Evening Market Update

Subtle Gains on Promising Jobs and Trade Data

Stocks got off to a strong start today and managed to hang on to modest gains, following the release of a better-than-expected read on US jobless claims and a narrower trade deficit. The optimistic data sent Treasuries lower and helped to ease some of the recent concerns about a double-dip recession, although lackluster trading volume this week has made the upward movement less convincing. In equity news, Dow member McDonald’s Corp reported a 4.9% increase in global same-store sales, while Men’s Wearhouse Inc posted 2Q EPS that beat analysts’ expectations. The technology sector was helped by an announcement from Apple Inc. that it would relax some of its restrictions on application development, which sent shares of Adobe Systems Inc higher. Moreover, Oracle Corp and NetApp Inc agreed to dismiss their patent litigation against each other. On the M&A front, 3M Co. agreed to acquire Arizant Inc. for $810 million.

The Dow Jones Industrial Average moved 28 points (0.3%) higher to 10,415, the S&P 500 Index gained 5 points (0.5%) to 1,104, while the Nasdaq Composite advanced 7 points (0.3%) to 2,236. In light volume, 837 million shares were traded on the NYSE and 1.7 billion shares were traded on the Nasdaq. Crude oil lost $0.55 to $74.12 per barrel, wholesale gasoline was lower by $0.01 at $1.93 per gallon, and the Bloomberg gold spot price fell $10.40 to $1,244.55 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.1% higher at 82.65..

Dow member McDonald’s Corp. (MCD $74) reported that global same-store sales—sales at stores open at least thirteen months—rose 4.9% year-over-year (y/y) in August. The world’s largest fast-food chain said US sales increased 4.6%, aided by beverage sales of its new McCafe Real Fruit Smoothies and Frappes, while Europe was 2.2% higher, as strength in the UK and Russia was slightly offset by France. However, sales in the Asia/Pacific, Middle East and Africa segment jumped 7.8%, fueled by sales growth in Japan, China, and Australia. Shares finished lower, suggesting some on the Street had expected better sales results in August.

Apple Inc. (AAPL $263) announced that it has relaxed some restrictions to its iOS Developer Program license as it tries to improve its App Store. AAPL said it is relaxing all restrictions on the development tools used to create iOS applications for its iPhone and iPad devices, as long as the resulting apps do not download any code, helping give developers the flexibility they want. Shares of Adobe Systems Inc.(ADBE $33) traded sharply higher after the announcement as AAPL’s program-developer license dropped restrictions on development tools offered by ADBE, which it previously excluded products offered by the company. Shares of AAPL also gained ground on the release.

In other industry news, Oracle Corp. (ORCL $24) and NetApp Inc. (NTAP $47) announced that both entities agreed to dismiss their pending patent litigation, which began in 2007 between Sun Microsystems—which was acquired by ORCL earlier this year—and NTAP. Both companies are seeking to have the lawsuits dismissed without prejudice and terms of the agreement were not disclosed. Shares of ORCL moved higher, while NTAP finished lower.

Men’s Wearhouse Inc. (MW $22) reported 2Q EPS ex-items of $0.83, above the $0.71 Reuters estimate, with revenues increasing 2% y/y to $537 million, slightly above the $535 million that the Street was looking for. The clothing retailer’s US same-store sales rose 1.2% y/y. MW said its clothing product sales, which represented about 68% of total sales in 2Q, declined by 0.6%, due mainly to a decrease in store traffic at its flagship stores and average transaction value at its K&G stores. MW was solidly higher.

In M&A news, 3M Co. (MMM $83) agreed to acquire Arizant Inc. from private-equity firm Court Square Capital for $810 million. Arizant specializes in products used to prevent hypothermia during surgery and will be part of 3M’s health-care unit, it’s second-largest unit after the industrial and transportation division. 3M said the acquisition will decrease EPS by $0.03 in the first year after the deal is completed. Shares of MMM traded higher.

Jobless claims fall, trade deficit narrows

Weekly initial jobless claims fell by 27,000 to 451,000, versus last week's figure which was upwardly revised by 6,000 to 478,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to slip to 470,000. The four-week moving average, considered a smoother look at the trend in claims, dropped by 9,250 to 477,750, while continuing claims dipped by 2,000 to 4,478,000, compared to the 4,450,000 that was anticipated by economists.

Meanwhile, the trade deficit narrowed from a slightly favorable revision of $49.8 billion in June to $42.8 billion in July, versus the Bloomberg estimate calling for the deficit to come in at $47.0 billion. Exports increased to $153.3 billion from $150.6 billion in June, led by capital goods, while consumer goods led a decrease in imports to $196.1 billion from $200.3 billion.

Treasuries finished lower after extending losses following the employment and trade reports. The yield on the two-year note was 5 bps higher at 0.56%, the yield on the 10-year note rose 10 bps to 2.75%, and the 30-year bond yield advanced 11 bps to 3.84%. Yields have moved higher since reaching near record lows at the end of August, aided by some eased risk aversion as concerns about the possibility of a double-dip recession have dissipated somewhat on a string of relatively favorable global economic data to begin the new month.

Also, the popularity of fixed income investments have grown amid the economic uncertainty, volatility in the equity markets, as well as the near zero rates of returns available to investors’ cash holdings. Schwab’s Senior Vice President for the Schwab Center for Financial Research, Mark W. Riepe, CFA, and Director of Income Planning, Rob Williams, discuss the five most important questions that all fixed income investors should be asking in their Schwab Insight Webcast: Five Important Questions for Fixed Income Investors, on Tuesday September 21, 2010 at 7:00 p.m. ET. Their answers and timely action steps can help you build a healthier fixed income portfolio in today’s environment and to sign up for the event, please go to www.schwab.com/insightwebcast .

BOE leaves rates unchanged, Bank of Korea follows suit

In economic news across the pond, the Bank of England left its benchmark interest rate unchanged at a record low of 0.5% and made no new changes to its asset purchase target, in a move that was widely expected. The BOE has agreed to pump 200 billion pounds of new money into the economy since the recent recession began, but voted against increasing that total. Additionally, the European Central Bank released its monthly report for September, saying it continues to expect price developments to remain moderate and the recovery should proceed at a moderate pace, with uncertainty still prevailing. Also, there were some reports in the region on consumer prices, with Germany’s CPI remaining flat month-over-month (m/m) in August, along with prices in Sweden. Rounding out the economic docket, France’s nonfarm payrolls were left unrevised at 0.2% growth in 2Q and the UK trade deficit widened to a level that exceeded economists’ forecasts.

In Asia/Pacific news, Australia’s employment change rose by 30,900 in August, compared to the 25,000 that economists expected, with full-time employment increasing by 53,100, bringing the unemployment rate down to 5.1% from 5.3%, versus the forecast for the rate to dip to 5.2%. Meanwhile, a report out of Japan showed growth in large manufacturing activity in 3Q accelerated compared to the previous quarter, while a separate report showed Japanese consumer confidence deteriorated in August. In other news in the region, the Bank of Korea unexpectedly kept its benchmark interest rate unchanged at 2.25% for the second-straight month, compared to the increase to 2.50% that was anticipated. The Korean central bank said inflation would accelerate while economic growth was expected to stay solid, per Reuters. Also, a separate report showed y/y producer prices decelerated from 3.4% to 3.1% in August. Additionally, India’s wholesale prices increased y/y in August.

The lone report on tomorrow’s US economic calendar will be wholesale inventories, which are expected to increase 0.4% in July, after rising 0.1% in June.

On the international front, releases will include French and Italian manufacturing and industrial production, UK PPI, the Canadian unemployment rate, and Indian industrial production. Additionally, Japan’s Finance Ministry will release a revised reading of 2Q GDP.