Evening Market Update

 

So Much News, So Little Direction

The debt ceiling overhang, mixed results on the corporate earnings front, and some disappointing economic data provided a landscape for indecision in today’s session. Industrials hampered blue chips, which accelerated to the downside in the final minutes, courtesy of a solid decline in shares of 3M Co after the conglomerate warned of struggles in its LCD unit going forward, while tech stocks helped to keep the S&P 500 and the Nasdaq close to the flatline. In earnings news, Ford Motor Co and Texas Instruments released favorable reports, while shares of Lexmark International jumped after the printer maker followed a disappointing 1Q with better-than-expected results for the 2Q. However, shares of Netflix and United Parcel Service suffered after serving up lackluster outlooks, despite EPS results that were above expectations. Meanwhile, Treasuries finished higher amid unexpected declines in new home sales, housing prices, and regional manufacturing activity that offset a better-than-expected showing in consumer confidence. 

The Dow Jones Industrial Average lost 92 points (0.7%) to 12,501, the S&P 500 Index fell 5 points (0.4%) to 1,332, and the Nasdaq Composite shed 3 points (0.1%) to 2,840. In moderate volume, 836 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.39 to $99.59 per barrel, wholesale gasoline gained $0.02 to $3.10 per gallon, and the Bloomberg gold spot price advanced $5.68 to $1,619.70 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.8% lower at 73.52.

Ford Motor Co. (F $13) announced 2Q EPS ex-items of $0.65, above the $0.60 consensus estimate of analysts surveyed by Reuters, with revenues increasing 13% year-over-year (y/y) to $35.5 billion, well above the $31.6 billion that the Street had forecasted. The automaker said it saw continued growth in its automotive business and it focused on strengthening its balance sheet. Shares finished lower after opening to the upside.

Texas Instruments Inc. (TXN $32) reported 2Q earnings of $0.56 per share, two cents above the estimate of analysts, with revenues declining 1% y/y to $3.5 billion, roughly inline with the Street’s forecast. The company said it saw continued success in its portfolio of analog and embedded processing chips, while it also resumed production ahead of schedule at its Japan factories that were damaged in the earthquake. TXN issued 3Q guidance that matched analysts’ forecasts. TXN was nicely higher.

Netflix Inc. (NFLX $267) posted 2Q profits of $1.26 per share, above the $1.11 that the Street had anticipated, with revenues growing 52% y/y to $789 million, compared to the $791 million that analysts projected. The online movie and TV show subscription service said global subscribers grew 70% y/y to 25.6 million. However, NFLX issued 3Q EPS guidance that missed the Street’s forecast, while warning that subscriber growth could slow as it implements a recently announced pricing change aimed at separating its mail subscription and online video streaming plans. Shares were sharply lower.

Dow member 3M Co. (MMM $90) achieved 2Q earnings of $1.60 per share, inline with what the Street had estimated, with revenues increasing 14% y/y to $7.7 billion, above the $7.6 billion that analysts had anticipated. The conglomerate said the impact of the Japan earthquake during the quarter was inline with expectations, while a larger-than-anticipated contraction in LCD TV end-market demand affected its sales, reflecting a tighter consumer electronics market. Despite raising the low end of its full-year EPS guidance, MMM’s projection missed the Street’s forecast, while warning that its optical business—which includes its LCD TV unit—“is going to struggle in the second half,” per Dow Jones Newswires. Shares were solidly lower.

Lexmark International Inc. (LXK $34) found some redemption by following up a weak 1Q by reporting record EPS for the 2Q of $1.36, well above the $1.03 analyst estimate. Revenues grew 1% y/y to $1.04 billion, also above forecasts, as sales from toner and ink rose 3% y/y and it saw strong demand from corporate customers. Shares of the printer maker were up over 18% on the day.

United Parcel Service Inc. (UPS $72) reported 2Q EPS ex-items of $1.05, one penny above the expectation of analysts, as revenues rose 8% y/y to $13.2 billion, exceeding the $13.1 billion that the Street was looking for. The package delivery and logistics firm said ”despite softening economic conditions,” it experienced “superior export volume growth in international and record supply chain & freight results,” while it benefited from quality of revenue in the US. However, although reiterating its full-year EPS outlook, the company said during a conference call with analysts that economic growth expectations have slowed and “gridlock in the nation’s capitol clearly is not helping,” per Dow Jones Newswires. UPS traded lower.

Housing data lackluster, manufacturing declines, while consumer confidence improved

New home sales unexpectedly fell, dropping 1.0% month-over-month (m/m) in June to an annual rate of 312,000 units, below the 320,000 rate forecasted by economists surveyed by Bloomberg, and May’s figure was downwardly revised by 4,000 to a 315,000 annual unit rate. However, the median home price rose 7.2% y/y and was 5.8% higher m/m to $235,200. Inventory of new homes for sale fell to a new record low of 164,000 units, representing 6.3 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, which also unexpectedly fell in June, 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 more than 90% 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 a sizeable portion of homeowners have negative equity in their homes, and loan underwriting standards remain restricted.

In other housing news, the S&P/Case-Shiller Home Price Index showed a decline in home prices of 4.51% y/y in May, compared to the 4.50% drop that economists surveyed by Bloomberg had expected. Month-over-month (m/m), home prices were 0.05% lower, compared to forecasts, which called for a flat reading. However, on a non-seasonally adjusted basis, home prices posted a modest increase for the second-straight month.

Meanwhile, the  Consumer Confidence Index came in above expectations, increasing from a downwardly revised 57.6 in June to 59.5 for July, compared to the 56.0 that economists anticipated. The favorable read on sentiment came as a decline in consumers’ assessment of the current situation was offset by an improvement in expectations of business conditions. Moreover, their appraisal of jobs being “hard to get” increased, while the read on jobs being “plentiful” remained flat. However, on inflation, the report showed consumers expect inflation to fall to 5.7% twelve months from now, from the 6.0% projection in June.

Finally, the Richmond Fed Manufacturing Index showed manufacturing activity in the Mid-Atlantic region unexpectedly deteriorated, back to a level depicting contraction, falling from 3 in June to -1 in July, compared to the increase to 5 that was expected by economists. A reading below zero depicts contraction. The decline in the index came as new orders volume and shipments both came in below zero, while the number of employees posted a solid decline.

Today’s data shows that a recovery in the housing market still remains well off in the distance and manufacturing activity continues to feel the impact of severe weather, the Japan production and supply-chain disruptions, as well as the frustratingly high unemployment level. 

Tomorrow, the US economic calendar will continue to be active as traders try to determine if a second-half rebound is in the cards for the economy, with the morning release of the volatile durable goods orders report, forecasted to rise 0.3% m/m in June, after gaining 1.9% in May, while ex-transportation, orders are forecasted to have risen 0.5% m/m after increasing 0.6% in May. Meanwhile, in afternoon trading, the Federal Reserve will release its Beige Book wherein Fed staffers summarize anecdotal economic data from all twelve Federal Reserve districts in preparation for the next Federal Open Market Committee (FOMC) meeting scheduled for August 9. The Fed downgraded its assessment of the economy at the late June meeting, citing temporary factors, but also noted that some of the headwinds “may be stronger and more persistent than we thought.“ Finally, the MBA Mortgage Applications Index will round out the day’s economic data.

Treasuries ended the day higher following the data and despite the US debt ceiling uncertainty, with the yield on the 2-year note down 1 bp to 0.40%, while the yields on the 10-year note and the 30-year bond declined 4 bps to 2.96% and 4.28%, respectively.

European economic data and markets mixed

Some disappointing corporate reports and the omnipresent eurozone and US debt dramas kept investors at bay overseas, as markets in the euro-region were mixed. Financials also suffered following disappointing debt auctions in Italy and Spain, as yields the two countries at the heart of the spreading contagion concerns have to pay rose. Economic news across the pond varied, as UK 2Q GDP expanded at a 0.2% quarter-over-quarter (q/q) rate, inline with economists’ forecasts, but a deceleration from the 0.5% growth seen in 1Q, while year-over-year, output grew at a rate of 0.7%, down from the 1.6% growth registered in 1Q, and below the 0.8% expansion expected. Meanwhile, the German GfK Consumer Confidence declined slightly more than anticipated for the month of August, but French consumer confidence unexpectedly improved.

In Asia, the mood was decidedly better as optimism toward the corporate earnings front and the economic prospects for the second half overshadowed the lingering concerns regarding the US debt ceiling issue and the eurozone debt crisis. Meanwhile, Bank of Korea Deputy Governor Chun offered an upbeat second-half economic outlook for the eastern nation, and Australia provided a favorable forecast for household spending. However, the markets in India failed to participate in the region’s advance after the nation’s central bank increased interest rates in an attempt to control inflation.

The international economic calendar will remain relatively light again tomorrow, with Germany reporting import prices and CPI, Italy offering business confidence, and industrial orders coming from the UK, while Australia will report CPI, and South Korea will release 2Q GDP.