Evening Market Update

Bulls Run on Benanke Speech and GDP Revision

The bulls were able to cap a rough week on a high note on Friday after a revision to 2Q domestic output in the US was smaller than expected as a result of an upward fine-tuning to the reading on consumer spending, and after Federal Reserve Chairman Ben Bernanke firmed his confidence in the economic recovery and said that the Fed stands ready to respond if necessary, in a speech at the Fed's annual economic symposium. The bidding war for 3PAR continued after both Dell and Dow component Hewlett-Packard made revised bids for the data storage company, while elsewhere in the tech sector, Intel lowered guidance saying it saw weaker-than-expected demand for PCs. Elsewhere on the equity front, Boeing delayed the delivery of its 787 Dreamliner again, and J. Crew Group and Tiffany & Co. reported earnings that bested analysts' forecasts. The long end of the yield curve steepened as Treasuries were patently lower on the day.

The Dow Jones Industrial Average jumped 164 points (1.7%) to 10,151, the S&P 500 Index gained 17 points (1.7%) to 1,065, and the Nasdaq Composite was 35 points (1.7%) higher at 2,154. In moderate volume, 1.1 billion shares were traded on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil gained $2.05 to $75.41 per barrel, wholesale gasoline was $0.04 higher at $1.91 per gallon, and the Bloomberg gold spot price rose $0.47 to $1,238.07 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-fell 0.4% to 82.91. For the week, including dividends, the DJIA declined 0.6%, the S&P 500 Index lost 0.7%, and the Nasdaq Composite shed 1.2%.

Boeing Co.(BA $63 ¹) reported that it is postponing delivery of the first 787 Dreamliner, already over two years late, by several weeks after a Rolls-Royce Group Plc (RYCEY $43) engine blew up in testing on August 2. Rolls-Royce said it is working closely with Boeing to "expedite delivery in support of their program schedule." The first plane is now scheduled to be delivered in the middle of 1Q 2011 to All Nippon Airways (ALNPY $7), who called the delay "regrettable." This setback comes after Boeing reported a delay last month related to horizontal stabilizers and instrumentation. Shares of BA were higher.

The duel for data storage 3PAR Inc (PAR $32) remained in high gear, after two bids Thursday were met by two more today. The day began with Dell Inc (DELL $12) raising its offer to $27 in cash per share, while shortly before the open of trading, Dow component Hewlett-Packard Co (HPQ $38) countered with a $30 cash per share offer, with an enterprise value of $2.0 billion. Shares are trading above the $30 mark however, as Dell has matching rights, or the ability to counter any offer within three days, and Dell’s last bid had a termination fee of $72 million, payable in the event 3PAR receives and accepts another unsolicited acquisition proposal that the board determines to be superior to Dell’s increased offer. Shares of 3PAR and Dell were higher, while Hewlett-Packard was lower.

Intel(INTC $18) announced that 3Q revenues will be below the company's previous forecast of $11.2-12.0 billion, with the new estimate of $11.0 billion, plus or minus $200 million. The company said that revenue is being affected by weaker than expected demand for consumer PCs in mature markets, while inventories across the supply chain "appear to be in-line with the company's revised expectations." Additionally, the company guided gross margin to be 66%, plus or minus a point, lower than the previous expectation of 67%, plus or minus a couple of points, as lower volume is being partially offset by slightly higher average selling prices stemming from "solid enterprise demand." Shares were higher.

J. Crew Group (JCG $31) posted 2Q EPS of $0.53, seven cents higher than analysts' estimates as revenue grew 14% to $407.5 million, also above the consensus estimate. However shares were lower after the retailer forecasted 3Q earnings of $0.55-0.60 per share, while the Street had been estimating $0.71 per share. CEO Mickey Drexler said that "While we are really pleased with the second quarter, it is more critical than ever to continue to move forward and invest in our business for quality, long term, earnings growth." In the conference call with analysts, Drexler said that customers are more "selective" with their purchases.

Tiffany & Co (TIF $41) reported 2Q earnings per share of $0.53, in line with Street estimates, as revenue grew 9.2% to $668.8 million, and the company raised its full year earnings forecast to $2.60-2.65 per share, from a previous estimate of $2.55-2.60 in earnings per share, while analysts are expecting $2.61 in EPS. The company said that they "look forward toward the second half of the year with a sense of guarded optimism," as they continue to grow their store base and launch new products such as jewelry containing yellow diamonds, handbags and leather accessories. The CEO added that "So far in this third quarter, consolidated worldwide sales are growing at a low-double-digit percentage rate over last year, with varying results by region." Shares were lower.

Second reading on GDP beats, Bernanke says recovery in place

The second look at 2Q Gross Domestic Product, the broadest measure of economic output, was released this morning and showed a 1.6% annualized rate of growth, compared to the downward revision to 1.4% expected by a survey of economists by Bloomberg, as personal consumption was upwardly revised to 2.0% from 1.6%, and was expected to remain unadjusted.

The GDP Price Index rose 1.9%, above the consensus of economists, which called for the number to remain at 1.8%, and the core PCE Index, which excludes food and energy, increased 1.1%, inline with estimates of an unrevised figure.

The speech from Fed Chair Ben Bernanke at the annual economic symposium held in Jackson Hole, Wyoming was released after the market open. The 17-page speech indicated that the Fed stands ready to provide more stimulus if needed, as Bernanke said that while the Fed's recent decision to stabilize its balance sheet "should promote financial conditions supportive of recovery," but that, "Additional purchases of longer-term securities, should the FOMC choose to undertake them, would be effective in further easing financial conditions." Bernanke gave a thorough analysis of the economy, saying that growth has been "too slow" and joblessness “too high." The Fed Chair said that the initial recovery was driven by fiscal stimulus and inventory building, but that a handoff appears underway to growth in private final demand, notably consumer spending and business investment, which can create sustained expansion. Bernanke said that businesses remain reluctant to add permanent employees, "citing slow growth of sales and elevated economic and regulatory uncertainty.' While he said consumer spending may grow relatively slowly in the near term, Bernanke expects the economy to continue to expand in the second half of 2010, albeit at a "relatively modest pace," and said that despite weaker data recently, "the preconditions for a pickup in growth in 2011 appear to remain in place."

In his discussion about the policy options for further easing, Bernanke reiterated three tools previously discussed, such as additional purchases, modifying the FOMC's communication, and reducing the interest paid on excess reserves, but also commented on a fourth strategy proposed by several economists, that the FOMC increase its inflation goals, by saying he sees no support for this option on the FOMC, adding that it was "inappropriate" for the US in current circumstances. Bernanke said that the FOMC has not agreed on specific criteria or triggers for further action, but said that should further action prove necessary, policy options were available but that they would require a "careful comparison" of benefit and cost.

Elsewhere, the University of Michigan's Consumer Sentiment Index was revised lower to 68.9 in August, while the expectation of economists was that the reading would be unchanged from the original estimate of 69.6. However, the reading was still above the 67.8 hit in July, which was the lowest since November 2009. The downward revision came as the economic outlook component was adjusted to 62.9 from 64.1 in the preliminary reading, but is still above the 62.3 mark of July, while the current economic conditions component of the report was 78.3, and the economic outlook component rose from 60.6 to 62.3. The report also revealed that inflation expectations for one-year from now are 2.7% and 2.8% for the five-year time horizon.

Treasuries were lower and the yield curve steepened on the economic data and Bernanke's speech. The yield on the two-year note was 4 bps higher at 0.56%, the yield on the 10-year note jumped 16 bps to 2.64%, and the 30-year bond yield was 17 bps higher at 3.69%.

Economic news light overseas

In European economic news, the UK released revised 2Q GDP data, saying the economy rose 1.2% quarter-over-quarter as construction expanded faster than previously estimated, with gains also coming as inventories rose, and consumer spending gained 0.7%, offsetting declines in fixed investment. Additionally, the German import price index fell less than expected month-over-month.

There was little in the way of economic news in the Asia/Pacific region, but Japan's Prime Minister Kan made additional comments on the country’s currency situation, saying the government is "ready when necessary to take bold measures," as the near 15-year high on the yen versus the dollar and eight-year high relative to the euro hurts the prospects of the nation's exporters. Kan also said he expects the Bank of Japan to implement monetary policy "swiftly," and that he will be speaking with central bank governor Shirakawa soon after he returns from the Jackson Hole meeting in the US. After markets closed in Japan, Kan added that stimulus measures will be outlined on August 31, as the nation faces a difficult economic situation, highlighted by reports today that consumer prices fell for a 17th month and household spending rose less than forecast. Kan's government is under pressure ahead of elections next month.

Weak economic data rattles markets this week

Despite Friday's rally, the equity markets suffered for most of the week amid a number of disappointing economic reports, most notably from the housing sector. New home sales for the month of July unexpectedly fell 12.1% month-over-month (m/m) to an annual rate of 276,000 units, the lowest level since 1963, and well below the forecasted flat reading of 310,000 units. The report came a day after existing-home sales showed a 27.2% m/m plunge in July to an annual rate of 3.83 million units, far short of the 13.4% decline to 4.65 million units that economists surveyed by Bloomberg had expected. Further exacerbating the negative sentiment earlier in the week, durable goods orders rose a meager 0.3% m/m in July, much lower than the forecast of a 3.0% increase by economists, while the Kansas City Fed’s manufacturing index fell to a reading of zero from 14 in July, right at the line that denotes neither expansion nor contraction. Other than Friday's better-than-expected revision to 2Q GDP and Bernanke's speech at the Fed's annual symposium demonstrating his confidence in the economic recovery, the only bright spot in the week's economic calendar came from a larger-than-expected decline in weekly initial jobless claims to a level of 473,000, moving away from the 500,000 mark from last week.

While barely helping sentiment, a number of M&A deals dominated the corporate headlines early in the week, most notably from the week-long bidding war for 3PAR between Dell Inc. and Hewlett-Packard. Elsewhere, a number of other possible suitors are reportedly eyeing Potash Corp. of Saskatchewan Inc. (POT $148) after it formally rejected the $38.6 billion, $130 per share, unsolicited buyout from BHP Billiton (BHP $67), Campbell Soup Co. (CPB $37) is reportedly considering a $2.3 billion offer for part of privately-held United Biscuits Plc, and HSBC Holdings Plc (HBC $50) said it is in talks with financial group Old Mutual Plc (ODMTY $16) to buy a 70% controlling stake in South Africa’s fourth-largest bank.

The currency markets garnered additional attention this week, as the yen touched fresh 15-year highs against the US dollar, troubling investors as the recent surge in the Asian currency has dampened the outlook for profits of companies in the nation that rely on sales abroad, and has pulled the Nikkei 225 Index down 22% from its April high.

Job market in view next week

The week starts off slow, with Tuesday's reading of the S&P/CaseShiller Home Price Index, which lags the sales data by a month, and is forecasted to rise 3.5% year-over-year (y/y) and 0.25% m/m in June.

However, traders will likely pay more attention to Tuesday's midday release of the minutes from the August Federal Open Market Committee (FOMC) meeting. The Fed moved to stem a decline in its balance sheet at the last meeting, by keeping its holdings constant, after downgrading its assessment of the economy and the jobs market, saying that the pace of recovery was slower than expected. While there was only one formal dissenting vote at the meeting, the Wall Street Journal reported that seven of the seventeen policymakers at the meeting either spoke against the proposal or had reservations, and market participants will be scouring the minutes for enlightenment about these discussions. Some of the fireworks from the report are likely to be outweighed by Bernanke's Jackson Hole speech, which described in detail his outlook on the economy and potential policy actions, adding that the FOMC has not agreed on specific criteria or triggers for further action.

Readings on the economy in August will continue with Wednesday's ISM Manufacturing Index, expected to decline to 53.0 in August from 55.5 in July, while the ISM Non-Manufacturing Index, to be released on Friday, is forecasted to decline to 53.5 in August from 54.3 in July. The level that separates expansion from contraction is 50.0.

The week ends with the release of nonfarm payrolls on Friday, expected to fall 100,000 in August, after declining by 131,000 in July, while excluding government employment, which has been falling as temporary Census workers decline, private sector payrolls are expected to increase 49,000, after expanding by a disappointing 71,000 in July. The unemployment rate is estimated to increase to 9.6% from 9.5%, as workers re-enter the workforce as job openings increase.

Other releases on the US economic calendar include MBA Mortgage Applications, the Conference Board’s measure of consumer confidence, final 2Q productivity, initial jobless claims, factory orders, and pending home sales.

Elsewhere in the Americas, Canada releases 2Q GDP and Brazil releases industrial production.

In Europe, releases include euro-zone and UK manufacturing and services PMI reports, euro-zone consumer confidence, CPI, unemployment, and retail sales, UK consumer confidence, mortgage approvals, and housing prices, as well as German unemployment and retail sales.

In Asia/Pacific, Japan is slated to announce industrial and vehicle production, housing starts, and capital spending, while Australia will report retail sales, building approvals, and 2Q GDP. Additionally, India and China will announce manufacturing and services PMIs, and India releases 2Q GDP.

In central bank action, the European Central Bank and Bank of Brazil meet to discuss monetary policy.