Evening Market Update

Technology Stocks Apply Pressure to Markets

Early gains in the US equity markets, courtesy of better-than-expected earnings reports from Target and Deere & Co, faded as technology stocks pressured the Nasdaq following a disappointing outlook from Dell, while blue chips ended the day only modestly higher. In other equity news, shares of Abercrombie & Fitch suffered after the teen retailer warned of cost pressures in the second half of the year, despite posting stronger-than-expected 2Q results. Meanwhile, yesterday’s eurozone debt crisis meeting between Germany and France had little impact on today’s action. Treasuries were mostly higher despite reports that showed a slightly larger-than-expected rise in producer prices and a gain in mortgage applications.

The Dow Jones Industrial Average rose 4 points (0.04%) to 11,410, the S&P 500 Index gained 1 point (0.1%) to 1,194, while the Nasdaq Composite declined 12 points (0.5%) to 2,511. In modest volume, 973 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.93 to $87.58 per barrel, wholesale gasoline added $0.02 to $2.87 per gallon, while the Bloomberg gold spot price rose $9.70 to $1,794.70 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.4% lower at 73.72.

Target Corp. (TGT $51) reported 2Q earnings of $1.03 per share, above the $0.97 consensus estimate of analysts surveyed by Reuters, with revenues rising 4.6% year-over-year (y/y) to $16.2 billion, roughly inline with what the Street had forecasted. 2Q same-store sales—sales at stores open at least a year—rose 3.9% y/y. TGT issued full-year EPS guidance that topped expectations, and shares were solidly higher.

Dell Inc. (DELL $14) announced 2Q EPS ex-items of $0.54, exceeding the $0.49 that the Street was looking for, as revenues increased 1% y/y to $15.7 billion, compared to the $15.8 billion that analysts had expected. The company said growth in its enterprise businesses highlighted the quarter, with “solid demand” for its server, storage and services portfolio, while revenue for laptops and desktops rose 4%. However, DELL lowered its full-year revenue guidance, based on “strategic decisions to redirect resources from lower-to-higher value solutions and a more uncertain demand environment.” DELL was over 10% lower

Deere & Co. (DE $74) achieved fiscal 3Q profits of $1.69 per share, two cents above analysts’ forecasts, with net revenues increasing 24% y/y to $7.7 billion, exceeding the $7.5 billion that the Street had projected. The farm and construction equipment maker said it saw increased sales of large farm machinery, which “are having a major impact on Deere’s performance,” while construction-equipment sales are moving higher “in spite of weakness in the North American residential and commercial construction sectors.” However, the company noted that raw material prices increased. DE raised its full-year net income outlook, including a negative impact of the Japanese earthquake and tsunami, but said “concerns over the health of the global economy and recent turmoil in world financial markets have introduced an additional element of uncertainty into the near-term outlook.” DE traded lower.

Abercrombie & Fitch Co. (ANF $65) finished over 6% lower after the teen-apparel retailer reported that its 2Q gross profit margin fell 150 basis points (bps) y/y, due to an increase in average unit cost. Also, the company noted that “Costing pressures will be greater in the second half of the year, and macroeconomic uncertainty has increased.” However, ANF reported 2Q EPS of $0.35, five cents above expectations, and revenues that rose 23% y/y to $917 million, topping the $879 million that was forecasted.

Producer prices come in hotter than expected, while mortgage applications rise

The Producer Price Index showed prices at the wholesale level rose 0.2% month-over-month (m/m) in July, after falling by an unrevised 0.4% in June, and compared to the 0.1% increase that economists surveyed by Bloomberg had forecasted. Also, the core rate, which excludes food and energy, increased 0.4% m/m, above forecasts of a 0.2% gain, after rising an unadjusted 0.3% in June. On a year-over-year basis, headline producer prices were 7.2% higher, versus the 7.0% increase that was projected, and the core rate was up 2.5%, above expectations of a 2.3% rise.

The hotter-than-expected read on July prices at the wholesale level was led by a 2.8% increase in tobacco products, which accounted for nearly one-quarter of the increase in core prices, along with gains in prices for light motor trucks, pharmaceuticals, and food. However, prices for energy goods declined 0.6%, after falling 2.8% in June. Although the decline in energy prices—led by a solid decrease in gasoline prices—may be some good news out of today’s report, core prices, the measure that the Federal Reserve pays more attention to, increased for the eighth consecutive month, possibly handcuffing the Fed’s willingness to offer further stimulus efforts, known as QE3, to try to stave off an economic slip back into a recession.

Meanwhile, with next week’s speech by Chairman Ben Bernanke at the Fed’s annual economic conference in Jackson Hole, Wyoming—the site of Bernanke’s first signal of QE2 last year—looming on the horizon, the possibility of QE3 is likely to garner more attention among investors and economists with every piece of economic data leading up to the event. Tomorrow, we will get a plethora of reports including: the Consumer Price Index, with both the headline figure and the core rate, which excludes food and energy, forecast to rise 0.2% m/m during July, weekly initial jobless claims, expected to rise to 400,000 from the previous week’s 395,000, and the Conference Board’s Index of Leading Indicators, where economists are anticipating a 0.2% uptick during July, following a gain of 0.3% in June. Also, existing home sales will be reported, forecast to rise 2.7% to annual rate of 4.9 million units in July from 4.7 million the month prior, as well as the Philly Fed Manufacturing Index, which is expected to tick higher to 4.2 in August from 3.2 in July.

In other economic news, the MBA Mortgage Application Index rose 4.1% last week, after the index that can be quite volatile on a week-to-week basis, jumped by 21.7% in the previous week. The advance came as an 8.0% gain in the Refinance Index more than offset a 9.1% decline in the Purchase Index. The increase in refinancing activity accompanied a 5 basis point drop in the average 30-year mortgage rate to 4.32%.

Treasuries finished mostly higher following the inflation data, with the yield on the 2-year note flat at 0.19%, while the yield on the 10-year note was down 6 bps to 2.16%, and the 30-year bond declined 11 bps to 3.56%.

Eurozone crisis meeting has little effect overseas

Sentiment across the pond was mixed as yesterday’s eurozone crisis meeting between Germany and France had a muted impact. The meeting concluded with the two nations dampening expectations of the inception of Eurobonds in the near-term and downplaying the need to increase the size of the euro-area’s bailout fund, known as the European Financial Stability Facility (EFSF). The lack of any announcement of the creation of Eurobonds and an increase in the EFSF was likely expected, but financials saw some pressure to limit the resiliency today as Germany and France proposed a financial transactions tax that will take effect in September. In economic news, core eurozone consumer prices came in cooler than expected in July. Meanwhile, we got some data from the UK employment front, with the region’s jobless claims rising more than expected for July, while a separate report showed the UK unemployment rate moved higher. Finally, the Bank of England released the minutes from its early August policy meeting, which showed the first unanimous vote among policymakers to keep its benchmark interest rate unchanged at 0.5% since May 2010.

In the Asia/Pacific region, economic news came only from the land down under, with a report showing an increase in Australia’s Leading Index for the month of June, while 2Q wage costs in the nation rose 0.9% quarter-over-quarter, matching expectations.

The international economic calendar will remain light tomorrow with few reports of note, including
retail sales from the UK, Japan’s trade balance and Leading Index, and Canada’s Leading Index, wholesale trade and wholesale inventories.