Evening Market Update

Tums Anyone?

Investors were treated to another wild ride in the markets today—beginning the day on solid footing, plunging by over 300 points following the statement concluding the Federal Reserve’s monetary policy meeting, only to recover to close at the day’s highs. In its statement, the Fed noted that economic growth so far this year has been “considerably slower” than expected, while also saying it anticipates “exceptionally low levels for the fed funds rate at least through mid-2013.” Treasuries jumped following the announcement and gold rose, while the US dollar fell sharply against the Swiss franc and Japanese yen and crude oil prices gave up early gains to finish lower. Elsewhere on the economic front, separate reports showed a modest decline in 2Q productivity, a rise in labor costs, and a deterioration in small business optimism. Meanwhile, equity news took a back seat to the FOMC statement, with MGM Resorts International posting a smaller-than-forecasted loss, while DISH Network and Cablevision Systems missed analysts’ profit projections, and shares of Fossil suffered after lowering its guidance.

The Dow Jones Industrial Average jumped 430 points (4.0%) to 11,239, the S&P 500 Index gained 53 points (4.7%) to 1,173, and the Nasdaq Composite soared 124 points (5.3%) to 2,483. In very heavy volume, 2.4 billion shares were traded on the NYSE and 3.8 billion shares changed hands on the Nasdaq. WTI crude oil fell $2.01 to $79.30 per barrel, wholesale gasoline lost $0.02 to $2.67 per gallon, and the Bloomberg gold spot price rose $17.55 to $1,737.00 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 1.1% lower at 74.00.

MGM Resorts International (MGM $11) reported a 2Q net loss ex-items of $0.05 per share, compared to the shortfall of $0.13 per share that analysts surveyed by Reuters had projected, with revenues rising 17% year-over-year (y/y) to $1.8 billion. The casino and hotel operator said it believes the foundation of the Las Vegas recovery “is solid and our business is building,” while its MGM Macau had another record quarter. Shares of MGM moved below the flatline as analysts expressed caution about the impact of the recent drop in the equity markets and soft economic data on consumer sentiment and discretionary spending.

DISH Network Corp. (DISH $23) announced 2Q earnings of $0.75 per share, four cents below the expectation on the Street, but revenues rose 13.3% y/y to $3.6 billion, topping the $3.4 billion that analysts had projected. The satellite-TV provider said its net subscribers decreased by about 135,000 during the quarter. Shares finished nearly unchanged.

Fossil Inc. (FOSL $82) was sharply lower after the watch and fashion-accessories maker issued 3Q EPS guidance that was well below the Street’s expectations, while lowering the high-end of its full-year earnings outlook, which also came up short of analysts’ estimates. The company’s guidance is overshadowing its 2Q results, which showed EPS of $0.80, four cents above expectations and revenues of $557 million, exceeding the $537 million that the Street forecasted.

Cablevision Systems Corp. (CVC $17) was down over 12% after the cable operator reported 2Q EPS of $0.32, ten cents below the Street’s forecast, with revenues rising 9.1% y/y to $1.7 billion, compared to the $1.8 billion that analysts were anticipating. CVC said its total customers declined by 17,000 quarter-over-quarter (q/q).

Fed gives mid-2013 target date for continued low rates

Possibly validating some traders’ concerns about the slow pace of global growth, the Federal Open Market Committee (FOMC) meeting  concluded with the Fed saying that growth so far this year has been “considerably slower” than expected and the recovery over coming quarters is now expected to be at a “somewhat slower pace.” Additionally, the Fed said that temporary factors this year “appear to account for only some of the recent weakness in economic activity.” The Fed noted that the labor market has “deteriorated” in recent months and that household spending has “flattened out.” Lastly, the Fed said that downside risks to the economic outlook have increased. The other assessments of the economy were essentially unchanged, with continued business investment and a depressed housing sector. On inflation, the Fed said that it had moderated, and that the Fed continues to believe that it anticipates it will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate.

In a surprise development, the Fed gave a timeframe for keeping the fed funds rate at an exceptionally low level for an extended period, saying that this condition is anticipated to be the case through at least mid-2013. This new language prompted three members to dissent, with Presidents Fisher, Kocherlakota, and Plosser saying they would have preferred to keep the prior language.

Some traders believed that the Fed would make changes in its reinvestment policy to lengthen the maturity of its balance sheet by moving its purchases of maturing mortgage-backed assets to longer-dated Treasuries instead of shorter-term bonds, but this change was not made at this meeting. Lastly, the Fed reiterated it will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate, and added that it will continue to assess the economic outlook in light of incoming information and is prepared to employ those tools as appropriate.

Treasuries finished higher with the short-to-mid end of the curve moving to the upside following the Fed’s statement. The yield on the 2-year note was down 6 bps to 0.20%, the yield on the 10-year note was 4 bps lower at 2.28%, and the 30-year bond declined 1 bp to 3.64%.

Productivity dips and costs rise, small business optimism fades, Fed meeting on deck

The preliminary reading on 2Q nonfarm productivity showed a 0.3% decline on an annual basis, from the 0.6% drop seen in 1Q, which was revised from a 1.8% increase, and compared to the 0.9% decline that economists surveyed by Bloomberg expected. Unit labor costs came in at a 2.2% increase, versus a gain of 4.8% that was recorded in 1Q, revised sharply higher from a previous 0.7% rise, and compared to the 2.4% growth that was estimated.

Elsewhere, the NFIB Small Business Optimism Index deteriorated in July, declining from 90.8 in June to 89.9, matching the expectation of economists. The decrease came as the number of firms reporting expectations of higher sales and a better economy deteriorated, along with declines in plans to hire and increase capital spending.

Treasuries are lower in afternoon action following the data and the steep gains amid yesterday’s sell-off in the equity markets, with the yield on the 2-year note up 3 bps to 0.29%, the yield on the 10-year note 6 bps higher at 2.38%, and the 30-year bond gaining 7 bps to 3.72%.

Europe pares losses

In Europe, the solid advance in the US before the Fed’s policy announcement helped to limit the impact of lingering US and euro-area debt concerns and growing worries about the health of the global economy. However, some economic data out of Germany kept a lid on sentiment and markets in region finished mixed. Europe’s largest economy reported that exports fell more than expected in June, while imports unexpectedly rose, resulting in a smaller-than-projected trade surplus. Meanwhile, economic releases out of the UK were mixed with a read on the region’s home prices unexpectedly improving in July, while separate reports showed industrial production and manufacturing activity came in below expectations and the UK trade deficit surprisingly widened.

In Asia, some late-day resiliency helped spare some of the markets from huge losses, as traders digested a plethora of key economic data in the region. China’s consumer and producer prices both accelerated in July to 6.5% and 7.5% y/y, respectively, dampening optimism that the government’s monetary-tightening campaign may be in the late stages. However, other reports showed that the nation’s tighter monetary policy may not be slowing growth as much as some anticipated, with industrial production and retail sales growing over 14% and 16%, respectively, while fixed asset investment rose more than 25%.

Tomorrow’s US economic calendar will be light and include wholesale inventories, forecast to rise 1.0% in June, following a 1.8% gain in May, and MBA mortgage applications. Internationally, releases will include Japan’s Tertiary Index, South Korea’s unemployment rate, and China’s loan growth and trade balance, while Germany will report CPI, and France will provide industrial production.