Evening Market Update

Stocks Slip as Bernanke Backs Off QE3 Talk

The US equity markets traded lower today, as traders were hit with a plethora of economic data, corporate earnings, and concerns over the nearing deadline to raise the US debt ceiling, which were elevated after Moody’s Investors Service warned that the triple-A credit rating of the US could be downgraded if the borrowing limit is not raised. The markets also remain focused on the Fed’s next move, as Fed Chairman Ben Bernanke told a Senate committee that the time had not come yet for additional easing, after temporarily raising hopes in his comments yesterday. Treasuries moved lower, as weekly initial jobless claims fell more than anticipated, June retail sales increased slightly, business inventories jumped, and producer prices were mixed. In equity news, Dow member JPMorgan Chase & Co reported better-than-expected 2Q earnings and revenue, while Yum Brands Inc. also beat on the top- and bottom-lines. Outside of earnings, ConocoPhillips announced that it aims to separate the company’s refining & marketing and exploration & production businesses into two stand-alone, publicly-traded corporations.

The Dow Jones Industrial Average fell 54 points (0.4%) to 12,437, the S&P 500 Index decreased 9 points (0.7%) to 1,309, while the Nasdaq Composite declined 34 points (1.2%) to 2,763. In moderate volume, 924 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil was $2.32 lower at $95.73 per barrel, wholesale gasoline fell $0.03 to $3.11 per gallon, and the Bloomberg gold spot price ros $4.17 to $1,586.55 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.6% at 75.27.

Dow member JPMorgan Chase & Co. (JPM $40) reported 2Q earnings of $1.27 per share, above the $1.21 consensus estimate of analysts surveyed by Reuters, with revenues rising 7% year-over-year (y/y) to $27.4 billion, compared to the $25.1 billion that the Street had expected. The company’s Chairman and CEO Jamie Dimon said its 2Q earnings reflected “solid performance across most of our business,” with strong earnings across most products at its investment banking unit, while its commercial banking segment posted record revenue and continued loan growth. Meanwhile, its retail banking unit “demonstrated good underlying performance” but continued to experience “high losses for mortgage-related issues.” JPM said its Basel III capital ratio was “well in excess” of what is required today by the global capital rules and greater than the level it expects will be required under the proposed rules for up to five years. JPM traded nicely higher.

Meanwhile,  YUM Brands Inc. (YUM $56) posted 2Q EPS ex-items of $0.66, five cents above the expectation of analysts, with revenues increasing 9% y/y to $2.8 billion, exceeding the $2.7 billion forecast of the Street. The parent of Taco Bell, Pizza Hut, and KFC said its same-store sales—sales at stores open at least a year—fell 4% y/y in the US, while its international same-store sales rose 2%, led by a sharp increase out of China. The company said its “outstanding” international results were offset by a steep decline in US profits, driven by higher commodity costs and the decrease in same-store sales. YUM raised its full-year EPS guidance. YUM moved to the upside.

Elsewhere, ConocoPhillips (COP $76) announced that it will pursue the separation of the company’s refining & marketing and exploration & production businesses into two stand-alone, publicly traded corporations via a tax-free spin-off of the refining & marketing business to COP shareholders. The company said it has concluded that two independent companies focused on their respective industries will be better positioned to pursue their individually focused business strategies. COP finished solidly higher.

Retail sales rise modestly, inflation mixed, but jobless claims fall and inventories jump

Advance retail sales for June rose 0.1% month-over-month (m/m), compared to the 0.1% decline that was forecasted by economists surveyed by Bloomberg, and May’s 0.2% decrease was revised to a fall of 0.1%. June sales ex-autos were flat, as expected, while May’s 0.3% rise was revised to a 0.2% gain. Sales ex-autos and gas rose 0.2% in June, versus the 0.4% increase that was anticipated, and its May figure was revised from a 0.3% increase to a 0.2% gain. The report showed autos, building materials, and clothing sales led the June results to the upside, partially offset by declines in sales in furniture, electronics & appliances, and gasoline stations.

Meanwhile, the Producer Price Index showed prices at the wholesale level fell 0.4% m/m in June—the first decline in a year—after increasing by an unrevised 0.2% in May, and a larger drop than the 0.2% decline that economists forecasted. However, the core rate, which excludes food and energy, rose 0.3% m/m, above forecasts of a 0.2% increase, after rising an unadjusted 0.2% in May. On a year-over-year basis, headline producer prices were 7.0% higher, versus the 7.4% increase that was projected, and the core rate was up 2.4%, above expectations of a 2.2% rise. Prices for energy goods posted their largest drop since July 2009 to pressure the headline figure, while the seventh-straight increase in the core rate came as almost half of the gain was attributed to prices for light motor trucks, with plastic products also contributing to the higher-than-expected rate. Tomorrow, we will get the complete picture on inflation, with the release of the Consumer Price Index (CPI), anticipated to have fallen 0.1% m/m in June, after rising 0.2% in May. Energy prices have moderated since May, contributing to the m/m decline at the headline level, while the core CPI, which excludes food and energy, is forecasted to have risen 0.2% m/m, after increasing 0.3% in May. On a year-over-year basis, the headline rate is expected to be up 3.6%, and ex-food and energy, the core CPI is forecasted to have increased 1.6%.

Elsewhere, weekly initial jobless claims fell by 22,000 to 405,000, versus last week's figure which was upwardly revised by 9,000 to 427,000, and compared to the 415,000 level that economists had expected. Also, the four-week moving average, considered a smoother look at the trend in claims, declined by 3,750 to 423,250, while continuing claims rose by 15,000 to 3,727,000, above the forecast of economists, which called for continuing claims to come in at 3,680,000.

Finally, business inventories increased 1.0% m/m in May, compared to the 0.9% gain that was expected, and April’s 0.8% growth was revised to a 1.0% advance. However, sales declined 0.1%, causing the inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—to increase to 1.28 months, from an upwardly revised 1.27 months in April.

Treasuries were lower, as the yield on the 2-year note rose 2 bps to 0.37%, the yield on the 10-year note was 7 bps higher at 2.95%, and the 30-year bond gained 8 bps to 4.25%.

The modest rise in consumer spending on goods outside autos and gas, signs that easing energy price pressures but hotter-than-forecasted underlying inflation, the drop in jobless claims, and jump in business inventories illustrates why we have recently seen a lack of conviction on monetary policy from the Federal Reserve. This week’s release of the minutes from its June meeting and the two-day semiannual Congressional monetary policy testimony by Fed Chairman Ben Bernanke—which concluded at the Senate today—showed that the Fed may be at a crossroad in its navigation of policy through this soft patch in the economy. Bernanke noted that on one hand, the possibility remains that the recent economic weakness may persist longer than anticipated, constituting “a need for additional policy support.” However, the Fed Chief was quick to point out that on the other hand, the economy could evolve in a way that “would warrant a move toward less-accommodative policy.” During the Q&A session of his testimony today, Bernanke appeared to try to cool expectations of further policy easing, known as quantitative easing or QE3, pointing out that at this point the Fed is not prepared to take further action on monetary policy. Also, the Fed Chairman noted that he was not sure of the efficacy of further policy easing in the current economic environment.

US debt ceiling uneasiness gaining steam

The US debt ceiling issue is gaining more attention on the Street as the August 2 deadline for raising the borrowing limit moves closer, exacerbated by Moody’s Investors Service warning late-yesterday that it may cut the top-notch AAA credit rating of the US if the debt ceiling is not raised by the deadline. Although Fed Chair Bernanke’s testimony before the Senate today was a repeat of yesterday’s remarks in front of the House, during the Q&A session commented on the fiscal challenges facing the US, particularly the raising of the debt ceiling issue. Bernanke reiterated his concerns over not raising the debt ceiling, noting the negative impact of potential credit rating downgrades and a loss of investor confidence that could send interest rates higher to threaten the recovery. 

Global debt issues pressure international markets

Today’s euro-area debt crisis uneasiness came courtesy of a bond auction in Italy, which although did not fail as some had feared amid the recent contagion worries, the yields the debt-heavy nation had to pay were solidly higher from levels seen in previous auctions. Additionally, Italy won a confidence vote in the Senate on its austerity plan, which had been expedited to try to cool the aforementioned flare-up in concerns that the eurozone debt crisis could spread to the nation’s shores. Tomorrow, the lower house Chamber of Deputies is set to cast its confidence vote on the plan, to secure final passage of the measure, per Bloomberg. Meanwhile, conviction in Europe was also stymied ahead of tomorrow’s results from the European stress tests of the banking sector. In other economic news, eurozone core consumer prices came in hotter than expected y/y in June, but m/m, headline consumer prices were flat.

In Asia/Pacific economic news, New Zealand’s 1Q GDP grew more than anticipated and India’s wholesale inflation came in cooler than expected. Additionally, South Korea’s central bank voted to leave its benchmark interest rate unchanged at 3.25% as expected.

Factory production will join more inflation data tomorrow

In addition to the previously referenced Consumer Price Index (CPI), tomorrow also brings the release of industrial production and capacity utilization, forecast to rise 0.3% and improve to 76.9%, respectively, for the month of June. Manufacturing has been a bright spot, with production globally bouncing back as Japan gets back online following the March disasters, and the June ISM Manufacturing Index unexpectedly rose. While economic growth has been tenuous.

Other US economic releases on tomorrow’s calendar include the July Empire Manufacturing Index, expected to rise to 5.0 after a disappointing decrease to -7.79 in the prior month, and the preliminary University of Michigan Consumer Sentiment report is anticipated show an improvement in July to 72.0 from 71.5.

On the international front, tomorrow’s reports include the trade balance in the Eurozone, and wholesale sales in Canada.