Evening Market Update

Fed Leaves Rates Low and Maintains Extended Period Language

The US equity markets have overcome early losses and are higher in afternoon action after the Federal Reserve left its benchmark interest unchanged and kept its language regarding keeping the fed funds rate “exceptionally low” for an “extended period.” However, the Fed did change its language pertaining to financial market conditions, saying that they have become “less supportive.” Treasuries moved higher initially after the announcement, moving back near session highs that came from a record plunge in new homes sales and a drop in mortgage applications, which dampened sentiment regarding the housing market and the global economic recovery. The focus on the economic front continues to overshadow upbeat profit reports from Adobe Systems, Carmax, and Jabil Circuit, along with upbeat commentary from Red Hat. Overseas, the US housing data weighed on stocks in Europe.

At 2:35 p.m. ET, the Dow Jones Industrial Average is up 0.5%, the S&P 500 Index is 0.2% higher, and the Nasdaq Composite is advancing 0.3%. Crude oil is up $0.35 at $76.70 per barrel, wholesale gasoline is $0.01 higher at $2.09 per gallon, and the Bloomberg gold spot price is down by $4.03 at $1,236.03 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.3% at 85.91.

Adobe Systems Inc. (ADBE $31) reported fiscal 2Q EPS ex-items of $0.44, one penny ahead of the Reuters estimate, with revenues increasing 33.8% year-over-year (y/y) to $943 million, above the $907 million that the Street was looking for. The software company said its strong revenue growth was driven by the successful launch of its Creative Suite 5, and the company’s growth is being fueled by “the explosion of digital content across all media and devices.” ADBE issued better-than-expected 3Q EPS guidance and announced a $1.6 billion stock repurchase program. Shares are lower.

Carmax Inc. (KMX $22) announced fiscal 1Q earnings of $0.44 per share, well above the $0.33 that analysts were anticipating, with revenues rising 23% y/y to $2.26 billion, above the $2.1 billion that was forecasted by the Street. The auto retailer said it had another quarter of “healthy increases” in both used and wholesale vehicle sales, and its 9% increase in same-store sales—sales at stores open at least a year—of used vehicles reflected the benefit of a continuing gradual rebound in customer traffic, as well as the easy y/y comparison. Shares are solidly higher.

Red Hat Inc. (RHT $32) posted fiscal 1Q EPS ex-items of $0.18, matching the Street’s forecast, as revenues, which increased 20% y/y to $209 million, exceeded the $203 million expectation of analysts. The open source solutions technology firm said it achieved a “significant” increase in large deals booked y/y, including several with an initial consulting component which it believes is a positive indicator of new project spending and future subscription billings. RHT is trading to the upside.

Jabil Circuit Inc. (JBL $15) is up sharply after the electronics company reported fiscal 3Q EPS ex-items of $0.40, six cents above the expectation of analysts, as revenues jumped 34.6% y/y to $3.5 billion, which was above the $3.2 billion Street forecast. The company said its presence in rapidly growing sectors such as healthcare and life sciences, clean tech and advanced enterprise IT hardware is expected to be complemented by strong growth in smart phone devices and mechanical components. JBL reported 4Q EPS guidance that topped analysts’ forecasts.

Fed rates and extended period language unchanged, but tweaks financial market talk

The Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting by making no changes to the language with regard to the “extended period” for keeping rates at an “exceptionally low” rate and no changes to the fed funds target rate of a level between 0-0.25%.

On the overall economy, the Fed said information received since it last met in April suggests that the economic recovery is proceeding and the labor market is improving gradually. The Fed also maintained that inflation is likely to be subdued for some time, but changed it stance on financial conditions, changing its language from “financial market conditions remain supportive of economic growth,” to conditions have become “less supportive of economic growth,” noting the recent European crisis, saying this reflects “developments abroad.” Also, the Fed said that bank lending had continued to contract in recent months. Thomas M. Hoenig was, for the fourth-straight meeting, the lone dissenter, continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the build-up of future imbalances and increase risks to longer-run macroeconomic and financial stability. Treasuries moved higher following the announcement.

New home sales tumble, mortgage applications decline

New home sales fell more than expected, tumbling 32.7% month-over-month (m/m) in May to an annual rate of 300,000 units, and compared to the decline of 18.7% to 410,000 units that economists surveyed by Bloomberg expected. Sales were down across regions and the annual rate is the lowest since records began in 1963. The median sales price of new houses sold in May was $200,900, down 9.6% y/y, and the supply of new homes for sale is 213,000 units, representing a supply of 8.5 months at the current sales rate. New home sales reflect contacts signed and since the deadline to qualify for the government’s homebuyer tax credit was April, this was the first look at housing demand without the crutch of government stimulus efforts. Market sentiment was unnerved by the sharp drop in sales, which was larger than the 12.1% and 14.7% gains that were seen in March and April, respectively, and coupled with yesterday’s unexpected drop in existing home sales—which still had support of the government incentives, due to the fact that these sales reflect contracts signed one to two months prior—to dampen the outlook for the continued stabilization of the housing market, and possibly fueling concerns about a double dip in the housing market

In other housing news, the US MBA Mortgage Application Index declined 5.9% last week, after the index that can be quite volatile on a week-to-week basis, jumped 17.7% in the previous week. The decrease came as the Purchase Index declined 1.2% after increasing 7.3% the week prior, while the Refinance Index fell 7.3% after surging 21.1% the week prior. The decrease in the overall index came despite a 6 basis-point drop in the average 30-year mortgage rate to 4.75%, near the record low of 4.61% that was reached at the end of March 2009.

Europe extends losses on record drop in US home sales

Stocks in Europe finished solidly under the flatline, with financials and basic materials leading the decline amid global economic concerns, exacerbated by the record low in the US new homes sales report, which pushed European markets to session lows. Traders also sifted through a plethora of economic data across the pond, highlighted by the release of the Bank of England’s minutes from its most recent monetary policy meeting earlier this month, in which it left its benchmark interest rate at a record low of 0.5%. The report revealed that there was one BoE member that voted against keeping the rate unchanged, voting for an increase to 0.75% on concerns about “resilient” inflation in the aftermath of the recession.

In other economic news, separate readings of consumer confidence showed German sentiment topped expectations, while Italy’s report came in below forecasts. Meanwhile, a slew of services and manufacturing PMI reports were released, with Germany’s manufacturing topping forecasts, while its services came in short of expectations, France’s services exceeded forecasts, but its manufacturing report disappointed, and euro-zone services fell short of forecasts, while manufacturing came in above economists’ expectations.

In equity news in the euro-zone, BASF SE (BASFY $57) moved higher after the world’s largest chemical company by sales announced that it has agreed to purchase specialty chemicals company Cognis GmbH for a deal valued at about 3.1 billion euros ($3.8 billion). Also, BP Plc (BP $30) announced the New Gulf Coast Restoration Organization, which formally shifted Gulf responsibility from BP’s CEO Tony Hayward to Robert Dudley.

The UK FTSE 100 Index traded 1.3% lower, France’s CAC-40 Index was down 1.7%, Germany’s DAX Index finished off 1.0%, and Italy’s FTSE MIB Index declined 1.2%.