Evening Market Update

Negative Global Economic Data Hampers Sentiment

After beginning the day well-entrenched in negative territory, stocks climbed off the lows and looked as if they may post a gain for the day, but disappointing global economic data weighed on sentiment and the markets finished modestly lower. The negativity came courtesy of a larger-than-expected deterioration in China’s PMI Manufacturing Index, as well as a larger-than-expected drop in the US ISM Manufacturing Index and a tumble in pending home sales. Moreover, US weekly initial jobless claims unexpectedly rose and Moody’s Investors Service warned about a possible debt downgrade of Spain. In other economic news, construction spending fell, but by a smaller amount than anticipated. On the equity front, Dow member Microsoft abandoned its mobile phones, automakers reported modest vehicle sale increases for June, Yahoo! announced another $3 billion share repurchase plan, while Constellation Brands provided a mixed 1Q earnings report. Elsewhere, BJ’s Wholesale is engaged in talks to go private, while Dendreon said the Centers for Medicare and Medicaid Services is reviewing coverage policy of its Provenge drug. Treasuries finished mostly lower.

The Dow Jones Industrial Average fell 41 points (0.4%) to close at 9,733, the S&P 500 Index shed 3 points (0.3%) to finish at 1,027, and the Nasdaq Composite declined 8 points (0.4%) to 2,101. In moderate volume, 1.6 billion shares were traded on the NYSE and 2.7 billion shares were traded on the Nasdaq. Crude oil fell $2.68 to $72.95 per barrel, wholesale gasoline lost $0.06 to $2.00 per gallon, and the Bloomberg gold spot price tumbled $45.05 to $1,197.20 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—lost 1.9% to 84.48.

Dow member Microsoft Corp. (MSFT $23) announced that it will end sales of its Kin mobile phones, less than two months after making the devices available on the market. The Wall Street Journal reported that people familiar with the matter said Kin did not meet sales targets. MSFT has not commented on the reason for the discontinued sales of the device but said it will focus exclusively on Windows Phone 7, and it will not ship the Kin in Europe as was planned. Shares finished modestly higher.

Yahoo Inc. (YHOO $14) reported that its Board of Directors has approved a plan to repurchase up to $3 billion in its common stock. The new plan comes as the world’s number-two search engine is close to finishing a previous $3 billion stock buyback, and it said the repurchases may take place in the open market or in privately negotiated transactions. YHOO was higher.

The two largest US automakers, General Motors and Ford Motor Co. (F $11) reported June US vehicle sales that fell short of analysts’ forecasts, posting increases of 10.7% and 13.3%, respectively. Both companies were expected to report a sales increase of 16%. Chrysler Group, on the other hand, posted a 35% increase in June sales, above the average 33% analyst estimate. Foreign automakers didn’t fair any better than their American counterparts, with Toyota Motor (TM $69) reporting that June sales rose 6.8%, below the 9% Bloomberg estimate, Honda Motor (HMC $29) saying sales were 6.2% higher, also below the 9% forecast, and Nissan Motor (NSANY $14) posting an 11% increase, far short of the 27% gain expected. F, TM and HMC traded higher, while NSANY was lower on the day.

BJ Wholesale Club Inc. (BJ $44) was sharply higher after private equity firm Green Equity Investors V L.P. announced that it has a 9.5% stake in the retailer, saying that it believes BJ shares are undervalued. Green Equity Investors added that it intends to engage in discussions with BJ, which might include a “going private” transaction.

Constellation Brands Inc. (STZ $16) reported fiscal 1Q EPS ex-items of $0.38, three cents above the Reuters estimate, with revenues dipping 1% year-over-year (y/y) to $788 million, below the $797 million that the Street was anticipating. STZ raised its full-year EPS guidance, however shares were lower.

Shares of Dendreon Corp. (DNDN $30) were solidly lower after the company said Centers for Medicare and Medicaid Services (CMS) is reviewing coverage policy of the drug Provenge—a treatment for prostate cancer patients. DNDN said CMS is requesting public comments on the effects of Provenge on health outcomes in patients and it is not a change in Medicare coverage.

ISM slows, jobless claims rise, pending home sales tumble, construction spending dips

The ISM Manufacturing Index declined to 56.2 in June from 59.7 in May, worse than the expected fall to 59.0. 50 is the separation point between expansion and contraction. The slower rate of growth was driven by a sharp drop in the prices paid component, which fell from 77.5 in May to 57.0 in June, along with reductions in the rate of both new orders and production. However, as the dust settled on the reaction to the headline report in the US, there were some aspects that remained positive, suggesting the manufacturing sector continues to help economic prosperity. The overall economy has expanded for the 14th straight month and the manufacturing sector posted the 11th consecutive month of growth, with 13 of 18 industries reporting growth. Also, the Institute for Supply Management (ISM) noted, “given the robust nature of recent growth, it is not surprising that we would see a slower rate of growth at this time.” Additionally, the employment component, although declining from 59.8 to 57.8, remained in expansion territory for the seventh-straight month. The ISM added that respondents’ comments remain generally positive, but expectations have been that the second half of the year will not be as strong in terms of the rate of growth.

Meanwhile, sentiment did not get any relief from the weekly initial jobless claims report, which rose 13,000 to 472,000, versus last week's figure which was upwardly revised by 2,000 to 459,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to decrease to 455,000. The four-week moving average, considered a smoother look at the trend in claims, rose by 3,250 to 466,500, and continuing claims increased by 43,000 to 4,616,000, compared to the increase to 4,550,000 that was anticipated.

The disappointing data continued, with the release of pending home sales, which posted a steep decline, tumbling 30% month-over-month (m/m) in May, more than double the 14.2% decline that economists were expecting. The gauge of the pipeline of existing home sales were clearly impacted by the end of the government’s homebuyer tax credit as sales are listed as pending when contracts are signed, and to qualify for the federal incentive contracts needed to be signed by the end of April.

However, there was a relatively positive report on today’s economic calendar, as construction spending was also released this morning, declining 0.2%, a smaller amount than the expectation of a drop of 0.8%.

Treasuries finished mostly lower with the yield on the 2-year note gaining 3 bps to 0.64%, the yield on the 10-year note up 1 bp to 2.94%, and the 30-year bond yield flat at 3.89%.

Chinese data and Euro-area debt concerns weigh on global markets

Anxiety over euro-area debt ratcheted a notch higher after Moody’s Investor Service placed Spain’s bond ratings on review for possible downgrade, citing deteriorating short-term and long-term economic growth prospects and fiscal challenges that face the nation. Moody’s did downgrade five regions in Spain, and applied a negative outlook on the regional areas. Also, Spain and France both held debt auctions that appeared to go well, per CNBC, but demand for Spanish debt was below prior auctions. In other euro-area debt news, the European Central Bank reported that it will lend 78 banks in the region 111.2 billion euros ($137.1 billion) in six-day loans to help banks with today’s maturity of the ECB’s twelve-month lending facility.

Meanwhile, there was a plethora of economic data for traders to digest across the pond. Germany’s retail sales rose 4% month-over-month (m/m) in May, matching economists’ forecasts, while, year-over-year (y/y), sales fell 2.4%, well below the 0.6% decline that was expected. PMI Manufacturing reports were heavy in the euro-zone, with Italy and Germany posting better-than-expected reports, and euro-zone PMI Manufacturing was expectedly unrevised, while readings of manufacturing in the UK, France, Spain, and Sweden all deteriorated. Other economic reports in the region included a flat reading of French producer prices, and Sweden’s central bank increased its benchmark interest rate by 25 basis points to 0.5%, inline with economists’ expectations.

Further east, a report on Chinese manufacturing shook already wavering sentiment and added to the recent concerns about a slowdown in China, which has led the global recovery, and the possibility of a double-dip recession. The nation’s PMI Manufacturing Index fell from 53.9 in May to 52.1 in June, compared to the 53.2 reading that economists surveyed by Bloomberg had expected. A reading above 50 depicts the demarcation point between expansion and contraction. The report overshadowed a better-than-forecasted report of manufacturing confidence among Japan’s largest manufacturers, as the Japanese Tankan Large Manufacturers Index jumped from -14 in 1Q to 1 in 2Q, above the -4 that economists had expected. A positive reading depicts that the number of optimistic views outweighed pessimistic views in the sector.

Elsewhere, Australian retail sales rose by a smaller-than-forecasted amount, while South Korea reported consumer prices that came in below expectations, exports for the nation were stronger than forecasted, and a PMI Manufacturing report showed activity slowed. Rounding out the day in Asia, India’s PMI Manufacturing report also deteriorated.

Strong job gains anticipated, heavily influenced by Census hiring

All eyes will be on tomorrow’s release of nonfarm payrolls, expected to fall 130,000 in June, after increasing 431,000 in May, while excluding government hiring, private sector payrolls are expected to increase 110,000, after expanding by a disappointing 41,000 in May, due to the outsized impact of temporary hiring for the Census on the headline number. The unemployment rate is estimated to increase to 9.8% from 9.7%, as workers re-enter the workforce as job openings increase.

The other release on tomorrow’s US economic calendar is factory orders, expected to fall 0.5% in May. On the international calendar, UK home prices, euro-zone PPI, and Italian employment will be released.