Evening Market Update

Markets Post Gains, Volume Light Ahead of Fed

Equity markets finished in the plus column amid lighter-than-usual volume and a mixed bag of corporate news, ahead of tomorrow’s Fed monetary policy announcement. On the equity front, Dow member Hewlett-Packard announced the resignation of its CEO following a sexual harassment investigation, which overshadowed its preliminary 3Q results and guidance, and fellow Dow component McDonald’s posted strong global same-store sales. Elsewhere, Sara Lee and Apple disclosed management changes within their respective ranks. In earnings news, DISH Network reported better-than-expected profits, but a loss of subscribers dampened any enthusiasm, while Tyson Foods posted earnings that beat the Street. Treasuries finished mixed as there were no major economic reports scheduled for release today.

The Dow Jones Industrial Average gained 45 points (0.4%) to 10,699, the S&P 500 Index was 4 points (0.6%) higher at 1,128, and the Nasdaq Composite rose 17 points (0.8%) to 2,305. In light volume, 790 million shares were traded on the NYSE and 1.6 billion shares were traded on the Nasdaq. Crude oil rose $0.78 to $81.48 per barrel, wholesale gasoline gained $0.01 to $2.12 per gallon, while the Bloomberg gold spot price lost $4.15 to $1,201.25 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—rose 0.4% to 80.70.

Dow member Hewlett-Packard Co. (HPQ $43) was under pressure after the company’s Chairman, Chief Executive Officer, and President Mark Hurd has decided to resign his positions effective immediately. HPQ said the decision was made following an investigation of the facts and circumstances surrounding a claim of sexual harassment against Hurd and HPQ by a former contractor to the company. However, the company added that the investigation determined there was no violation of HPQ's sexual harassment policy, but did find violations of HPQ's Standards of Business Conduct. HPQ appointed CFO Cathie Lesjak as CEO on an interim basis.

Additionally, the company issued preliminary 3Q results, in which its said EPS ex-items of $1.08 was one penny above the Street’s forecast, and revenues of $30.7 billion, just topped the $30.3 billion estimate. Also, the company issued 4Q guidance that matched expectations and it raised its full-year revenue and EPS ex-items forecast.

In other management shifts in the corporate sector, Sara Lee (SLE $15) said Chairman and CEO Brenda Barnes will step down from her posts in order to concentrate on her health after suffering a stroke in May. Elsewhere, Mark Papermaster, Apple’s (AAPL $262) senior VP for mobile services, has resigned amid the fallout surrounding problems related to the antenna design in the company’s iPhone 4. AAPL did not comment on the report. Shares of SLE lost ground, while AAPL finished higher.

Fellow Dow component McDonald’s Corp. (MCD $73) traded higher after the world’s largest fast food chain announced global same-store sales—sales at restaurants open at least thirteen months—jumped 7.0% year-over-year (y/y) in July, well above the 4.8% increase that was expected by analysts. Also, the company said its US same-store sales increased 5.7% y/y, versus the 4.6% increase that was expected, while sales in Europe rose 5.7% and in Asia/Pacific, Middle East and Africa (APMEA) rose 10.1%. MCD said its top contributors in the US were beverages, including the recently launched real fruit smoothies and frappes. Europe’s results were led by France, the UK and Germany, while Japan, Australia, and China aided sales in APMEA.

DISH Network Corp. (DISH $19) was sharply lower after the satellite TV provider announced that it lost about 19,000 net subscribers during 2Q, snapping a string of five-straight quarters of subscriber growth, per Dow Jones Newswires. The company’s subscriber results are more than offsetting its 2Q EPS that topped expectations, coming in at $0.57, versus the $0.53 estimate, as revenues grew 9.1% y/y to $3.2 billion, just above the $3.1 billion that was expected

Tyson Foods Inc. (TSN $17) reported fiscal 3Q EPS $0.65, compared to the $0.58 that the Street was looking for, with revenues increasing 12% y/y to $7.4 billion, just above the $7.3 billion that analysts were anticipating. The protein producer said its beef and pork segments had margins above their normalized ranges, chicken continued to improve, while its prepared foods struggled with rapidly rising input costs, but managed to post a decent return. Despite the results, shares finished lower.

Economic calendar quiet, Fed meeting on tap tomorrow

Treasuries finished mixed as there were no major economic releases scheduled for today. The yield on the two-year note rose 3 bps to 0.54%, the yield on the 10-year note was flat at 2.82% and the yield on the 30-year bond edged 1 bp higher to 4.01%.

The highlight of the week will be Tuesday’s one-day Federal Open Market Committee (FOMC) meeting and mid-day statement release. No changes are expected to the fed funds target rate, currently at a level between 0-0.25%. In the minutes from the last FOMC meeting, held June 23, the Fed noted that a majority of the participants viewed the risks to the economic outlook as tilted to the downside, and since that time, a slew of economic reports have come in weaker than expected, prompting calls for more stimulus. In his congressional testimony at the end of July, Fed Chair Bernanke mentioned three actions the Fed could take, if needed, to further support the economy, including strengthening its verbal commitment to keep rates low for an extended period, reinvesting proceeds from its mortgage security purchases, and cutting the interest rate it pays on reserves that banks hold at the Fed. Traders will be parsing each word in the FOMC statement to glean any current or potential future changes in direction, and the Fed is likely to carefully choose those words to manage expectations appropriately.

Currently the Fed reinvests proceeds from maturing Treasuries, but the Fed’s balance sheet effectively shrinks when mortgage-backed securities (MBS) are prepaid (when mortgages are refinanced or paid off due to a home sale), or when they mature. The Fed is in a quandary, as the decline in its balance sheet essentially tightens, and money supply is a key variable in the index of leading economic indicators. However, the current expansion of the Fed’s balance sheet hasn’t had its intended impact, as the money isn’t multiplying throughout the economy. Typically, when banks lend, the money spent by the borrower then spurs further spending, by the eventual recipient of the money.

The only other event scheduled on tomorrow’s US economic calendar is wholesale inventories, expected to rise 0.4% in June following a 0.5% increase in May.

Europe economic calendar light, but positive

Some positive news on the economic front across the pond came in the form of Germany reporting that its trade surplus for June expanded by a larger-than-forecasted amount, as exports jumped more than double what was expected. Elsewhere, a report showed euro-zone investor confidence jumped from -1.3 in July to 8.5 in August, the highest level since December 2007, and well above the 1.6 level that was anticipated, while a separate release showed France’s business sentiment remained unchanged at an upwardly revised 101.

In the Asia/Pacific region, investors will be awaiting tomorrow’s conclusion of the Bank of Japan’s monetary policy meeting in the hopes the central bank will address the strength in the yen versus the dollar and other major currencies, as the yen hit an eight-month high versus the greenback and is threatening a fifteen-year high. Moreover, a report showed Japan’s current account surplus unexpectedly shrunk, suggesting the strength in the yen may be impacting the nation’s trade, while a separate report showed the nation’s trade surplus expanded, but at a level that was below economists’ forecasts. In other Japanese news, Goldman Sachs downgraded its growth forecast for the nation, due partly to the disappearance of government stimulus efforts.

In other economic news in the region, Australia’s home loans for June fell more than expected and a separate report showed the nation’s growth in job advertisements declined month-over-month in July, South Korea’s Producer Price Index rose 3.4% y/y in July, after increasing 4.6% in June, and Taiwan’s trade surplus increased much more than forecasted.

Tomorrow’s international economic calendar will include: retail sales and trade balance numbers from the UK, German CPI, industrial production out of France, and China’s trade balance.