Evening Market Update

Fed Notes Slowing Growth, Market Yawns

Stocks were modestly higher on the day, overcoming early pressure from European debt concerns, and showing little reaction to US economic news, which included a fall in mortgage applications and a decline in use of credit by consumers, and Treasuries were lower. The mid-day release of the Beige Book from the Fed noted “widespread signs of deceleration” in the economy in an informal survey of activity, although two districts reported net improvements. On the equity front, the battle over Oracle Corp’s hiring of Dow member Hewlett-Packard Co’s former CEO Mark Hurd continued, chipmaker Altera Corp raised its revenue guidance, Phillips-Van Heusen Corp beat estimates, and Bristol-Myers Squibb announced the acquisition of ZymoGenetics. In energy news, the Energy Information Administration raised its forecast of US oil demand for 2010, and BP Plc announced the findings of its internal investigation of the Gulf oil spill.

The Dow Jones Industrial Average moved 107 points (1.0%) higher to 10,341, the S&P 500 Index gained 13 points (1.2%) to 1,092, while the Nasdaq Composite advanced 25 points (1.1%) to 2,209. In light volume, 878 million shares were traded on the NYSE and 2.0 billion shares were traded on the Nasdaq. Crude oil gained $0.58 to $74.67 per barrel, wholesale gasoline was higher by $0.01 at $1.94 per gallon, and the Bloomberg gold spot price gained $0.20 to $1,255.75 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.3% lower at 82.63.

Following the lawsuit filed by Dow member Hewlett-Packard Co. (HPQ $39) against Oracle Corp. (ORCL $24) pertaining to yesterday’s announcement that ORCL has hired former HPQ CEO Mark Hurd as its President, ORCL’s CEO Larry Ellison said ORCL has viewed HPQ as an important partner but offered a tough response. Ellison said, “By filing this vindictive lawsuit against Oracle and Mark Hurd, the HP board is acting with utter disregard for that partnership, our joint customers, and their own shareholders and employees. The HP board is making it virtually impossible for Oracle and HP to continue to cooperate and work together in the IT marketplace.” Shares of both firms fell.

Altera Corp. (ALTR $27) said based on quarter-to-date results and the company’s outlook for the remainder of the quarter, 3Q revenue at the semiconductor firm is expected to be 10-14% above 2Q levels, versus its prior view of sequential growth of between 4-8%. The company reported 2Q revenues of $469.3 million. ALTR said the telecom and wireless vertical market is on track to be the fastest growing portion of its business, driven in large part by 3G wireless deployments and needs for additional wireless backhaul capacity. The company will report its 3Q results after the closing bell on October 19, and analysts are expecting it to post revenues of $498 million in 3Q. ALTR traded higher.

Bristol-Myers Squibb Co. (BMY $27) announced an acquisition of biotechnology company ZymoGenetics (ZGEN $10) for $9.75 cash per share, or $735 million net of cash acquired, an over 80% premium to where ZGEN closed on Tuesday. BMY said the move would expand its investigational biologic platform while increasing its position in Hepatitis C. BMY said the deal would be $0.03 dilutive to 2010 EPS, while reducing 2011 EPS by $0.07 per share. Shares of BMY rose.

Phillips-Van Heusen Corp. (PVH $54) reported 2Q EPS ex-items of $0.72, above the $0.54 Reuters estimate, with revenues more than doubling year-over-year (y/y) to $1.1 billion, roughly inline with the Street’s expectations. The company’s Calvin Klein unit continued its growth momentum, while the company’s newly acquired Tommy Hilfiger business generated almost half of the company’s revenues as North American retail and European wholesale divisions performed “particularly well.” PVH raised its full-year 2010 outlook. Shares were nicely higher.

BP Plc. (BP $38) moved higher after it released results of its internal investigation of the cause of the massive Gulf of Mexico oil spill, saying that no single factor caused the deepwater oil rig explosion and decisions by multiple companies contributed to the spill.

In other energy news, the Energy Information Administration (EIA) released its monthly outlook, increasing its forecast for US oil demand in 2010 to an increase of 0.9% from 0.7% a month ago, citing upward revisions to the outlook for gasoline and distillate, but the agency lowered its 2011 demand to 0.7% from 0.8% a month ago. The EIA lowered its estimate of US GDP growth to 2.8% in 2010 and 2.3% in 2011, while the prior forecast was for 3.1% and 2.7% respectively.

Mortgage apps dip, Fed Beige Book notes slowing growth, consumers use less credit

The morning’s US economic calendar was relatively light with the lone report in the first-half of today’s session being the MBA Mortgage Application Index, which declined 1.5% last week, after the index that can be quite volatile on a week-to-week basis, gained 2.7% in the previous week. The decrease came as the Refinance Index fell 3.1%, more than offsetting a 6.3% gain in the Purchase Index. The decline in the overall index came amid a 7 basis-point rise in the average 30-year mortgage rate to 4.50%, off of the record low of 4.43% reached in the previous week. Treasuries remain lower, showing little reaction to the report and are finding pressure amid the rebound in the equity markets.

The Federal Reserve released its Beige Book, a summary of anecdotal information gathered from all twelve Fed Districts across the US depicting current economic conditions and one of the tools used by Federal Open Market Committee (FOMC) members to help construct monetary policy. The report noted continued growth in national economic activity during the reporting period of mid-July through the end of August, “but with widespread signs of a deceleration compared with the preceding periods.” Economic growth at a modest pace was depicted in five western Districts, Boston and Cleveland noted positive developments or net improvements, while remaining Districts of New York, Philadelphia, Richmond, Atlanta, and Chicago all highlighted mixed conditions or deceleration in overall economic activity.

Consumer spending was a positive aspect of the report, with consumer spending said to have “appeared to increase on balance despite continued consumer caution that limited nonessential purchases, while activity in the travel and tourism sector picked up relative to seasonal norms.” The release depicted that manufacturing activity pointed to further expansion, “although the pace of growth eased according to several Districts.” However, the report continued to show housing and labor market conditions were weak, with home sales slowing further following an initial drop after the expiration of the homebuyer tax credit, while hiring of permanent employees was held down in part by employers’ reliance on temporary and contract workers, as reported by Philadelphia and Atlanta, although Boston noted that conversions from temporary to permanent staff picked up. Elsewhere, the report showed lending activity was “stable to down slightly on net,” with most Districts reporting little or no change from existing low levels of commercial and industrial lending, as businesses remained “quite cautious about expansion plans.” The report offered little new surprises for the Fed to consider in its next FOMC meeting on September 21, suggesting the Fed may maintain its stance that economic conditions continue to warrant keeping the fed funds rate near zero for an “extended period.”

Consumer credit fell for the sixth-consecutive month, dropping by $3.6 billion during July, less than the $4.7 billion decline forecasted by economists, while June’s figure was revised to a smaller drop, of $1.0 billion from the initially reported $1.3 billion decrease. The decline was led by waning use of revolving credit, which fell for the twenty-third straight month, decreasing by $4.4 billion in July and $30.5 billion during 2010. Meanwhile, non-revolving credit, which includes auto loans and other personal loans but excludes debt secured by real estate such as home equity lines of credit, rose $758 million in July and is up by $7.5 billion in 2010.

Treasuries showed little reaction to the economic reports of the day, but instead found pressure amid the rebound in the equity markets. The yield on the two-year note was 4 bps higher at 0.51%, the yield on the 10-year note rose 5 bps to 2.65%, and the 30-year bond yield advanced 6 bps to 3.72%.

Fears over debts in Europe highlight international news, Canada hikes rates again

Debt fears came into focus again in Europe, led by concerns about the banking sector in Ireland, leading the nation’s credit default swaps to rise to record levels ahead of a late session decision about the fate of Anglo Irish Bank, which was nationalized in January 2009, and said last week that it needs about 25 billion euros ($32 billion) in funding, which could increase pressure on the Irish government to raise capital. Late in the European trading day, the Irish government announced that it will split Anglo Irish Bank into two companies, one comprising of the good assets of the bank that will continue to operate, the “funding bank,” and the other made up of the bad assets, an “asset recovery bank,” that will be wholly or partly sold over a period of time.

However, stocks rose as fears subsided after a successful debt auction in Portugal and a report that showed Portuguese 2Q GDP expanded by a larger amount than initially projected. Greek debt also joined the headlines, as the nation’s largest lender, National Bank of Greece (NBG $2), announced plans to raise about 2.8 billion euros ($3.6 billion) to bolster its capital position, while Greece’s 2Q GDP was upwardly revised.

Moreover, European countries announced some disappointing data, with a report showing industrial production in Germany—Europe’s largest economy—increased by a much smaller amount than anticipated, as it rose 0.1% month-over-month (m/m) in July, versus the 1.0% increase that was forecast. Also, a separate report showed UK industrial production rose by a smaller-than-expected amount. Other economic reports included: a smaller-than-expected contraction in Germany’s trade surplus, France’s business sentiment remained unchanged but its trade deficit widened by a larger amount than anticipated, Spain’s industrial output dropped, UK home prices unexpectedly increased in August, and Sweden’s 2Q GDP was revised to a higher expansion that forecasted.

In Asia/Pacific, Japan’s machine orders jumped 8.8% m/m in July, more than four times the growth expected by economists, and the Japanese trade surplus widened by a larger-than-forecasted amount even amid the steep gains seen in the yen. However, negative news in Japan came in separate surveys of current and expected economic conditions that came in below economists’ forecasts. Elsewhere, Australia’s home loans in July rose by a larger amount than expected.

In other economic news in North America, the Bank of Canada (BoC) increased its benchmark interest rate by 25 basis points to 1.0% as expected by economists surveyed by Bloomberg. The BoC said the global economic recovery is proceeding but remains uneven, balancing strong activity in emerging market economies with weak growth in some advanced economies. In the US, the BoC said the recovery in private demand is being held back by high unemployment and recent indicators suggest a more muted recovery in the near term. Finally, the Canadian central bank said economic activity in Canada was slightly softer in 2Q than it had expected, although consumption and investment have evolved largely as anticipated. In other Canadian economic news, building permits fell by a smaller-than-expected amount and the Ivey Purchasing Manager Index rose much more than anticipated, to 65.9, the highest reading in more than two years.

The releases on the US economic calendar tomorrow are weekly initial jobless claims, forecast to fall to 470,000 from 472,000 the week prior, and the trade balance for July, expected to be a deficit of $47.0 billion.

Elsewhere, international releases include Japan consumer confidence, German CPI, Canadian housing starts, Australian employment change, and South Korean PPI. Additionally, the Bank of England and Bank of Korea meet to discuss monetary policy.