%) to 2,669. In moderate volume, 853 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.58 to $94.75 per barrel, wholesale gasoline rose $0.08 to $2.96 per gallon, and the Bloomberg gold spot price was $2.75 higher at $1,549.03 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.3% higher at 74.88.

FedEx Corp. (FDX $91) reported fiscal 4Q EPS of $1.75, three cents above the consensus estimate of analysts surveyed by Reuters, with revenues growing 12% year-over-year (y/y) to $10.6 billion, above the $10.4 billion that the Street had forecasted. The package delivery company said its results were aided by continued strong yield improvement in all transportation segments and volume growth of ground and international express shipments. Also, the company’s freight unit’s return to profitability also improved operating results. FDX issued 1Q and full-year EPS estimates that were slightly above expectations, assuming continued moderate growth in the global economy and “subsiding cost headwinds.” Also, the company said it will benefit from the tax expensing/accelerated depreciation provisions included in the Tax Relief Act of 2010 passed last December. Shares were solidly higher.

However, Adobe Systems Inc. (ADBE $30) was under pressure despite saying its fiscal 2Q EPS ex-items were $0.55, compared to the $0.51 that analysts had estimated, with revenues increasing 9% y/y to $1.0 billion, exceeding the $995 million that the Street had anticipated. The software maker issued 3Q EPS guidance with a midpoint that was below analysts’ forecasts and reaffirmed its full-year outlook.

Meanwhile, CarMax Inc. (KMX $33) announced fiscal 1Q profits ex-items of $0.52 per share, above the $0.47 that analysts had projected, as revenues increased 18% y/y to $2.7 billion, exceeding the Street’s forecast of $2.5 billion. The auto retailer said its 1Q used car same-store sales—sales at stores open at least a year—rose 6% y/y. Shares traded nicely to the upside.

In M&A news, UK-based  AstraZeneca Plc. (AZN $49) announced that it has agreed to sell its dental implants unit Astra Tech to US-based DENTSPLY International Inc. (XRAY $39) for $1.8 billion in cash. XRAY said the transaction is expected to be immediately accretive to its adjusted EPS. AZN finished flat, while shares of XRAY were solidly in the green.

Fed leaves policy unchanged, slashes 2011 growth forecast

As expected, the Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting by making no changes to the fed funds rate, while opting to hold off on any new monetary stimulus efforts. The Fed modestly downgraded its assessment of the economy, as Fed Chief Ben Bernanke did in a speech two weeks ago, saying the recovery is continuing at a moderate pace, but “somewhat more slowly that the Committee had expected.” Moreover, the Fed noted that recent labor market indicators have been “weaker than anticipated,” compared to its assessment that overall conditions in the labor market are “improving gradually,” in late-April. The Fed added that the slower pace of the recovery “reflects in part factors that are likely to be temporary,” such as the impact of higher food and energy prices on the consumer and supply chain disruptions associated with the tragedy in Japan. The Fed removed its “transitory” language when referring to inflation, saying the Committee anticipates that inflation “will subside to levels at or below” consistent with its dual mandate and continued to note that longer-term inflation expectations have “remained stable.”

To promote a stronger pace of recovery and help ensure inflation over time is consistent with its mandate, the Fed said its asset purchase program, which consists of $600 billion of longer-term Treasuries, will be completed by the end of this month, and it will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate. Finally, voting on today’s decision was unanimous, and as expected, gave no hints of added further stimulus measures in the face of its economic assessment.

The markets paid close attention to the post-statement news conference led by Fed Chair Bernanke, as well as the Q&A session that followed. In the statement, the Fed Chair reiterated that the reasons for the slowdown in recovery are expected to be temporary, but added that “some of the headwinds that are concerning us, like the weakness in the financial sector and problems in the housing sector, may be stronger and more persistent than we thought.” Bernanke also said there has been no talk of an additional round of quantitative easing, pointing out that the recent asset purchase program succeeded in mitigating the risk of deflation that existed last year, leaving the Fed closer to meeting its dual mandate position. The Fed’s range of estimates for growth this year was cut to 2.7%-2.9%, down from the April estimate of 3.1%-3.3%. Estimates for the 2011 unemployment rate were also increased from 8.4%-8.7% in April, to a current range of 8.6%-8.9%. Additionally, estimates of inflation were narrowed to 2.3%-2.5% from 2.1%-2.8% in April, while core inflation projections increased to a 1.5%-1.8% range from a prior range of 1.3%-1.6%. The longer run projections for growth, unemployment and inflation all remained unchanged from the April estimates.

Treasuries rebounded following the Fed release and press conference to finish the session flat, as the yields on the 2-year note, 10-year note and 30-year bond were all unchanged at 0.37%, 2.98% and 4.22%, respectively.

Mortgage applications decline, while gasoline inventories surprisingly drop

The MBA Mortgage Application Index declined 5.9% last week, after the index that can be quite volatile on a week-to-week basis, jumped by 13.0% in the previous week. The decrease came as a 7.2% drop in the Refinance Index, was accompanied by a 2.8% decline in the Purchase Index. Elsewhere, the average 30-year mortgage rate rose by 6 basis points (bps) to 4.57%.

In other economic news, the Department of Energy (DoE) released its weekly inventory report, which showed US crude oil stockpiles fell by 1.7 million barrels, compared to the 1.8 million barrel decline that economists surveyed by Bloomberg had expected. Moreover, gasoline inventories unexpectedly dropped, falling by 464,000 barrels, compared to the 1.0 million barrel increase that was expected. Crude oil prices are higher, while gasoline prices are moving solidly to the upside following the DoE’s report.

Greek uncertainty remains following vote of confidence for Papandreou

Enthusiasm in the European markets from last night’s expected successful confidence vote for Greek Prime Minister Papandreou was pared by uncertainty over whether Greece can redirect its fiscal situation to a sustainable path. Greece’s Parliament voted 155-143 in favor of keeping a recently reshuffled government intact, clearing the first hurdle for the debt-laden nation to receive further financial aid from the euro-zone bailout facility. Next week, the Greek Parliament will vote on Papandreou’s austerity plan, which aims to cut 78 billion euros ($112 billion) from the government’s budget in order to stave off a debt default, per Bloomberg. Also, the relatively eased concerns toward Greece were met with continued uncertainty that any further financial aid received from the euro-zone rescue package will only provide a short-term stay from the fiscal issues facing Greece and some remain skeptical that Greece’s long-term debt issues can be successfully corrected with the current plan.

In other international economic news, euro-zone industrial new orders rose at a smaller pace in April than economists forecasted and euro-area consumer confidence declined inline with estimates, while French business confidence unexpectedly improved in June. Additionally, the Bank of England (BoE) released the minutes from its most recent monetary policy meeting, which showed policymakers remained split 7-2 on the direction of its policy, with two members calling for an increase in interest rates, and 8-1 on it asset purchase program with one wanting an increase in purchases. Finally, in the Asia/Pacific region, Australia’s Leading Index rose 0.2% month-over-month (m/m) in April, after rising an upwardly revised 0.6% in March.

More housing data on tap

New home sales will be released tomorrow, expected to show a 4.0% m/m decrease in May to an annual rate of 310,000 units, after rising 7.3% to an annual rate of 323,000 units the prior month. New home sales are watched closely as they are a more timely indicator of conditions in the housing market than existing home sales as they are measured when a contract is signed rather than when the sale is closed, but have suffered from the discounts offered by the foreclosure market.

The other release on tomorrow’s US economic calendar is weekly initial jobless claims, expected to fall by 1,000 to 415,000. Elsewhere, international economic data will include euro-zone manufacturing and services PMIs, Italian consumer confidence, Australia’s leading index, Mexico’s unemployment rate and the advance Chinese manufacturing PMI reading for June released by HSBC.