Evening Market Update

Volatile Week Ends With a Streak

Equity markets finished an incredibly volatile week on a two-day winning streak, as stocks shrugged off a larger-than-expected drop in consumer sentiment en route to solid gains. Treasuries, likely still pricing this week's unprecedented move by the Federal Reserve also were mostly higher on the day, Advance retail sales matched expectations and earnings were mixed, as J.C. Penney fell short of expectations, while NVIDIA and Nordstrom both surprised to the upside.

The Dow Jones Industrial Average gained 126 points (1.1%) to 11,269, the S&P 500 Index picked up 6 points (0.5%) to 1,179, and the Nasdaq Composite gained 15 points (0.6%) to 2,508. In heavy volume, 1.3 billion shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.49 to $85.23 per barrel, wholesale gasoline dropped $0.01 to $2.82 per gallon, and the Bloomberg gold spot price shed $18.79 to $1,745.13 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was mostly flat at 74.59. For the week, including dividends, the DJIA lost 1.5%, the S&P 500 Index shed 1.7%, and the Nasdaq Composite was down 1.0%.

J.C. Penney Co. Inc. (JCP $27) announced 2Q earnings of $0.07 per share, below the $0.09 consensus estimate of analysts surveyed by Reuters, as revenues declined 0.8% year-over-year (y/y) to $3.9 billion, matching what the Street was expecting. The department store retailer said its 2Q same-store sales-sales at stores open at least a year-increased 1.5% y/y. Shares finished lower due to the lack of an update from the company regarding its full-year guidance, raising concerns about the competitive environment JCP faces. 

Nordstrom Inc. (JWN $45) reported 2Q EPS of $0.80, six cents above the Street's expectation, with revenues increasing 12.4% y/y to $2.7 billion, compared to the $2.8 billion that analysts were anticipating. The company's 2Q same-store sales increased 7.3% y/y. JWN raised its full-year EPS outlook. Shares closed solidly higher.

NVIDIA Corp. (NVDA $13) achieved 2Q EPS ex-items of $0.32, exceeding analysts' estimates of $0.25, with revenues of $1.0 billion matching the Street's projection. The graphic chip maker said consumer demand for notebooks drove 2Q revenue growth of 5.7% compared to 1Q. The company offered 3Q revenue guidance that exceeded analysts' expectations, but shares gave up an early advance and finished lower amid concerns among analysts regarding the outlook for its Tegra mobile dual core chip business and the possible impact on earnings of higher operating expenses.

Retail sales rise, while consumer sentiment tumbled and inventories missed forecasts

Advance retail sales for July increased 0.5% month-over-month (m/m), matching the growth that was forecasted by economists surveyed by Bloomberg, and June’s 0.1% gain was revised to a rise of 0.3%. July sales ex-autos were higher by 0.5% m/m, exceeding the 0.3% increase that was anticipated, and June’s flat reading was revised to a 0.2% gain. Sales ex-autos and gas rose 0.3% m/m in July, versus the 0.2% growth that was anticipated, and its June figure was revised from a 0.2% increase to a rise of 0.5%.

Following last month's 2Q GDP report, which showed disappointing growth due to a sharp deceleration in consumer spending, today’s data was a sight for the bulls' sore eyes as it suggested that the consumers continue to spend despite the frustratingly high unemployment rate and crimped discretionary income due to high fuel and food costs. Although sales at the gas pumps rose 1.6% m/m in July, spending rose a solid 1.4% on electronics and appliances, furniture sales gained 0.5%, and online sales advanced 0.9%. However, the enthusiasm of the data is waning as today's read on consumer sentiment showed confidence has fallen sharply recently, with US political uncertainty, eurozone contagion fears, and the Federal Reserve's downgraded assessment of the economy likely taking a toll on consumers’ economic views.

The preliminary University of Michigan's Consumer Sentiment Index showed consumers’ psyches fell more sharply than expected in August, dropping from 63.7 in July to 54.9-the lowest since 1980-compared to the declined to 62.0 that economists had projected. The tumble in the index came as the economic outlook and current economic conditions components of the report both fell sharply. On inflation, the 1-year and 5-year inflation outlooks remained at 3.4% and 2.9%, respectively.

Finally, business inventories rose 0.3% m/m in June, compared to the 0.5% gain that was expected, and May's 1.0% growth was revised to a 0.9% advance. However, sales rose 0.4% m/m, and the inventory-to-sales ratio-the amount of time it would take to deplete inventories at the current sales pace-remained at 1.28 months.

Treasuries finished mostly higher, with the yield on the 2-year note unchanged at 0.18%, while the yield on the 10-year note dropped 10 bps to 2.24%, and the 30-year bond lost 8 bps to 3.72%.

Sentiment rebounds in Europe, but Asian data adds to global slowdown concerns

The equity markets in Europe rebounded for a second-straight day, led by solid gains in financials following the announcement of a short-selling ban on financial stocks in France, Italy, Spain and Belgium. Also boosting sentiment, a meeting between Germany and France was scheduled for Tuesday, which investors hope will yield progress in resolving the region's debt crisis. In European economic news, French consumer prices fell more than expected in m/m in July and Italy's trade deficit narrowed.

In Asia/Pacific economic news, Japanese industrial production was revised slightly lower for June and Chinese reports showed growth in yuan-denominated loans slowed. Elsewhere, Hong Kong announced that its 2Q GDP unexpectedly contracted q/q and the economy experienced slower-than-expected growth over the past year. Finally, India's industrial production rose much more than expected in June, despite the government’s recent rate increases aimed at cooling inflation.

Final weekly tally buries the lead of a wild week

Even though the final stats for the equity markets this week resembled another "summer doldrums" period of market action that traders had become accustomed to amid the soft patch in the economy, the intra-week action was so volatile that the exchange floors on Wall Street may continue humming throughout the weekend. Aside from Friday’s modest moves-as traders were probably too exhausted to garner enough energy to place orders with conviction-the S&P 500 Index, alternated between gains and losses that exceeded 4% every session, highlighted by Monday's 6.7% drop on the heels of Standard & Poor’s late-Friday (S&P) downgrade of the US' credit rating and Tuesday’s 4.7% rally after the Federal Reserve noted that rates will likely remain extremely low through at least mid-2013. The Dow and Nasdaq posted similar swings throughout the week as sentiment turned on a dime with the eurozone crisis reaching new heights on growing concerns about the AAA-credit rating of France suffering the same fate as its US counterpart, while double-dip recession fears were soothed somewhat by a strong reading on US retail sales and a drop in US weekly initial jobless claims below the key 400,000 level.

Meanwhile, the wild action was not relegated to stocks, as Treasury yields fell sharply amid a flight to safety, despite the S&P downgrade of the US debt, and gold prices continued to surge amid some amplified risk aversion, though prices pared gains late in the week as margin requirements were raised for the trading of the precious metal. Finally, the US dollar, although finishing flat on the week, saw sharp losses erased against the Swiss Franc, aided by an intervention of the Swiss National Bank, while trading blows with the euro, and losing ground to the safe-haven Japanese yen.

Manufacturing, housing and inflation data to join the market fray

With the focus on the eurozone likely continuing to garner the most attention among investors next week we will get a slew of manufacturing, housing and inflation reports that may divert some of the attention away from the other side of the Atlantic. The Empire Manufacturing Index, expected to post a flat reading-the demarcation point between expansion and contraction-after recording a -3.76 reading in July, provides the first look at regional activity for August on Monday. Meanwhile, the Philly Fed Manufacturing Index will follow on Thursday, forecasted to improve modestly from 3.2 in July to 3.7 in August, while Tuesday's release of the Fed's July report on industrial production and capacity utilization will provide further insight into the health of the manufacturing sector, with production expected to rise 0.5% and utilization forecasted to increase slightly from 76.7% in June to 77.0%.

Housing data will also begin early in the week, with Monday's NAHB Housing Market Index expected to remain at 15 for August-a reading depicting sentiment among homebuilders remains poor-while housing starts and building permits will follow on Tuesday, with starts expected to decline 4.6% in July and permits forecasted to decline 1.9%. Also, we will get the first look at July home sales, with Thursday’s release of existing home sales, forecasted to rise 2.7% m/m.

Finally, July inflation data will pour in throughout the week, beginning with Tuesday's Import Price Index, anticipated to decline 0.1% m/m, followed by Wednesday's release of the Producer Price Index, expected to increase 0.1% m/m, while excluding food & energy, core prices are projected to rise 0.2% m/m. The price pressure data will culminate with Thursday's release of the Consumer Price Index, estimated to grow 0.2% m/m on both the headline and core rates.

Other reports on next week's US economic calendar include: weekly mortgage applications, weekly initial jobless claims, and the Conference Board’s Index of Leading Economic Indicators.

Next week's international economic calendar offers CPI readings from Canada, the eurozone, and the U.K., GDP reports from the eurozone and Japan, minutes from the meetings of the Bank of England and the Reserve Bank of Australia, and Japanese leading indicators.