Evening Market Update

Traders Shun Disappointing Economic Data

Equities were able to overcome the shadow cast from a larger-than-expected decline in US consumer confidence, a mixed home prices report and a reading of contraction in manufacturing activity in the Southeast, as stocks finished higher on the day. Lingering sovereign debt concerns were a source of early pressure after Standard & Poor’s and Fitch warned of possible downgrades to Ireland’s credit ratings. On the equity front, Walgreen Co and Paychex both topped the Street’s earnings forecasts, while Dow member Pfizer ended trials of a prostate cancer treatment, Jabil Circuit guided revenue lower, and Monsanto suffered amid apprehension over the performance of its newest corn seed product. Treasuries ended higher following the disappointing economic data.

The Dow Jones Industrial Average gained 46 points (0.4%) to close at 10,858, the S&P 500 Index added 6 points (0.5%) to 1,148, and the Nasdaq Composite rose 10 points (0.4%) to 2,380. In modest volume, 1.0 billion shares were traded on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil lost $0.34 to $76.18 per barrel, wholesale gasoline was flat at $1.94 per gallon, and the Bloomberg gold spot price jumped $14.30 to $1,308.65 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—fell 0.6% to 78.91.

Walgreen Co. (WAG $34) reported fiscal 4Q EPS of $0.49, five cents above the Reuters estimate, with revenues increasing 7.4% year-over-year (y/y) to $16.9 billion, compared to the $16.8 billion that the Street was anticipating. Same-store sales—sales at stores open at least a year—increased 1.5% y/y, with prescription sales, which accounted for 65.9% of sales in the quarter, increasing 1.6%. The pharmacy and grocery retailer said it exceeded the industry-wide prescription growth rate by 3.0 percentage points —excluding itself—during the same period as reported by IMS Health. Shares were sharply higher as the company also said its gross profit margin improved 70 basis points compared to the same period last year.

Paychex Inc. (PAYX $27) announced fiscal 1Q EPS of $0.36, two pennies north of analysts’ forecasts, as revenues grew 4% y/y to $518.3 million, above the $507 million consensus forecast of the Street. The payroll and human resources outsourcing firm said its client retention improved but sales of new units continue to be difficult. PAYX said although its 1Q was slightly better-than-expected, the company remains cautious on fiscal 2011. The company reaffirmed its full-year earnings guidance. PAYX finished modestly higher.

Dow member Pfizer Inc. (PFE $17) reported that it has stopped a late-stage trial of its prostate cancer pill Sutent, due to interim analysis that the combination of the treatment with another drug was unlikely to improve overall survival. Separately, the drugmaker provided an update to its development pipeline, which includes 118 programs from Phase 1 through registration. Shares moved slightly higher.

Jabil Circuit Inc. (JBL $13) came under pressure after the electronics-component firm issued fiscal 1Q 2011 revenue guidance that came in below expectations, saying it expects revenues to be between $3.9-4.0 billion, compared to the $4.1 billion that was expected by the Street. The company’s disappointing outlook overshadowed its better-than-forecasted fiscal 4Q results. JBL reported fiscal 4Q EPS ex-items of $0.52, above the $0.48 that analysts were anticipating, as revenues jumped 39% y/y to $3.9 billion, roughly inline with expectations.

Shares of Monsanto (MON $49) were over 8% lower on heightened concerns that the performance of the agricultural biotech firm’s new SmartStax corn seeds will fall short of its promises. MON has touted SmartStax, which includes eight genes added for weed and pest control and is its most expensive seed, as “the highest yielding corn product available.” However, an analyst covering the company reported a 3-5% lower crop yield in early harvest reports out of Iowa compared to its less-expensive brethren. According to Bloomberg, in a telephone interview, a company spokesperson said it will give farmers credit for future seed purchases if they are dissatisfied with SmartStax, a move the analyst reported as a possible “financial headwind” for the company next year.

Home prices mixed, consumer confidence falls, Richmond Fed report depicts contraction

The release of the S&P/Case-Shiller Home Price Index which lags the sales data by a month, rose 3.18% y/y in July, compared to the increase of 3.10% that economists surveyed by Bloomberg had expected. However, month-over-month (m/m), home prices were 0.13% lower, compared to forecasts, which called for a decline of 0.10%.

Meanwhile, the Conference Board released its consumer confidence  report, which fell to a level below expectations, dropping to 48.5 in September—the lowest level since February—compared to the expectation of a decline to 52.1, and August’s reading was downwardly revised from 53.5 to 53.2. The headline number dropped as respondents’ gauge of the present economic situation being “bad” rose and those saying conditions are “normal” decreased. Moreover, those saying jobs are “hard to get” moved higher, but those saying jobs are “not so plentiful” dipped slightly. The report also revealed that expectations of deterioration for the next six months in business conditions and employment increased.

In other economic news, the Richmond Fed Manufacturing Index fell to -2 in September from 11 in August, compared to the decline to 6 expected by economists, and the index dropped below the level of zero that is the demarcation point between expansion and contraction for the first time since January.

Treasuries finished higher, moving to the upside following the disappointing reading of consumer confidence and lackluster report on manufacturing activity in the Southeast. The yield on the two-year note lost 2 bps to 0.42%, the yield on the 10-year note fell 7 bps to 2.46%, and the 30-year bond yield declined 6 bps to 3.66%.

Additional downgrades for Ireland a possibility, European economic news mixed

Heightened anxiety over sovereign debt continued after ratings agencies Standard & Poor’s and Fitch warned that downgrades to Ireland’s credit rating may be coming on increasing costs pertaining to the recapitalization of the nationalized Anglo Irish Bank. Some of the concerns were soothed by reports that European central banks purchased government debt of Ireland, according the Bloomberg, which cited people familiar with matter, but the purchases were not confirmed by euro-area policy makers.

Meanwhile, there was plenty of European economic data for traders to digest, including a 1.6% m/m drop in French consumer spending for August, far more than the 0.2% decline expected by economists, as French President Nicolas Sarkosy is set to present his budget which aims to drastically cut the nation’s deficit. Also, August retail sales in Sweden came in flat versus expectations of 0.5% growth. On the positive side of the ledger however, UK 2Q GDP was unrevised at 1.2% quarter-over-quarter (q/q) growth, marking the fastest rate of quarterly growth in nine years, aided by a rebound in consumer and government spending, and the nation’s 2Q current account deficit narrowed more than anticipated. Elsewhere, a measure of German consumer confidence showed that sentiment will likely increase to a three-year high in the month of October. Moreover, Germany’s Consumer Price Index declined by a smaller amount than expected m/m in September.

Meanwhile, the economic calendar in the Asia/Pacific region was light, with the lone reports worth mentioning being a deterioration in Japanese small business confidence for September and South Korean consumer confidence ticking lower.

Tomorrow’s US economic calendar will be light, yielding only the MBA Mortgage Applications Index, while internationally, a plethora of reports are on tap, including CPI out of Spain, business confidence and PPI from Italy, consumer credit and mortgage lending in the UK, consumer confidence in the euro-zone, and Japan releases its Tankan survey.