Evening Market Update

Stocks Surge on Strong Manufacturing Data in US and Abroad

The equity markets started the week off on solid footing, with the Dow climbing over 200 points on improving global recovery sentiment and an encouraging reading of the US ISM Manufacturing Index. The smaller-than-expected deceleration in US manufacturing and an unexpected increase in construction spending combined to increase economic optimism, while sending Treasuries lower. Federal Reserve Chairman Ben Bernanke reiterated in a speech that the economy is expanding at a moderate pace, but that the housing market continues to be a drag on the recovery. In earnings news, Humana Inc posted better-than-expected earnings and revenue figures, while NRG Energy and Allergan Inc. also both beat bottom line estimates. Elsewhere on the equity front, MetLife Inc announced a capital raising effort to help fund its acquisition of an AIG unit, while the United Arab Emirates announced that it will block Research in Motion’s BlackBerry service due to security concerns.

The Dow Jones Industrial Average jumped 208 points (2.0%) to close at 10,674, while the S&P 500 Index rose 24 points (2.2%) to finish at 1,126, and the Nasdaq Composite gained 41 points (1.8%) to 2,295. In moderately light volume, 1.0 billion shares were traded on the NYSE and 2.0 billion shares were traded on the Nasdaq. Crude oil rose $2.52 to $81.47 per barrel, wholesale gasoline was $0.05 higher at $2.17 per gallon, and the Bloomberg gold spot price gained $0.85 to $1,181.85 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.7% lower at 80.93.

Humana Inc. (HUM $49) reported 2Q EPS of $2.00, well above the $1.68 Reuters estimate, with revenues increasing 9.5% year-over-year (y/y) to $8.7 billion, above the $8.6 billion that the Street had expected. The health benefits company said it benefitted from strength in both its commercial and government segments and its benefit ratio—a key industry metric that measures medical costs—was unchanged y/y. Shares were higher after the results, which also included the company raising its full-year EPS outlook.

In related industry news, MetLife Inc. (MET $43) announced that it will offer 75 million shares of common stock to the public to help finance the $6.8 billion cash portion of the purchase price for its previously announced acquisition of American Life Insurance Company from American International Group, Inc. (AIG $40). Additionally, MET said it plans to offer $3 billion in senior debt to help fund the cash portion of the deal. MET and AIG traded higher.

Research in Motion (RIMM $57) finished lower after the United Arab Emirates said over the weekend that it will block mobile services such as e-mail, internet browsing, instant messaging and text messaging for RIMM’s BlackBerry device in October, due to security concerns. The U.A.E. said the ban was the result of the “failure of ongoing attempts, dating back to 2007,” to bring BlackBerry services in line with U.A.E. telecommunications regulations, according to Dow Jones Newswires. RIMM issued a statement to its customers assuring them that their data is secure, but didn’t address the U.A.E. ban directly, citing the “confidential nature” of the discussions with governments.

NRG Energy Inc. (NRG $23) reported 2Q EPS of $0.81 and revenue of $2.13 billion, beating analysts’ bottom line expectation of $0.43, but missing on the $2.35 billion revenue target. The merchant generator, which sells power on the open market instead of at regulated rates, said it has seen energy demand and prices fall due to the economic weakness, and has relied on its hedging program to maintain earnings. However, NRG increased its outlook for full-year earnings, based on the strength of year-to-date results. Shares of the company moved higher.

Allergan Inc. (AGN $65) announced that 2Q earnings rose 36% y/y, as the maker of Botox benefitted from a 7% increase in the wrinkle treatment, as well as a 10% increase in pharmaceutical sales. EPS for the quarter came in at $0.85, four cents higher than the Street’s expectations. Earlier this month, U.K. regulators approved Botox as a tool for preventing chronic migraine headaches, which could pave the way for U.S. Food and Drug Administration approval, and lead the company to affirm its full-year earnings target and raise the low end of its product-sales estimate. Shares of AGN were higher.

US manufacturing and construction data add to the plethora of favorable global reports

The ISM Manufacturing Index declined to 55.5 in July from 56.2 in June, better than the fall to 54.5 that was expected. The reading marks the twelfth consecutive month the manufacturing sector has been above the 50 level that separates contraction versus expansion, and indicates the overall economy grew for the 15th consecutive month. Improvements in employment, supplier deliveries and inventories reduced the impact of a month-over-month deceleration in new orders and production. The employment component rose to 58.6 from 57.8, marking the eighth consecutive month of growth, supplier deliveries increased to 58.3 from 57.3 and inventories advanced 4.4 to 50.2, the first month of growth following three months of contraction. On the negative side of the ledger, new orders fell 5.0 to 53.5 and production lost 4.4 to 57.0. The price component unexpectedly rose 0.5 to 57.5, versus the expectation of a decline to 55.0, although prices were characterized as “slightly higher but stable.” Elsewhere, trade improved, with imports falling 4.0 while exports rose 0.5. The complement ISM Non-Manufacturing Index will be released on Wednesday, and is expect to fall to 53.0 from 53.8 in June.

In other economic news, construction spending unexpectedly increased, rising 0.1%, compared to the 0.5% decline that was expected, but May’s 0.2% decline was revised to a 1.0% drop. Residential construction spending fell, but nonresidential spending moved higher.

Treasuries were lower after extending early losses following the better-than-forecasted US manufacturing and construction spending. The yield on the two-year note gained 1 bp to 0.55%, the yield on the 10-year note increased 5 bps to 2.96% and the yield on the 30-year bond rose 7 bps to 4.06%.

Meanwhile, Federal Reserve Chairman Ben Bernanke spoke at a conference on the challenges for the economy and state governments. The Fed Chief reiterated that the economy is now expanding at a moderate pace, but the housing market has remained weak with the overhang of vacant or foreclosed houses weighing on home prices and new construction, and the slow recovery in the labor market is weighing on household confidence and spending. However, Bernanke said while the support to economic activity from simulative fiscal policies and firms’ restocking of their inventories will diminish over time, rising demand from households and businesses should help sustain growth. He also noted that cuts in state and local programs and employment are also weighing on economic activity and the weak economy over the past few years has significantly reduced state and local government revenues, which in turn has forced difficult decisions on spending and taxes. Bernanke offered little new information regarding the timing of the Fed’s monetary policy changes but per Dow Jones Newswires, during the Q&A session, the Fed Chairman said, “We need to be careful about tightening too quickly,” adding that monetary policy should remain loose until “sustained” growth is seen, especially in jobs.

Chinese manufacturing data suggests a cooling off in economic growth

Reports of PMI Manufacturing highlighted the European economic calendar, with euro-zone activity being revised further into expansionary territory than originally reported for July, and UK manufacturing expanding by an amount that exceeded economists’ forecasts, while manufacturing activity in Germany—Europe’s largest economy—remained at a level depicting solid expansion. Other favorable manufacturing reports in the area included readings from Sweden, France, and Spain, while Italy’s release came in just below expectations, but still showed the expansion in the sector accelerated.

In Asia/Pacific news, China’s PMI Manufacturing Index decelerated from 52.1 in June to 51.2 in July, compared to the 51.4 reading that economists had expected. A reading above 50 depicts expansion and traders cheered the fact that the sector continued to grow and that the slower rate may keep the government from tightening its policy measures further to prevent the formation of asset bubbles and the overheating of the economy. Furthermore, a separate report constructed by HSBC also showed a contraction in Chinese manufacturing activity. Elsewhere in the region, South Korea’s exports surged 29.6% y/y in July, manufacturing continued to expand, and consumer prices increased inline with expectations, while manufacturing reports in both Australia and India showed expansion in the sector accelerated.

Personal income and spending on tap for tomorrow

The health of the consumer will be in focus tomorrow with the release of personal income and spending for June, forecasted to show modest growth of 0.2% and 0.1%, respectively. Any better-than-forecasted strength in the release will likely stimulate sentiment and support recovery sentiment as the consumer accounts for the lion’s share of the economy. Other releases on the US economic calendar will include factory orders, which are expected to decrease 0.5% in June, after falling 1.4% in May, and pending home sales, which economists predict will increase 4.0% in June, after plummeting 30% m/m in May due to the expiration of the homebuyer tax credit.

Releases on the international calendar will include euro-zone PPI, Chinese non-manufacturing PMI, Brazilian industrial production, and retail sales and building approvals out of Australia.