Evening Market Update

 

 

Stocks Keep Climbing on Greek Vote and Housing Data

The US equity markets finished in the green for the third straight day, as the passage of the Greek austerity plan by the nation’s parliament combined with a solid jump in US pending home sales to lift stocks further to the upside. Treasuries were mostly lower, as the only other release on the domestic economic front was a small decline in mortgage applications. In equity news, Family Dollar Stores and KB Home both reported earnings that missed the Street’s expectations, while Monsanto managed to beat analysts’ projections and raised its full-year outlook. Additionally, Bank of America announced that it will pay $8.5 billion to settle lawsuits against its Countrywide unit, and the Federal Reserve announced that debit card swipe fee limits will be higher than initially proposed, which gave shares of Visa and MasterCard a lift.

The Dow Jones Industrial Average gained 73 points (0.6%) to 12,262, the S&P 500 Index rose 11 points (0.8%) to 1,307, and the Nasdaq Composite advanced 11 points (0.4%) to 2,740. In moderately light volume, 880 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil rose $2.02 to $94.91 per barrel, while wholesale gasoline gained $0.12 to $3.00 per gallon, and the Bloomberg gold spot price was $9.88 higher at $1,511.13 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.6% lower at 74.67.

Family Dollar Stores Inc. (FDO $53) reported 3Q EPS of $0.91, an 18% increase over the same period last year, but below the $0.95 consensus estimate of analysts surveyed by Reuters, as revenues during the quarter rose 7.8% to $2.15 billion, but also short of the $2.17 billion expected. Same-store sales—sales at stores open at least a year—grew 4.7% on strong sales of consumables and home products. The discount retailer said it expects EPS in a range of $0.62-0.70 for the current quarter, with analysts expecting $0.65 per share, but it lowered its full-year earnings estimate to between $3.08-3.16 per share from $3.13-3.23 per share. Shares of FDO were higher.

Bank of America Corp. (BAC $11) announced that it has agreed to pay $8.5 billion to settle claims surrounding bad mortgages it acquired after its purchase of Countrywide Financial in 2008. The settlement will add to a 2Q loss of $0.88-0.93 per share, which includes a $2.6 billion impairment charge, and BAC said it will add $5.5 billion to a liability reserve fund for future loan-repurchase requests. BAC traded higher.

Shares of Monsanto Co. (MON $70) finished higher after reporting that it achieved a 77% year-over-year (y/y) increase in 3Q profits to $1.26 per share, beating the $1.10 forecast of analysts surveyed by Reuters, as sales rose 21% to $3.59 billion. MON upped its full-year guidance, saying it expects EPS ex-items of between $2.84-2.88, from a previous forecast of $2.72-2.82, above the $2.82 expected by analysts, but the fiscal 4Q, a traditional money-losing period, will show a loss of $0.26-0.30 per share, compared to the $0.18 per share loss expected. Separately, MON disclosed that it is the subject of a Securities and Exchange Commission probe surrounding its customer-incentive programs, and that it is cooperating fully with the investigation.

Elsewhere, shares of homebuilder KB Home (KBH $10) moved lower after it reported a wider-than-expected 2Q loss of $0.89 per share, as revenues fell 27% y/y to $271.7 million amid a still depressed housing market. Analysts had forecast a loss of $0.33 per share. The company’s CEO said that he “believes the current housing market conditions will likely continue until there are meaningful and sustained improvements in job growth and consumer confidence.”

Shares of Visa Inc. (V $87) and MasterCard Inc. (MA $310) finished sharply higher after the Federal Reserve announced that it would cap the swipe fees that banks charge on debit cards at 21 cents, which is about half of the 44 cents that banks currently charge, but higher than the 12 cent figure that was initially proposed back in December.

Pending home sales jump, mortgage applications fall

Pending home sales jumped 8.2 m/m in May, compared to the 3.0% increase that economists had projected, and April’s 11.6% decline was favorably revised to an 11.3% decrease. Moreover, compared to last year, sales were up 15.5%, after falling an upwardly revised 26.3% in April. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales. The National Association of Realtors (NAR) said the May increase was the largest monthly gain since November, and NAR chief economist Lawrence Yun said, "This solid gain in contract signings implies that home values in many localities are or will soon be stabilizing as inventories get absorbed at a faster pace."

Also, the MBA Mortgage Application Index declined 2.7% last week, after the index that can be quite volatile on a week-to-week basis, fell by 5.9% in the previous week. The decrease came as a 2.6% drop in the Refinance Index was accompanied by a 3.0% decline in the Purchase Index. Elsewhere, the average 30-year mortgage rate fell by 11 basis points (bps) to 4.46%.

In central bank news, the Federal Reserve, the Bank of England, the European Central Bank, the Bank of Canada and the Swiss National Bank today announced that the existing temporary U.S. dollar liquidity swap arrangements that were due to expire in August of this year will be extended through August 1, 2012. The agreements, which were initiated during the financial crisis, allows the Fed to lend dollars to foreign central banks for a fee and they in turn lend them on to commercial banks locally, as many foreign banks, especially in Europe, had trouble acquiring short-term dollar loans in the credit markets in order to fund their holdings of mortgage bonds and other U.S. dollar-denominated debt. In its upcoming monetary policy meeting, the Bank of Japan will consider the extension of such swap arrangements.

Treasuries were mostly lower, although the yield on the 2-year note fell 1 bp to 0.47%, while the 10-year note advanced 8 bps to 3.11%, and the 30-year bond rate was 5 bps higher at 4.38%.

Greece approves austerity plan, Japanese data offers pleasant surprise

In European economic news, the Greek Parliament voted 155-138 in favor of Greek Prime Minister Papandreou’s austerity plan, a wider margin than last week’s confidence vote, and a crucial step for the debt-laden nation to receive further financial aid to fulfill its near-term funding needs. Greek markets were markedly higher, but gains were pared following the vote as attention now moves to a second bill tomorrow that authorizes the implementation of the package, and as violent public protests escalated and continue in the streets of the troubled nation. In other economic news in the region, eurozone economic confidence fell to its lowest level in eight moths, according to Bloomberg, but slightly above what was expected by economists’ expectations, as the overhang of Greece’s debt problems continued to sap sentiment. Elsewhere, France’s 1Q GDP was revised slightly lower to a 0.9% quarter-over-quarter (q/q) expansion from the 1.0% q/q growth that was previously reported and expected to remain, retail sales in Spain plunged on a year-over-year basis during the month of May and mortgage approvals in the UK ticked slightly higher in May, but below economists’ forecasts.

In Asia/Pacific economic news, Japan released a better-than-expected report on the nation’s industrial output during May. Additionally, industrial production in the world’s third-largest economy jumped 5.7% m/m, above economists’ forecasts and at the fastest clip since 1953, as the country tries to slowly rebound from the devastating earthquake and tsunami it suffered in March. Elsewhere, China’s leading index fell slightly in May and India’s government announced that it will maintain its economic growth target.

Back in the Americas, Canada’s consumer prices rose 3.7% y/y in May, the largest increase since March of 2003, and higher than the 3.3% rate expected by economists. On a seasonally adjusted monthly basis, prices rose 0.2%, after increasing 0.3% last month. The rise was primarily a result of higher gasoline prices, which increased 29.5% during the month. Elsewhere, Brazil’s central bank, in its quarterly inflation report, forecasted a 4.9% rise in consumer prices next year, if it increases its benchmark interest rate to 12.5% in July as expected. The figure is above the 4.5% target rate that policy makers remain committed to meeting for 2012, which will likely require the central bank to raise rates for a “sufficiently long” period of time, according to the central bank’s director for economic policy.

Tomorrow’s US economic calendar  will include the Chicago Purchasing Managers Index, which is expected to fall to 54.0 in June, after unexpectedly plunging from 67.6 to 56.6 in May. A reading above 50 depicts expansion. The only other report from the domestic front will be weekly initial jobless claims, expected to decline to 420,000 from 429,000 last week.

The international economic docket will be chalk full of data, including German retail sales and unemployment rate, UK housing prices, French consumer spending and producer prices, euro-zone CPI, Canada’s April GDP, South Korea’s industrial production and leading index, and Japanese vehicle production, construction orders, and housing starts.