Evening Market Update

Festive Holiday Mood Begins Early

On Friday, stocks closed the best week in over two years to the upside, with bullish sentiment aided by an unexpected gain in the US ISM Manufacturing Index, which offset well-telegraphed declines in manufacturing surveys overseas. Treasuries fell as equities gained, dismissing a downwardly adjusted reading on consumer confidence and a decline in construction spending. Meanwhile, Darden Restaurants met expectations and raised guidance, a consortium of technology firms won a bid for Nortel Networks' patent portfolio, and automakers reported mixed June sales that missed the headline industry figure. Elsewhere, Blackboard agreed to a private equity buyout for $1.64 billion and shares of specialty truck maker Oshkosh gained ground on reports of a stake by activist Carl Icahn.
 

Friday, the Dow Jones Industrial Average gained 168 points (1.4%) to 12,583, the S&P 500 Index rose 19 points (1.4%) to 1,340, and the Nasdaq Composite advanced 43 points (1.5%) to 2,816. In moderately light volume, 866 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.48 to $94.94 per barrel, while wholesale gasoline was flat at $2.97 per gallon, and the Bloomberg gold spot price lost $13.08 at $1,487.10 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was 0.1% lower at 74.27. For the week, including dividends, the DJIA surged 5.4% the S&P 500 Index jumped 5.6%, and the Nasdaq Composite gained 6.2%.

Darden Restaurants Inc. (DRI $52) announced fiscal 4Q EPS of $1.00, matching the Street's expectation, as revenues rose 6.8% year-over-year (y/y) to $2.0 billion, also inline with analysts' forecasts. The parent of Olive Garden and Red Lobster said its same-restaurant sales-sales at restaurants open at least a year-increased 2.2% y/y. DRI gave a positive outlook for the next fiscal year that exceeded analysts’ expectations, and shares of the company traded higher.

A consortium of technology firms, including Apple Inc. (AAPL $343), Microsoft Corp. (MSFT $26), Research in Motion Ltd. (RIMM $29) and Sony Corp. (SNE $27) have won a bid to acquire the remaining patents and patent applications of now-bankrupt Nortel Networks, beating out other bidders including Google Inc. (GOOG $521) and Intel Corp. (INTC $23). The Nortel portfolio includes around 6,000 patents and applications in telecommunications, internet search, social networking and mobile. Shares of AAPL, MSFT, SNE, GOOG, and INTC were higher, while RIMM was modestly lower.

General Motors Co. (GM $31) reported a 10.5% y/y rise in June US sales of its core brands-Buick, GMC, Cadillac, and Chevrolet, compared to estimates of a 17.1% increase. GM also lowered its full-year expectations for auto industry sales to the lower end of its previously announced 13.0 - 13.5 million range. Meanwhile, Ford Motor Co. (F $14) announced a 13.6% increase in June sales, which exceeded the 11.0% estimate of analysts, led by strong demand for fuel-efficient cars and crossovers. Chrysler reported a 30.1% y/y rise, Honda Motor Co (HMC $39) said sales fell 21.3% y/y and sales at Toyota Motor Corp (TM $83) declined 21.1% y/y. Shares of the automakers were higher.

In M&A news, Blackboard Inc. (BBBB $44) announced that it has agreed to be acquired by an investor group led by affiliates of Providence Equity Partners in an all-cash transaction valued at around $1.64 billion. The purchase price represents a 21% premium over the April 18th, 2011 closing price of BBBB, the day the company publicly announced that it was evaluating strategic alternatives. Shares of BBBB rose.

Elsewhere, shares of specialty truck maker Oshkosh Corp (OSK $33) gained over 10% after activist investor Carl Icahn revealed a 9.51% stake in the company.

Manufacturing read positive, construction spending and consumer sentiment disappoint

The ISM Manufacturing Index unexpectedly rose in June to 55.3 from 53.5 in May, while the expectation was for the index to fall to 52.0, with 50 marking the level that denotes expansion. The increase came as production rose to 54.5 from 54.0, new orders increased to 51.6 from 51.0, and employment advanced to 59.9 from 58.2. Additionally, supplier deliveries, a component within the Leading Economic Indictors index, grew to 56.3 from 55.7, and prices paid fell to 68.0 from 76.5, decreasing to a lower level than the 70.9 forecasted, and hitting the lowest level since August 2010.

Friday's US reading on manufacturing stands in stark contrast to declines seen in Asia and Europe, as well as several regional surveys such as the Empire Manufacturing Index and the Philadelphia Fed Manufacturing Index. However, taken in concert with Thursday's rise in manufacturing activity in Chicago, the ISM reading adds to the case that recent declines in economic data may be due to temporary issues, with disruption in the automotive sector due to the disaster in Japan a contributing factor. 

In other economic news, construction spending unexpectedly declined in May, falling 0.6% month-over-month (m/m), versus the 0.1% increase forecasted by economists, while April’s initially reported decrease of 0.4% was revised to a 0.6% decline. Within the report, private construction fell 0.4% and homebuilding outlays declined 2.1%, while construction of single-family and multi-family units also decreased.

Meanwhile, final University of Michigan's Consumer Sentiment Index, was unexpectedly revised lower to 71.5 from the preliminary reading of 71.8 for the month of June, compared to the increase to 72.0 that economists expected. The downward revision reflected a decrease in consumer expectations, although the survey's barometer of current economic conditions edged slightly higher. Additionally, consumer’s outlook on short-term inflation improved, while long-term inflation expectations ticked higher.

Treasuries continued their weekly decline on a move away from safety, on better US economic news and some progress on the debt situation in Greece. The yields on the 2-year note, 10-year note and 30-year bond rate all gained 3 bps to 0.49%, 3.19% and 4.40%, respectively.

Manufacturing slowdown overseas, as expected

Equity markets across the pond shifted from the passage of the Greek austerity plan earlier this week to the health of the global economic recovery, but declines in manufacturing surveys internationally were well telegraphed, and had little impact on trading. The final revision to the eurozone's PMI manufacturing report was unchanged, while figures from Italy and Germany were slightly below expectations and the French number met estimates. Meanwhile, factory production in the UK ticked slightly higher in June.

In Asia, China's manufacturing PMI data fell, showing the factory sector grew at its slowest pace in 28 months in June, Taiwan's manufacturing PMI fell below the 50-point level that denotes expansion, while South Korea saw only a slight 0.1 decrease in its manufacturing figure and a widening in its trade balance on weak demand abroad and Australian new home sales slipped. Economic data out of Japan was mixed, as a headline decline in the Tankan index of sentiment at large manufacturers was offset by plans to increase hiring and investment, while household spending declined more than expectations, the jobless rate saw an unexpected decline and the May CPI was flat on a m/m basis.

Best weekly gain since 2008

After entering the week in a sour mood characterized by uncertainty, markets moved higher throughout the week, with traders getting their cue from Wednesday's historic vote in Greece, where another set of austerity measures was passed. Wednesday's vote set in motion a series of events, including reports that French and German banks may volunteer to rollover their Greek holdings into longer-term maturity bonds, aimed at providing Greece with the current quarterly disbursement of funds, thwarting the risk of a near-term default in the debt-laden nation. Additionally, European Central Bank President Trichet reiterated the banks' "strong vigilance' on inflation, viewed as paving the way for a rate hike next week, which boosted the euro at the expense of the US dollar.

Economic news also added to the bulls' case, with an unexpected gain in the Chicago PMI and better news on home prices from the S&P/Case-Shiller Home Price Index, as well as a 5.7% surge in Japanese industrial production, the fastest m/m rate since 1953. Meanwhile, the expected falling of manufacturing surveys overseas was offset by an unexpected increase in the US national survey. Even negative news on spending in Germany and France, decline in business sentiment in Japan, and consumer sentiment in the US did little to damage the bullish mood on the Street.

Meanwhile, news on the corporate profits front was light, with highlights focused on better-than-expected reports from Delta Air Lines (DAL $9), Nike Inc (NKE $92), Family Dollar Stores (FDO $54) and Monsanto (MON $73). Elsewhere, stocks in the financials sector rose on the resolution of several regulatory issues, including a smaller-than-expected decrease in swipe fees for debit cards, clarification of Basel III capital rules, and the agreement by Bank of America Corp (BAC $11) to pay $8.5 billion to settle claims regarding mortgages acquired in its purchase of Countrywide Financial in 2008.

Jobs will be the focus in a holiday-shortened week

Major readings on the US economic calendar next week include Wednesday's ISM Non-Manufacturing Index, anticipated to fall to 53.6 from 54.6. A reading of 50 separates expansion from contraction.

However, employment will be the main focus for the week, with the employment component within the services ISM report, as well as both the ADP Employment Change and initial jobless claims set to be released. The week concludes with the Labor Department's nonfarm payrolls on Friday, expected to grow 89,000 in June after adding a mere 54,000 in May, and the unemployment rate is estimated to remain at 9.1% after rising in May from April’s 8.9% rate.

Other releases on the US economic calendar include factory orders, MBA Mortgage Applications, wholesale inventories, and consumer credit, and retailers will be reporting same-store sales for June. Elsewhere in the Americas, Canada reports industrial product and raw materials price indexes, building permits, new home prices, and its Ivey PMI, Brazil releases vehicle sales and production, and Mexico reports consumer prices.

Releases in Europe include eurozone PPI and retail sales, service PMI reports from the euro-zone and the UK, industrial and manufacturing production and PPI in the UK, and German factory orders, industrial production and May trade balance. Asia/Pacific reports will include Japan's leading index, machine orders, and May trade balance, Australia’s building approvals, retail sales, and employment, China’s services PMI, and Taiwan's June trade balance.

Central banks will be busy next week, with meetings in Australia, Sweden, and Mexico, as well as the Bank of England and the European Central Bank.