Evening Market Update

Stocks Tumble on Weak Jobs and Manufacturing Data

The equity markets slid to solid losses, as weekly initial jobless claims unexpectedly climbed to a nine-month high and the Philly Fed Manufacturing Index surprisingly contracted. The disappointing reports started the day off on a sour note and overshadowed an increase in the Index of Leading Economic Indicators. The equity front was highlighted by the announcement that Dow member Intel Corp will acquire security software firm McAfee Inc for approximately $7.7 billion. Multiple earnings reports were also in focus, as Applied Materials beat top line estimates, but missed EPS targets, while NetApp Inc, PetSmart Inc and Limited Brands Inc all beat the Street’s forecast and raised full-year guidance. On the negative side of the earnings ledger, Staples Inc missed revenue expectations, while Sears Holdings Corp posted a wider-than-expected loss and GameStop Corp disappointed on its outlook, EPS and revenues. Treasuries overcame early losses to finish the day higher.

The Dow Jones Industrial Average lost 144 points (1.4%) to 10,271, the S&P 500 Index fell 19 points (1.7%) to 1,076, and the Nasdaq Composite declined 37 points (1.7%) to 2,179. In moderately light volume, 1.1 billion shares were traded on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil lost $1.02 to $74.40 per barrel, while wholesale gasoline was $0.03 lower at $1.93 per gallon, and the Bloomberg gold spot price gained $1.70 to $1,231.15 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.3% higher at 82.46.

Dow member Intel Corp. (INTC $19) announced that it has reached a definitive agreement to acquire security software firm McAfee Inc. (MFE $47) for $48 per share in cash, or about $7.7 billion. INTC said the acquisition reflects that security is now a fundamental component of online computing. The boards of both companies have unanimously approved the deal, which is expected to close after MFE shareholders approve the deal and it gets regulatory clearances. INTC said it expects the combination to be slightly accretive to EPS excluding one-time charges related to the transaction in the first year and improve beyond that. INTC traded lower, while MFE was up over 50%.

Applied Materials Inc. (AMAT $11) reported fiscal 3Q EPS ex-items of $0.17, below the Reuters estimate of $0.25, but revenues rose more than 100% year-over-year (y/y) to $2.5 billion, up 10% versus the prior quarter, and exceeded the $2.4 billion that the Street was looking for. The chip equipment maker said it had strong results across its semiconductor, display and crystalline silicon solar businesses. AMAT issued 4Q EPS guidance the topped analysts’ expectations. Shares gave up early gains to finish lower.

NetApp Inc. (NTAP $41) achieved fiscal 1Q profits of $0.49 per share, three cents above estimates, as revenues rose 36% y/y to $1.1 billion, roughly inline with forecasts. The data-storage firm said it benefitted from IT organizations transforming their data centers. NTAP’s 2Q EPS guidance range had a midpoint that exceeded analysts’ forecasts. NTAP traded higher.

Staples Inc. (SPLS $19) announced 2Q EPS ex-items of $0.20, inline with analysts’ forecasts, with revenues flat y/y at $5.5 billion, below the $5.6 billion that the Street was expecting. The office supply chain said the sales environment is “challenging.” Shares of SPLS were lower.

Sears Holding Corp. (SHLD $61) was solidly lower after the retailer posted an adjusted loss of $0.19 per share, wider than the $0.18 shortfall that analysts had expected, with revenues dipping 1% y/y to $10.5 billion, just shy of the $10.6 billion that was forecasted. SHLD said its decline in total revenues was primarily a result of its domestic same-store sales—sales at stores open at least a year—falling 2.2% y/y. Sales at its Kmart stores were negatively impacted by food and consumables category, while sales at its Sears domestic stores were pressured by power lawn and garden, tools, and consumer electronics categories.

PetSmart Inc. (PETM $33) traded nicely higher after the pet supply firm increased its full-year EPS outlook and posted 2Q EPS of $0.41, five cents above the Street’s expectation. Revenues rose 6.2% y/y to $1.4 billion, inline with forecasts, while same-store sales grew 4.6% y/y.

GameStop Corp. (GME $ 19) was under solid pressure after the video-game retailer lowered its 3Q EPS outlook, posted 2Q earnings of $0.26 per share, which was one penny below expectations, and revenues of $1.80 billion that missed the $1.82 billion that analysts were forecasting. But GME did note that it was able to achieve both top-line and earnings growth “despite the ongoing volatility in the global economy.”

Limited Brands Inc. (LTD $26) reported 2Q EPS of $0.36, two cents higher than the Street’s estimate, as same-store sales rose 7% y/y. The parent company of Victoria’s Secret and Bath & Body Works also raised its 3Q and full-year guidance, and the company’s CEO attributed the strong quarter to tightly controlled inventory and expenses. Shares of LTD finished higher.

Jobless claims unexpectedly rise, LEI and Mid-Atlantic manufacturing read on the horizon

Weekly initial jobless claims rose by 12,000 to 500,000, versus last week's figure which was upwardly revised by 4,000 to 488,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to decrease to 478,000. The four-week moving average, considered a smoother look at the trend in claims, increased by 8,000 to 482,500, while continuing claims fell by 13,000 to 4,478,000, compared to the 4,500,000 that was anticipated by economists.

Additionally, the Philly Fed Manufacturing Index unexpectedly fell, dropping from 5.1 in July to -7.7 in August, compared to the forecast for a slight increase to 7.0. The report depicts business activity in the mid-Atlantic region surprisingly contracted—the first monthly decline since July 2009—as a reading of zero is the demarcation point between expansion and contraction. Every component making up the index deteriorated, with the largest drop coming from the inventory component which tumbled from 4.5 to -11.6, and the employment component fell from 4.0 to -2.7. However, today’s report showed that manufacturing executives expect growth in business activity over the next six months. Today’s report was worse than Monday’s release of the Empire Manufacturing Index, a measure of manufacturing in the New York region, which rose in August to a level of 7.10, but was below the estimated increase to 8.00, from the previous month’s level of 5.08. In the Empire report, new orders and shipments fell sharply to levels below the zero mark, but the employment component of the report rose solidly, moving further into a level depicting expansion.

In other economic news, the Conference Board released the Index of Leading Economic Indicators (LEI) for July, which increased by 0.1%, matching expectations, while June’s 0.2% decline was revised to a 0.3% drop. The increase was paced by positive contributions from the average workweek, pace of deliveries, and stock prices, while negative contributors were money supply and orders from nondefense capital goods.

Both reports continue to show economic expansion, with the manufacturing index easing to 55.5 in July from 56.2, while the nonmanufacturing index rose to 54.3 from 53.8. Looking inside the report tells a more complete story. New orders, which show what future activity may look like, fell back on the manufacturing side to a one-year low, but still in expansionary territory at 53.5. Although that's somewhat disappointing, it continues to show growth, and was offset by the nonmanufacturing new order reading, which rose to 56.7 from 54.4—indicating increasing activity in the much-larger service sector.

Treasuries pared early losses to finish higher following the jobless claims data and the sharp deterioration in the Philly Fed Index. The yield on the two-year note was 1 bp lower at 0.48%, the yield on the 10-year note declined 6 bps to 2.57% and the yield on the 30-year bond lost 9 bps to 3.65%.

Upbeat economic reports improve euro-zone sentiment

Economic optimism in Europe was helped after the German Bundesbank raised its growth forecast for Europe’s largest economy, as the central bank’s previous growth forecast of 1.9% for this year was revised to about 3% on the heels of the much stronger-than-anticipated 2Q GDP report released last week, which showed quarter-over-quarter (q/q) growth of 2.2%, compared to the 1.3% expansion that economists expected. Adding to the improved sentiment across the pond, UK retail sales excluding auto fuel rose 0.9% month-over-month (m/m) in July, versus the rise of 0.2% that was anticipated, and a separate report showed the UK budget deficit was smaller than expected, as the nation’s public sector net borrowing was 3.2 billion pounds in July, after posted a deficit of 13.9 billion pounds in June, and compared to the 4.8 billion pounds that was forecasted for July.

In Asia/Pacific economic news, media reports are suggesting that the Bank of Japan may hold an emergency meeting to discuss further easing of monetary policy amid the backdrop of a surging yen, which is tarnishing the outlook for profits of companies that rely heavily on sales outside the Asian nation. However, the speculation was kept in check as other reports suggested any policy action was unlikely before the BoJ’s regular scheduled meeting set for September 6-7th, according to Reuters. The BoJ did not comment on the reports. In other Japanese economic news, separate reports showed an all industry activity gauge unexpectedly rose m/m in June, machine tool orders were revised slightly higher for July, while Japan’s department store sales fell 1.4% y/y in July, after falling 6.0% in June. Elsewhere in the region, India’s producer price increases slowed but still showed double-digit growth, Taiwan’s government reported that its 2Q GDP expanded 12.5% y/y, compared to the 10.2% growth that was anticipated, Australia released a report that showed average weekly wages grew at a slower pace than expected, while New Zealand reported an improved read on consumer confidence and a mixed report on producer prices

Back in the Americas, Canada’s index of leading economic indicators increased by 0.4% in July, its slowest advance since June of last year. The June reading was also revised down from a 1.0% increase to a gain of 0.7%. The decline was mainly due to the slowdown in the country’s housing market, reflected by a decline of 4.1% in the measure of housing starts and existing home sales. Overall, six of the index’s ten components increased in the July reading.

There are no major releases on the US economic calendar tomorrow.

The international docket will be quiet as well, as the only major releases are Canadian and Brazilian CPI.