Evening Market Update

Stocks Recover From Early Losses, Still Finish in the Red

The equity markets managed to pare some early losses, but still finished below the flatline, as a lack of domestic economic data put corporate earnings in full focus. Dow member Exxon Mobil reported solid top- and bottom-line results, while Visa and Motorola also managed to post better-than-forecasted profits. Technology shares highlighted the negative side of the earnings ledger, led lower by disappointing quarterly results from Symantec Corp and NVIDIA Corp. Consumer-related issues also showed some weakness, as Colgate-Palmolive reported disappointing sales and full-year guidance and Kellogg fell short of earnings and revenue expectations. Rounding out the earnings releases was VistaPrint, which reported Q4 earnings that were well below the Street’s estimates. Treasuries finished mixed, as the lone release on the US economic docket was a report showing weekly initial jobless claims declined by more than economists expected. Sentiment was also threatened by comments from FOMC voting member James Bullard, who offered some dovish comments that included a warning about the possibility of a Japanese-style deflationary environment in the US.

The Dow Jones Industrial Average fell 31 points (0.3%) to close at 10,467, while the S&P 500 Index declined 5 points (0.4%) to finish at 1,102, and the Nasdaq Composite lost 13 points (0.6%) to 2,252. In moderate volume, 1.2 billion shares were traded on the NYSE and 2.3 billion shares were traded on the Nasdaq. Crude oil rose $1.22 to $78.21 per barrel, wholesale gasoline was $0.03 higher at $2.09 per gallon, and the Bloomberg gold spot price gained $4.55 to $1,168.15 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.6% lower at 82.15.

Dow member Exxon Mobil Corp. (XOM $60) reported 2Q EPS of $1.60, above the $1.46 Reuters estimate, with revenues jumping 24% year-over-year (y/y) to $92.5 billion, compared to the $98.3 billion that the Street was forecasting. XOM said its earnings jumped 85% y/y, reflecting higher crude oil realizations, improved downstream—refining—margins, and strong chemical results. Meanwhile the company’s oil and equivalent production increased 8% y/y. Shares relinquished an early gain to finish lower.

Visa Inc. (V $72) reported fiscal 3Q EPS of $0.97, four pennies above the Street’s forecast, while revenues grew 23% y/y to $2.03 billion, slightly above the $1.97 billion forecast, aided by “continued improvements” in global payments and processed transactions volumes. The credit card processor reaffirmed its full-year outlook, and added that, “It goes without saying, the United States debit market will undergo changes following implementation of the Wall Street Reform and Consumer Protection Act next year,” but it said that it is “too early” to fully and accurately gauge the impact of the legislation. Shares were solidly lower.

Kellogg Co. (K $48) reported 2Q earnings ex-items of $0.89 per share, short of the $0.94 that analysts were expecting, with revenues declining 5% y/y to $3.1 billion, also shy of the $3.3 billion that the Street was looking for. The breakfast food firm said its 2Q results reflect the deflationary environment in the cereal category, particularly in the US and UK, softer sales at its Eggo unit, and the voluntary cereal recall. The company also lowered its full-year outlook, but it said it is anticipating a stronger back half. Shares traded down solidly.

Colgate-Palmolive Co. (CL $78) posted 2Q profits of $1.17 per share, which exceeded the consensus estimate by one cent, with revenues rising 2% y/y to $3.8 billion, but was short of the $3.9 billion that the Street was anticipating. CL said it was “very pleased” to have delivered solid results in 2Q, despite heightened competitive activity and difficult economic conditions around the world. Also, the consumer products firm warned that foreign exchange volatility worldwide and the economic environment in Venezuela remain challenging, with an impact of a $0.10-0.15 per share reduction in full-year earnings expected, up from a previous forecast of between a $0.06-0.10 reduction. Shares of CL were lower.

Symantec Corp. (SYMC $13) announced fiscal 1Q EPS ex-items of $0.35, matching expectations, as its revenues were flat y/y at $1.4 billion, below the $1.5 billion forecast. The technology security and storage firm’s CEO said during the quarter the company saw “lengthening of procurement cycles driven by continued cautiousness among IT buyers,” and this affected its storage management results. SYMC issued 2Q guidance that came in below the Street’s anticipation and shares finished sharply lower.

NVIDIA Corp. (NVDA $9) was also under heavy pressure after the graphics chip maker lowered its 2Q revenue forecast to a range of $800-820 million, from its previous forecast of between $950-970 million. The company said the revenue shortfall occurred primarily in the consumer GPU—graphics procession chips—business, resulting from increased memory costs and economic weakness in Europe and China.

Shares of VistaPrint NV (VPRT $32) tumbled over 36% after the printing company reported Q4 EPS of $0.26, far short of the Street’s estimates of $0.37. VPRT also projected a Q1 profit that was well below analysts’ estimates, as changes in currency values have hurt the company’s performance.

However, Motorola Inc. (MOT $8) traded lower, even after the mobile phone maker reported 2Q EPS ex-items of $0.09, one cent above the Street’s forecast, and posted revenues that although dipped 1.5% y/y to $5.4 billion, were above the $5.2 billion that was anticipated by analysts. MOT said it shipped 8.3 million handsets and the company said its enterprise mobility solutions and network businesses posted strong operating earnings and excellent cash generation. MOT issued 3Q EPS guidance with a range that has a midpoint view that came in above the Street’s forecast.

Jobless claims decline to headline a light economic docket

Weekly initial jobless claims fell 11,000 to 457,000, versus last week's figure which was upwardly revised by 4,000 to 468,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to decrease to 460,000. The four-week moving average, considered a smoother look at the trend in claims, dropped by 4,500 to 452,500, while continuing claims rose by 81,000 to 4,565,000, compared to the increase to 4,500,000 that was anticipated by economists.

The jobless claims report was the lone major release scheduled on today’s economic calendar, but there was some Fedspeak today that deserves a mention. Federal Reserve Bank of St. Louis President and voting member of the Federal Open Market Committee (FOMC), James Bullard, offered some dovish comments regarding inflation, saying that the FOMC’s “extended period” language referring to the fed funds rate may be “increasing the probability of a Japanese-style deflationary outcome for the US within the next several years.” Bullard, in a recent research publication, concluded that, “an appropriate quantitative easing policy offers the best hope for avoiding a low nominal interest rate, deflationary outcome.”

Treasuries finished mixed after paring early losses that came from some global earnings reports and the slightly larger-than-forecasted decline in jobless claims. The yield on the two-year note lost 3 bps to 0.58%, the yield on the 10-year note declined 1 bp to 2.98% and the yield on the 30-year bond gained 1 bp to 4.07%.

Mixed data out of Europe, China maintains pledge for moderately loose monetary policy

The European economic calendar was chock full of reports, including a larger-than-forecasted increase in euro-zone economic confidence in July, Germany’s unemployment change and rate declined to match expectations, while separate reports showed UK home prices fell more than anticipated and UK mortgage approvals rose by an amount that missed estimates. Other reports across the pond that deserve a mention were an unexpected drop in Swedish retail sales but Sweden reported an improvement in consumer sentiment, Spain’s housing permits posted another steep decline, and Italian business confidence improved by an amount that topped expectations.

On the Asia/Pacific front, Japan issued a report that showed the country’s largest retailers posted a smaller-than-anticipated decline in June, while the Chinese central bank maintained its pledge to keep a “moderately loose” monetary policy. Meanwhile, South Korea released separate reports that showed the nation’s manufacturing activity deteriorated, while service-sector activity improved. Elsewhere in the region, New Zealand’s central bank raised its benchmark interest rate by 25 basis points to 3.0% as expected and a separate report showed the New Zealand trade surplus narrowed.

First reading on 2Q GDP growth in the US due out tomorrow

Tomorrow’s first look at 2Q Gross Domestic Product (GDP), the broadest measure of economic activity, is expected to show a 2.6% quarter-over-quarter annualized rate of growth, after expanding by 2.7% in the first quarter. Personal consumption is expected to have grown 2.4%, down from the 3.0% pace in 1Q. Inflation is expected to have remained benign, with the GDP Price Index anticipated to have risen 1.1%, the same pace as in 1Q, and the core PCE Index, which excludes food and energy, is forecasted to increase 1.0%, up from the 0.7% rate in 1Q.

Growth estimates for the US economy have been revised down over the past month, as retail sales, new home construction, inventory building and net exports have come in weaker than expected, while new home sales were higher than anticipated. The National Federation of Independent Businesses has noted that the high level of uncertainty about the rate of revenue growth, tax policy and health care costs has resulted in small businesses delaying capital investment and hiring. After a sharp V-shaped rebound off the economic trough, we believe the economy is settling in to a slower rate of growth, but not a “double-dip” recession, as most historically reliable indicators do not support that case. However, the “sub-par” rate of growth expected and the slow pace of decline in the unemployment rate and still low levels of factory utilization have kept the Fed on hold and have contributed to concerns about deflation, which can be difficult to tackle. Fed governor Bullard today indicated that the Fed may need to expand quantitative easing through the purchase of Treasuries to fend off the risk of deflation.

Other releases on the US economic calendar tomorrow include the Chicago Purchasing Manager survey, forecasted to decline to 56.0 in July from 59.1 in June, as well as the final July reading on the University of Michigan consumer sentiment survey, forecasted to uptick to 67.0 from the initially released 66.5 figure, down from the 76.0 reading in June.

International economic releases tomorrow include Japan’s unemployment rate, CPI, household spending, housing starts, and industrial and vehicle production. The euro-zone will announce CPI and the unemployment rate, Canada will release May GDP, New Zealand announces building permits and South Korea releases industrial production and its leading index.