Evening Market Update

Markets Crushed By Weak Data

The long awaited resolution to the US debt ceiling debate brought no relief to markets today, as troubling economic data fueled a broad-based selloff in risky assets. Investors fled for the safety of US Treasuries and equity markets suffered heavy losses following the release of data showing the first decline in consumer spending in over two years. Better-than-expected total vehicle sales and news from the earnings front offered a slight break from the day’s disappointments. Pfizer, Duke Energy, and Coach all exceeded analysts’ expectations. However, weak margins from Coach and a miss by Archer Daniels Midland sullied an otherwise strong day for earnings. 

The Dow Jones Industrial Average lost 266 points (2.2%) to 11,867, the S&P 500 Index fell 33 points (2.6%) to 1,254, and the Nasdaq Composite declined 75 points (2.8%) to 2,669. In heavy volume, 1.3 billion shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq. WTI crude oil fell $1.57 to $93.32 per barrel, wholesale gasoline dropped $0.03 to $3.03 per gallon, and the Bloomberg gold spot price increased by $37.55 to $1,656.93 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.2% higher at 74.45.

Pfizer Inc. (PFE $18) posted 2Q profits ex-items of $0.60 per share, a penny above what the Street was expecting, on a 0.9% decline in revenues to $16.98 billion that fell short of estimates. The world’s largest drugmaker, per Bloomberg, said sales of Lipitor topped $2.59 billion, while receipts from its arthritis treatment, Enbrel, saw 13% growth for the quarter and its pain pill, Lyrica, gained 19%. PFE reiterated its full-year profit forecast of $2.16-2.26 per share, while also maintaining its 2012 forecast, the first year in which it will have generic competition to its flagship Lipitor after losing patent protection for the drug in November. Shares were lower.

Duke Energy Corp. (DUK $19) reported an adjusted 2Q profit of $0.33 per share, after reporting a loss in the same period a year ago, ahead of the $0.31 consensus estimate of analysts surveyed by Reuters. The better-than-expected results came despite weaker demand from residential customers, as it saw an increase in demand for industrial power and higher sales in Brazil. DUK is in the midst of a $13.7 billion all-stock acquisition of Progress Energy Inc. (PGN $47) which receives a shareholder vote on August 23. DUK was nearly unchanged, while PGN traded slightly lower.

Shares of luxury handbag and luggage maker Coach Inc. (COH $61) were sharply lower, despite achieving fiscal 4Q EPS of $0.68, above the $0.65 that analysts were forecasting, as a decline in its gross margins is negatively affecting sentiment. COH had warned in mid-March that quarterly results would suffer as a result of the Japanese earthquake and tsunami. Revenues for the quarter rose 8.4% year-over-year (y/y) to $1.03 billion, but ahead of the $1.01 billion expected by the Street, as direct-to-customer sales gained 18% y/y on a comparable basis, which excludes an extra week last year, and same-store sales—sales at stores open at least a year—rose 10.1% y/y.

Archer Daniels Midland Co. (ADM $29) reported fiscal 4Q earnings of $0.58 per share, well short of the $0.85 Reuters estimate, despite a 45% surge in revenues to $22.87 billion, which was above the forecasts of analysts which called for sales of $20.43 billion. The agriculture firm cited an increase in tax expenses and significantly higher commodity costs in its corn-processing unit. Shares finished sharply lower.

General Motors Co. (GM $28) reported a 7.8 y/y rise in July US sales of its core brands—Buick, GMC, Cadillac, and Chevrolet, compared to estimates of a 7.0% increase from a Bloomberg poll of analysts. GM also lowered its full-year expectations for auto industry sales to the lower end of its previously announced 13.1-13.5 million range. Meanwhile, Ford Motor Co (F $12) announced a 5.9% increase in July sales, which missed the 7.6% estimate of analysts, amid a 13% rise in its Ford brand and a 40% increase in sales for Lincoln, while Chrysler reported a 20% y/y rise in US sales for the same period. Foreign automakers fared far worse in July, as Honda Motor Co (HMC $39) said sales fell 28.4% y/y and sales at Toyota Motor Corp (TM $81) declined 22.7% y/y. Shares of all four firms were lower.

Personal spending drops, income only inches higher

Personal income increased 0.1% month-over-month (m/m) in June, just shy of expectations of economists surveyed by Bloomberg, which called for a 0.2% rise, and May’s 0.3% increase was revised to a 0.2% gain. Also, personal spending dropped 0.2% m/m in June, the first time in nearly two years, compared to expectations of a 0.1% advance, and May’s unchanged reading was revised to a 0.1% increase. The savings rate climbed to 5.4% in June, the highest rate since September, from 5.0% in May.

Also, the PCE Price Index, which is released with the income and spending data, was up 2.6% year-over-year (y/y) in June, matching expectations, after May’s 2.5% increase was revised to a 2.6% increase. The core PCE Price Index, which excludes food and energy, was up 0.1% m/m, below forecasts of a 0.2% increase, while y/y, core prices moved 1.3% higher, versus the 1.4% gain that was expected.

After months of debate and with little time to spare, the US Senate voted 74-26 to pass legislation to increase the nation’s debt ceiling, after the House gave its approval for the deal late Monday. The bill, which was subsequently signed by President Barack Obama, will provide an immediate $400 billion increase in the $14.3 trillion U.S. borrowing cap, with an additional $500 billion assured this fall. The agreement also establishes a special joint committee of 12 members of Congress, which must provide recommendations for an additional $1.5 trillion in deficit reduction by November 23, 2011. 

Treasuries were solidly higher amid the weakness in stocks and disappointing economic data, as the yield on the 2-year note fell 5 bps to 0.32%, the yield on the 10-year note decreased 13 bps to 2.61%, and the 30-year bond rate was 17 bps lower at 3.91%. 

Europe focused on its own debt concerns, Australia leaves key rate unchanged

The US debt deal did little to help the European markets, as the region’s own debt concerns remain at the forefront of headlines. Spreads on Italian and Spanish debt versus their German counterpart rose to record intra-day highs, with the yield on 10-year notes in Italy surging 21 basis points (bps) to 6.25%, while similar maturities on Spanish debt jumped to 6.46%, the highest levels since 1997. Italian news agency Ansa reported that the country’s Financial Stability Committee will meet later today to discuss the rise in yields, while also saying Finance Minister Tremonti is set to meet with officials at the nation’s central bank. In other European economic news, the UK’s PMI Construction Index showed a slight downtick, though it did manage to exceed economists’ expectations. Prices at the wholesale level in the eurozone were flat on a month-over-month basis, and mostly inline with forecasts. On the equity front,  Barclays Plc (BCS $14) ), the UK’s largest bank, reported a sharp decline in profit for the first half of the year, stemming primarily from weak revenue out of its investment banking unit. The company also said it will eliminate up to 3,000 jobs in an effort to improve profits and cut costs..

In Asia/Pacific economic news, Australia reported an unexpected 3.5% decline in building approvals in the land down under, where economists were expecting a gain of 3.0%. The Reserve Bank of Australia left its benchmark lending rate unchanged, as expected, citing the uncertain global environment. While in India, the Governor of the nation’s central bank alluded to further interest rates hikes in order to curb inflation.

Adding to today’s bevy of global economic data, Brazil’s industrial production shrank 1.6% in June, considerably worse than the 0.4% reduction economists were expecting.

Read on services sector and job report preview on tap

The ISM Non-Manufacturing Index  will be released tomorrow, and is forecasted to increase to 53.5 in July from 53.3 in June, with 50.0 marking the level that separates expansion from contraction. The report is generally considered a measure of economic strength in the service sector and is the companion to the ISM Manufacturing Index, which was released on Monday, and posted a disappointingly large decline to 50.9 in July.

Additionally, traders will also be eyeing the employment component within the ISM index, as well as the ADP Employment Change Report, where private sector employers are expected to have added 100,000 jobs in July after expanding by 157,000 jobs in June. While the ADP report has not tracked the Labor Department’s broader nonfarm payrolls report, it is viewed as another read on trends in the job market. Friday’s nonfarm payrolls report is expected to show an increase of 85,000 in July, after increasing a mere 18,000 in June, while excluding government hiring, private sector payrolls are expected to increase 100,000, after expanding by 57,000 in June.

The other US releases on tomorrow’s economic calendar are factory orders for June, anticipated to decrease 0.8% after a 0.8% rise in May, and the MBA Mortgage Applications Index.

International economic releases will include services PMIs for the UK, eurozone and China, as well as euro-zone and Australian retail sales.