Evening Market Update

Political Posturing Pressures Markets

After holding on for most of the day, equity markets finally succumbed to pressure stemming from anxiety over the continuing gridlock in Washington. The US House of Representatives will vote on a Republican-sponsored plan later today and while passage is expected in the House, the bill is likely to face staunch opposition in the Democratically-controlled Senate. Economic releases provided some relief from the seemingly never ending stream of negative news from Washington, as initial jobless claims and pending home sales both came in better than expected. News from the earnings front was generally good as well, with Whole Foods Market, Visa, Green Mountain Coffee Roasters, and Dow member DuPont all besting analysts’ expectations. However, Exxon Mobile and Sprint Nextel’s earnings surprised to the downside. Treasuries rebounded from yesterday’s decline and finished the day higher.

The Dow Jones Industrial Average lost 62 points (0.5%) to 12,240, the S&P 500 Index fell 4 points (0.3%) to 1,300, and the Nasdaq Composite picked up 1 point (0.1%) to 2,766. In moderate volume, 981 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.25 to $97.15 per barrel, wholesale gasoline dropped $0.02 to $3.12 per gallon, and the Bloomberg gold spot price gained $1.95 to $1,615.42 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.1% higher at 74.23.

Whole Foods Market Inc. (WFM $67) reported fiscal 3Q EPS of $0.50, two cents above the consensus estimate of analysts surveyed by Reuters, with revenues growing 11% year-over-year (y/y) to $2.4 billion, roughly inline with the Street’s expectations. The natural and organic foods supermarket said its 3Q same-store sales—sales at stores open at least a year—rose 8.4% y/y, and it is continuing to gain market share at a faster rate than most public food retailers. WFM added that it will accelerate its new store openings. Shares were higher.

Visa Inc. (V $87) announced adjusted fiscal 3Q earnings of $1.26 per share, above the $1.23 that the Street was looking for, as revenues increased 14% y/y to $2.3 billion, mostly matching analysts’ estimates. The credit card transaction processing firm said it benefitted from increased global payments volume, and solid cross border and processed transaction growth. The company also announced a new $1 billion stock repurchase program. V traded to the downside.

Dow member  Exxon Mobil Corp. (XOM $81) posted 2Q EPS of $2.18, below the $2.33 that analysts had projected, while revenues of $125.5 billion exceeded the $121.4 billion that was expected on the Street. The energy company said its capital and exploration expenditures were a record $10.3 billion, up 58% y/y, while higher crude oil and natural gas prices, improved downstream—refining—results and continued strength in chemicals aided its performance. Meanwhile, XOM’s upstream—exploration and production—business rose y/y on higher liquids and natural gas prices, which offset negative impacts from production mix and volume effects. Shares were lower.

Fellow Dow component DuPont (DD $52) achieved 2Q profits ex-items of $1.37 per share, above the $1.34 analyst expectation, with revenues rising 19% y/y to $10.3 billion, topping the $9.9 billion that was anticipated by the Street. The company said sales in developing markets grew 29%, while it saw strong performances in its agriculture, performance chemicals and safety & protection units, as well as its acquisition of Danisco. DD raised its full-year EPS outlook, due to the expectation for continued global economic growth. Shares were mostly unchanged.

Sprint Nextel Corp. (S $4) finished sharply lower after the wireless service provider announced that it had lost about 101,000 net postpaid subscribers—customers under contract—which was far more than the 15,000 loss in subscribers that analysts contacted by Reuters had expected. Also, analysts were disappointed by the company’s wireless margins. The disappointing results overshadowed its separate announcement that it had signed a high-speed network deal with LightSquared, which will pay Sprint $9 billion over 11 years. Also, Sprint reported a 2Q loss ex-items of $0.06 per share, smaller than the $0.12 shortfall that analysts were expecting, while its revenues of $8.3 billion were inline with forecasts. However, including losses from investments and a tax expense charge, the company’s loss was $0.28 per share.

Green Mountain Coffee Roasters Inc. (GMCR $103) traded sharply higher after reporting fiscal 3Q EPS ex-items of $0.49, well above the $0.36 that the Street forecasted, with revenues surging 127% y/y to $717 million, exceeding the $607 million estimate of analysts. The specialty coffee company said more than 80% of its sales were from its Keurig single-cup brewing system business as it has seen awareness of the system “grow faster and more broadly than we could have imagined.” GMCR raised its full-year guidance.

Jobless claims fall more than expected and pending home sales unexpectedly increased

Weekly initial jobless claims fell below the key 400,000 mark for the first time since the week ending on April 1, dropping by 24,000 to 398,000, versus last week's figure which was upwardly revised by 4,000 to 422,000. Economists surveyed by Bloomberg expected jobless claims to come in at 415,000. Also, the four-week moving average, considered a smoother look at the trend in claims, dropped by 8,500 to 413,750, while continuing claims declined by 17,000 to 3,703,000, but above the forecast of economists, which called for continuing claims to come in at 3,700,000.

Pending home sales  surprisingly rose in June, increasing 2.4% month-over-month (m/m), compared to the 2.0% decrease that economists had projected, and May’s 8.2% gain was unrevised. Moreover, compared to last year, sales were up 17.3% in June, after increasing an unrevised 15.5% in May, compared to the 14.7% gain that was forecasted. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which unexpected dipped in June.

Treasuries were higher despite the data and the US debt ceiling issue, as the yield on the 2-year note dropped 2 bps to 0.42%, the yield on 10-year note fell 3 bps to 2.96% , and the yield on the 30-year bond shed 2 bps to 4.26%. 

Weak data out of Europe

Data from the economic calendar in Europe hindered sentiment as reports showed German unemployment fell by a smaller amount than economists anticipated in July and UK sales unexpectedly declined in July, while a read on the euro-zone business climate came in below estimates. Making matters worse, contagion fears were agitated by a disappointing 10-year debt auction in Italy, which fetched higher yields and raised less than the maximum target amount of capital.

The Asian economic calendar was relatively light today and US debt concerns dominated regional issues. Today’s lone major release from Asia showed Hong Kong’s trade deficit widened more than expected, as exports and imports both rose more than anticipated in June.

Inflation in Brazil slowed in the month of July, falling 0.14% from the prior month. Despite the improvement, the emerging economy still faces a relatively high inflation rate of 8.36%. Brazilian policy makers were pleased with the overall trend saying domestic demand is easing and lowering their inflation outlook for the country.

GDP headlines tomorrow’s economic docket

Tomorrow the economic week will end in grand fashion, with the release of the first reading of 2Q GDP, the broadest measure of US economic output, with economists surveyed by Bloomberg expecting an annualized 1.8% quarter-over-quarter (q/q) rate of expansion. The forecasted rate of growth is a slight deceleration from the 1.9% pace that was registered in 1Q, with personal consumption—the largest component of the report—expected to slow from a 2.2% gain in 1Q to 0.8% for 2Q. Another quarter of growth below the 2% level that many consider potential “stall speed,” the rate a which growth slows enough that it becomes self-reinforcing to the downside, may foster some concerns about a double-dip in the economy as economic data has been mostly on the softer side over the past couple of months. However, the soft patch in the economy has been attributed largely to temporary factors, which are expected to ease as we move further along in 3Q and end out the year. Also, we are near the apex of 2Q earnings season and for the most part, profits continue to be strong and guidance thus far has on the upbeat side.

Other areas of influence on the report will be government spending, inventories, and our nation’s imports and exports. In its late-June monetary policy meeting, the Federal Reserve noted that federal government outlays rebounded in the first two months of 2Q, from “unusually low levels in the first quarter,” but state and local spending “appeared to have declined further.” Also, data released so far has showed inventories grew solidly in April and May—increasing inventories are a positive contribution to the calculation for GDP—while our trade deficit widened to $50.2 billion in May from the $46.8 billion recorded at the end of March. However, not all of the data will have been received by the Department of Commerce to calculate output, so estimates of missing data will be used, hence, there will be two other revisions to GDP after tomorrow’s release. As for the inflation aspects of the data, the GDP Price Index is expected to rise 2.0%, and the core PCE Index, which excludes food and energy, is forecasted to increase 2.3%.

In addition to the GDP reading, tomorrow’s economic calendar includes the release of the final University of Michigan Consumer Sentiment Index, expected to be revised higher from 63.8 to 64.0 and the Chicago Purchasing Manager’s Index, which is expected to deteriorate from last month’s level of 61.1 by falling to 60.0.

Tomorrow brings a slew of international economic releases including Canadian GDP, euro-zone CPI, French PPI and consumer spending, Italy’s PPI, German retail sales, U.K mortgage approvals and consumer confidence. Japan will release readings on its CPI, jobless rate, industrial production, vehicle production, construction orders, and housing starts. Finally, China and South Korea are both scheduled to release their index of leading indicators.