Evening Market Update

Stocks Take Early Plunge, Rebound on Reports of Greek Deal

US stocks were taken for a wild ride today, falling sharply at the market open, then paring some losses late in the session to finish well off the lows of the day, while the tech-heavy NASDAQ managed to finish in the green. Early market pressure came courtesy of a slowdown in manufacturing activity in Europe and China, as well as a larger-than-expected increase in US weekly initial jobless claims and a decline in new home sales. Additionally, a surprise announcement from the International Energy Agency (IEA) that it will conduct a coordinated release of strategic oil reserves for only the third time in history moved oil prices sharply lower. However, a Reuters report late in the day suggesting that Greece has agreed to a new 5-year austerity plan with the EU and IMF helped spark a recovery and allowed stocks to pare some losses. In equity news, Dow member Pfizer and Bristol-Myers Squibb announced favorable results for their new jointly developed blood thinning drug, Bed Bath & Beyond and Lennar both beat the Street’s earnings expectations, while ConAgra Foods missed the profit projections of analysts and warned of higher input costs. Treasuries moved higher, but closed off the highest levels of the day, while the US dollar also gained ground.

The Dow Jones Industrial Average fell 59 points (0.5%) to 12,050, the S&P 500 Index lost 4 points (0.3%) to 1,284, while the Nasdaq Composite advanced 18 points (0.7%) to 2,687. In moderate volume, 1.1 billion shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil plunged $3.71 to $91.70 per barrel, wholesale gasoline fell $0.11 to $2.85 per gallon, and the Bloomberg gold spot price was $26.65 lower at $1,522.30 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.5% higher at 75.32.

Dow member  Pfizer Inc. (PFE $21) and Bristol-Myers Squibb Co. (BMY $29) are nicely higher after their jointly developed blood thinning drug Eliquis reached efficacy goals of a late-stage trial compared to a current treatment used by patients with an irregular heartbeat. Dow Jones Newswires said analysts forecast that the drug, if approved, could eventually generate annual sales of more than $1 billion. Shares of both companies were nicely higher.

ConAgra Foods Inc. (CAG $25) reported fiscal 4Q EPS ex-items of $0.47, below the $0.48 consensus estimate of analysts surveyed by Reuters, with revenues increasing 5.3% year-over-year (y/y) to $3.2 billion, matching what the Street had projected. The food company said the overall marketplace and economic conditions “remain challenging” as its consumer foods unit incurred 9% cost inflation this quarter, and high input costs and difficult economic conditions are expected to continue to create challenges in fiscal 2012 and additional pricing actions are under way. Shares of CAG traded lower.

Bed Bath & Beyond Inc. (BBBY $57) announced fiscal 1Q earnings of $0.72 per share, exceeding the $0.63 that analysts had anticipated, on a 9.7% y/y increase in revenues to $2.1 billion, which was roughly inline with the Street’s expectations. The home furnishing retailer said same-store sales—sales at stores open at least a year—increased by 7.0% y/y. The company said it expects 2Q EPS to be in a range of $0.77-0.82, compared to the $0.82 that analysts had estimated. BBBY finished solidly to the upside.

Lennar Corp. (LEN $19) said its 2Q EPS were $0.07, three pennies above the Street’s forecasts, with revenues declining 6% y/y to $765 million, but north of the $647 million that analysts were expecting the homebuilder to report. New orders were flat compared to the same period a year ago, while order backlog decreased 1% y/y. Shares moved higher following the report.

Weekly jobless claims rise and new home sales decline, while IEA releases oil reserves

Weekly initial jobless claims rose to a higher than expected level, increasing by 9,000 to 429,000, versus last week's figure which was upwardly revised by 6,000 to 420,000, and compared to the 415,000 level that economists surveyed by Bloomberg had expected. Also, the four-week moving average, considered a smoother look at the trend in claims, remained unchanged at last week’s upwardly revised mark of 426,250, while continuing claims dipped by 1,000 to 3,697,000, above the forecast of economists, which called for continuing claims to come in at 3,670,000.

New home sales fell 2.1% month-over-month (m/m) in May to an annual rate of 319,000 units, above the 310,000 rate forecasted and April’s figure was upwardly revised to a 316,000 annual unit rate. The median home price fell 3.4% y/y but rose 2.6% m/m to $222,600. Inventory of new homes for sale fell to 166,000 units, the lowest level on record, representing 6.2 months of supply at the current sales rate. New home sales are considered a more timely indicator of conditions in the housing market than existing home sales, as they are based on signings instead of closings. However, it is difficult to draw conclusions about the broader housing market from trends in new home sales, as existing home sales represent nearly 94% of the housing market, where sales of distressed properties have dominated both sales and prices. The housing market continues to be plagued by reluctance by consumers to make large purchases while still facing high unemployment and reduced ability to trade up, as over 28% of all homeowners have negative equity in their homes, as well as restrictive loan underwriting standards.

Treasuries moved higher, although some gains were pared following the late-day recovery of US equities. The yield on the 2-year note fell 3 bps to 0.34%, the yield on the 10-year note declined 6 bps to 2.92%, and the 30-year bond rate declined 4 bps to 4.17%.

In other economic news, crude oil prices moved sharply lower following a surprise supply announcement from the International Energy Agency (IEA). The IEA announced a coordinated release of 60 million barrels of oil in the coming month—2 million barrels per day—from its strategic reserves, “in response to the ongoing disruption of oil supplies from Libya.” This was the third time in history that reserves were released, with previous occurrences coming during the 1991 Persian Gulf War and 2005 Hurricane Katrina. The IEA also noted that the normal seasonal increase in refiner demand expected for this summer will exacerbate the shortfall further and “greater tightness in the oil market threatens to undermine the fragile global economic recovery.” The Agency said within 30 days from today it will reassess the oil market, review the impact of their coordinated action and decide on possible future steps. The United States Department of Energy will provide 30 million barrels of the release, and could add more if conditions warranted.

Reuters reports of Greek austerity deal, manufacturing data weak out of Europe and China

US equity markets got a boost late in the day from a Reuters report suggesting that Greece has agreed to a 5-year austerity plan with the EU and IMF, after committing to an additional round of tax increases and spending cuts, according to sources with knowledge of the talks. The Greek parliament must still approve the austerity measures by July 3rd in order to obtain 12 billion euros in emergency aid. Late yesterday, European Central Bank (ECB) President Jean-Claude Trichet fostered some of the renewed worries about Europe’s debt crisis, as he warned that risk signals for financial stability in the euro-zone are flashing “red,” per Bloomberg. Economic data out of Europe added to the global uneasiness, with the euro-zone Manufacturing PMI Index decelerating more than expected in June, led by larger-than-expected slowdowns in France and Germany—Europe’s largest economy.

The Asia/Pacific economic front was highlighted by a preliminary report on Chinese manufacturing activity for June, which showed expansion nearly stalled, falling from 51.6 in May to 50.1, with a reading above 50 denoting expansion. A separate report out of China detailed a government plan to support alternative energy production and affordable housing, per Bloomberg. Back in the Americas, Mexico’s unemployment rate rose to 5.2% in May, up from 5.1% in April, and higher than the 4.9% rate expected by economists.

Final revision to GDP and durable goods on tap for tomorrow

Tomorrow, the economic week will conclude with the final revision to 1Q GDP, expected to be revised slightly higher from the 1.8% annualized rate of growth reported in the first revision to a 1.9% pace of expansion. The release will likely have a muted impact as we are near the end of 2Q and the economic landscape has changed since 1Q. As a result, tomorrow’s durable goods report will likely carry more weight as it will give us a read on manufacturing demand in the heart of 2Q. Headline durable goods orders are forecasted to rise 1.5% m/m in May, after the volatile report showed a 3.6% decline in April. Meanwhile, excluding transportation, goods are anticipated to increase 0.9%, after falling 1.5% in the previous month, and nondefense capital goods excluding aircraft, a barometer of business spending, are expected to gain 1.0%, rebounding from April’s 2.6% decline. Durable goods are intended to last at least three years and attention will likely be paid to signs that the impact from the disruptions in the manufacturing sector from the earthquake and tsunami in Japan are waning and whether corporate confidence is resilient enough to foster businesses investment in the face of the soft patch in the global economy.

Economic releases on the international front tomorrow will include the German Ifo Business Climate Index, French consumer confidence, Italian retail sales and Mexico’s trade balance.