Morning Market Update

Rebounding From Global Data Pounding

Stocks are well off the lows of the day, paring losses that came from a deluge of disappointing global economic data, headlined by 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, to exacerbate global recovery worries. But construction spending fell by a smaller amount than anticipated and Treasuries are nearly unchanged heading into afternoon action. In equity news, Dow member Microsoft Corp shelved its mobile phones, General Motors and Ford Motor Co reported vehicle sales increases for June, Yahoo Inc announced another $3 billion share repurchase plan, while Constellation Brands Inc provided a mixed 1Q earnings report. Elsewhere, BJ’s Wholesale may be in talks about going private, while Dendreon Corp said Centers for Medicare and Medicaid Services (CMS) is reviewing coverage policy of the drug Provenge. Overseas, Europe finished with steep gains.

At 12:55 p.m. ET, the Dow Jones Industrial Average and the S&P 500 Index are 0.7% lower, and the Nasdaq Composite is declining 0.8%. Crude oil is down $3.00 at $72.63 per barrel, wholesale gasoline is off $0.07 at $2.00 per gallon, and the Bloomberg gold spot price is down by $33.73 at $1,208.53 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 1.3% at 84.94.

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 have turned back above the flatline.

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 is higher.

General Motors reported that its June US vehicle sales rose 10.7%, compared to the Bloomberg estimate of analysts, which called for the company to post a rise of 16% in sales. Ford Motor Co. (F $10) reported that its June vehicle sales increased 13.3%, below the 16% gain that analysts had expected. F is trading higher. Other major automakers are set to report their June sales numbers later today.

BJ Wholesale Club Inc. (BJ $42) is 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 $15) 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. STZ is lower.

Shares of Dendreon Corp. (DNDN $30) are 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. The report added to an earlier manufacturing report from China, which also posted a slower pace of manufacturing activity than was forecasted, and the equity markets extended morning losses. The Chinese 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. However, as the dust settles 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 some relative positive aspect of 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%.

Europe lower on debt concerns and Chinese data disappointment

Stocks in Europe came under broad-based pressure on the continued global recovery concerns, exacerbated by today’s disappointing manufacturing data out of China, elevated euro-area debt fears, and the plethora of disappointing US reports. The euro-area debt uneasiness came as 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.

The UK FTSE 100 Index was down 2.3%, France’s CAC-40 Index finished 3.0% lower, Germany’s DAX Index declined 1.8%, Italy’s FTSE MIB Index decreased 1.9%, Spain’s IBEX 35 Index dropped 0.9%, and Sweden’s OMX Stockholm 30 Index was off 2.4%.