Evening Market Update

Oil Flow Stops, Goldman Settles, Stocks Recover

The equity markets finished mixed, following a late-day rally that was spurred by reports from BP Plc that the flow of oil into the Gulf may have stopped and on reports that the SEC has settled its fraud lawsuit against Goldman Sachs, which was confirmed after the market close. A plethora of economic news was released today, including a larger-than-anticipated drop in weekly initial jobless claims, a subdued reading on producer prices and a surprising increase in industrial production, although the manufacturing component within the report decreased. Two other readings of manufacturing, the Empire Manufacturing Index and the Philly-Fed Manufacturing Index, were also released and showed a similar disappointing decline. In equity news, Dow member JPMorgan Chase & Co. reported 2Q EPS that topped analysts’ estimates, while the entire financial industry took note that the US Senate passed the financial regulatory reform bill, which could now be signed into law as early as tomorrow. Meanwhile, fellow Dow component Boeing announced another delay of the production of its 787 Dreamliner could push delivery into next year, while Marriott International Inc posted better-than-expected profits for the second quarter. On the M&A front, private-equity firm Carlyle Group agreed to acquire nutritional supplement firm NBTY Inc in a transaction valued at $3.8 billion. Treasuries recovered from early losses to finish higher.

The Dow Jones Industrial Average fell 7 points (0.1%) to close at 10,359, the S&P 500 Index was 1 point higher at 1,096, and the Nasdaq Composite was flat at 2,249. In moderate volume, 1.1 billion shares were traded on the NYSE and 2.0 billion shares were traded on the Nasdaq. Crude oil fell $0.28 to $76.76 per barrel, wholesale gasoline lost $0.01 to $2.06 per gallon, while the Bloomberg gold spot price increased $0.85 to $1,209.15 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 1.2% lower at 82.409.

JPMorgan Chase & Co. (JPM $40) reported 2Q EPS of $1.09, compared to the $0.71 Reuters estimate, but it was unclear if analysts had forecasted items such as a reduction in loan loss reserves ($0.36 per share benefit) and a $0.14 per share charge for a UK bonus tax, which JPM said were included in its results. Revenues declined 7.5% to $25.6 billion, roughly inline with the Street’s forecast. The company’s provision for credit losses—capital set aside to absorb losses—fell from $9.7 billion in the same period a year ago to $3.36 billion, and its total consumer provision for credit losses fell over 50%, reflecting improved delinquency trends and reduced net charge-offs—the amount of loans the company does not expect to be repaid. JPM’s CEO sounded a cautious tone, saying although the company is gratified to see consumer-lending net charge offs and delinquencies decline, they remain at “extremely high levels” and therefore returns in its consumer lending business are still “unacceptable.” Shares were higher.

In related financial industry news, the U.S. Senate voted 60-39 to pass the financial regulatory reform bill, which will now be sent to President Barack Obama to be signed into law, as early as Friday. The 2,300 page legislation was designed to give the government the power to break up or rein in big banks, protect consumers through the creation of new consumer protection agency, and shine light on complex financial products.

Meanwhile, shares of fellow Dow component Boeing Co. (BA $64 ¹) finished lower after the aircraft maker said its initial delivery of the 787 Dreamliner could slip a few weeks into 2011. A BA executive in charge of the 787 program said the “precautionary” new guidance was due to issues with testing, rather than the aircraft itself, and the company still aims to deliver the first aircraft by the end of 2010, although the latest glitch marks the sixth delay over the past two and a half years.

In M&A news, nutritional supplement firm NBTY Inc. (NTY $37) announced that it has reached an agreement to be acquired by private-equity firm Carlyle Group in a transaction valued at $3.8 billion. Carlyle will acquire all the outstanding common stock of NBTY for $55.00 per share, representing a premium of 57% over NBTY’s average closing share price during the 30 trading-day period ending July 14th. NBTY traded over 40% higher in today’s trading.

Marriott International Inc. (MAR $32) reported 2Q EPS of $0.31, two cents above the consensus estimate, with revenues increasing 8% to $2.77 billion, which roughly matched expectations. The hotel chain said its revenue per available room (Revpar)—a key industry metric—increased 9.9% y/y, led by its company-operated North American unit, and as the average daily rate rose 1.6%. The company said business and leisure stays at its hotels are “trending up,” and it anticipates even more favorable pricing in the second half of 2010 and into 2011. MAR also increased its full-year EPS guidance. Shares of MAR finished lower.

BP Plc. (BP $39) said the flow of oil into the Gulf of Mexico has stopped, as the company conducts a test to see whether a recently placed cap on the well can entirely seal it off. Shares of BP jumped on the news.

Jobless claims drop, producer prices subdued, but manufacturing sentiment takes a hit

Weekly initial jobless claims dropped 29,000 to 429,000, versus last week's figure which was upwardly revised by 4,000 to 458,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to decrease to 445,000. The four-week moving average, considered a smoother look at the trend in claims, declined by 11,750 to 455,250, and continuing claims increased by 247,000 to 4,681,000, compared to the increase to 4,447,000 that was anticipated by economists. However, the report was skewed by the government’s seasonal adjustment which expected temporary factory layoffs in early July that did not occur this year.

Meanwhile, the Producer Price Index showed prices at the wholesale level fell 0.5% month-over-month (m/m) in June, after decreasing 0.3% in May. The average economist forecast called for prices to fall by 0.1%. The decline was due to a 0.5% fall in energy prices and a 2.2% decline in food prices. Meanwhile, the core rate, which excludes food and energy, rose 0.1% m/m, matching the forecast. On a year-over-year basis, headline producer prices were 2.8% higher, and the core rate was up 1.1%. As a leading indicator, prices at the intermediate stage of production fell 0.9%, its first decline since July 2009, led by a 2.6% in energy prices, but even excluding food and energy, prices fell 0.4% m/m.

The June reading of industrial production rose 0.1% m/m, above the 0.1% decline expected after advancing 1.3% in May. Revisions to the prior three months as a whole were generally a wash. However, digging into the report, there was a disappointing 0.4% decline in manufacturing, the worst month since June 2009, and even excluding the auto sector, output fell 0.3%. Major market groups were mixed in June, as business equipment gained 0.9%, but consumer goods fell 0.6%. For the 2Q, industrial production rose at a 6.6% annual rate, led by a 15.7% increase in business equipment, while consumer goods rose 1.0%. Within business equipment, industrial and other equipment drove the quarterly increase, gaining 22%. Capacity utilization at 74.1% was unchanged relative to the downwardly revised figure for May. Utilization remains 6.5% below its average from 1972 to 2009.

As evidenced by today’s industrial production report, economic activity has slowed, with releases such as retail sales, ISM manufacturing, the jobs report and housing all noting the deceleration started in May. The slowdown in economic growth prompted the Fed to lower its growth forecast at the June meeting, as detailed in yesterday’s minutes from the meeting. Additionally, they lowered their inflation outlook over the next couple of years due to the large amount of excess capacity, “significant downside risks to the outlook for real activity,” and the possibility that inflation expectations could begin to decline in response to low actual inflation. As a result, the Fed believes it could take five-to-six years for the economy to return to its longer-term path.

Elsewhere, the first reports on manufacturing activity for July came in and are dampening sentiment for the continuation of the economic recovery, beginning with the Empire Manufacturing Index, a measure of manufacturing in the New York region, which fell in July to a level of 5.08. This was well below the estimates of economists surveyed by Bloomberg, which expected a decrease to 18.00, from the previous month’s level of 19.57. However, the index remains above the level of zero that suggests conditions are neither contracting nor expanding.

Moreover, the Philly Fed Manufacturing Index (chart) fell from 8.0 in June to 5.0 in July, compared to the forecast for slight increase to 10.0. The report depicts business activity in the mid-Atlantic region and a reading of zero is the demarcation point between expansion and contraction.

Within the regional manufacturing reports, both disappointing readings came as new orders fell, with orders in the Philly Fed report dropping below the zero mark, depicting contraction, while the employment component of both reports expanded, highlighted by a jump out of negative territory for the Philly report.

Treasuries erased early losses and finished higher following the disappointing manufacturing reports, as the yield on the two-year note was flat at 0.60%, the yield on the 10-year note lost 6 bps to 2.99%, and the 30-year bond yield declined 5 bps to 3.98%.

Chinese 2Q GDP highlights international news

The Asia/Pacific region dominated the international news front, highlighted by the release of 2Q GDP in China, which showed a deceleration in growth for the economy that has paced the global economy’s recovery from the recession. China’s economy expanded 10.3% year-over-year (y/y), after growing by 11.9% y/y in 1Q, and compared to the 10.5% expansion that economists had expected.

Meanwhile, there were several other major economic reports released on China that also garnered attention, with producer and consumer prices both rising by smaller-than-forecasted amounts, retail sales and industrial production growing at rates below expectations, while urban investment in fixed assets increased by a larger-than anticipated amount and the Conference Board’s leading economic indicators for China improved from the previous month’s reading. In other economic news, the Bank of Japan announced that it kept its benchmark interest rate unchanged at 0.1%, as expected, while increasing its current-year economic growth forecast but the BoJ reduced its growth outlook for the following year.

The European economic calendar was relatively light, with Ireland’s producer prices increasing in May from the previous month, Greece’s unemployment rate rising from 11.6% to 11.9%, as expected, and Sweden’s average home prices declining in June.

US CPI on tap for tomorrow

The highlight of tomorrow’s US economic calendar will be the release of the Consumer Price Index for June. Economists are expecting a 0.1% decrease in prices at the consumer level m/m, after the index fell 0.2% last month. The core rate, which strips out food and energy, rose 0.1% m/m last month, and is expected to increase 0.1% again for June. The only other release due out tomorrow is the University of Michigan Consumer Sentiment Index, which is expected to fall to 74.0 in July from a reading of 76.0 last month.

The international economic calendar will be on the quiet side again tomorrow, with reports including Canadian leading indicators, Brazilian inflation, New Zealand consumer prices, and department store sales out of Japan and South Korea.