Evening Market Update

Despite Favorable US Data, Stocks Fail to Prevail

After receiving a boost from favorable reads on US 2Q GDP, weekly initial jobless claims, and Midwest business activity, US stocks have given up gains and are lower heading into afternoon action. Given the strong gains in an uncharacteristically strong month of September and as we stand at the doorstep of 4Q, traders may be harvesting some profits. Treasuries are lower following the upbeat US data, showing little reaction to US Federal Reserve Chairman Ben Bernanke’s testimony on Capitol Hill, in which he has not offered any new commentary on the current economic situation or details on a time frame of any further stimulus efforts, which expectations of have ramped up recently. In equity news, AIG announced that it will sell some Japanese assets to Prudential Financial Inc and unveiled its plan to exit the control of the US government, Manitowoc Co reported plans to refinance its credit facility, and Dow member Boeing Co announced a delay in its 747-8 Freighter. Overseas, European equities were mixed as traders wrestled with the US data, which helped offset some continued sovereign debt news across the pond.

At 1:00 p.m. ET, the Dow Jones Industrial Average is down 0.3%, the S&P 500 Index is 0.2% lower, and the Nasdaq Composite is declining 0.3%. Crude oil is up $1.46 at $79.32 per barrel, wholesale gasoline is up $0.03 at $2.02 per gallon, and the Bloomberg gold spot price is down $2.45 at $1,307.40 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is flat at 78.79.

Prudential Financial Inc. (PRU $57 ¹) announced that it has signed a definitive agreement with American International Group Inc. (AIG $39) for it to acquire Japanese units AIG Star Life Insurance Co. Ltd. and AIG Edison Life Insurance Company for a total purchase price of $4.8 billion. PRU said the addition of these operations to its existing businesses in Japan will increase its presence. Separately, AIG reported the it has agreed in principle on a plan for the US government to sell its stake in the insurer, in which the Treasury is expected to receive about 1.655 billion shares of AIG common stock after exchanging the $49.1 billion of preferred shares that were sold to the government as part of the bailout from the Troubled Asset Relief Program (TARP). The Treasury will own 92.1% of AIG common stock, which it will sell on the open market. Prior to the conversion of the government’s stake into common stock, AIG will be required to pay back in full a $20 billion secured credit facility that it has with the Federal Reserve Bank of New York. AIG is higher, while PRU is lower.

Manitowoc Co. (MTW $12) is up over 10% after the crane and foodservice equipment maker announced plans to refinance a portion of its term loans under its senior secured credit facility with senior unsecured notes to improve the balance and flexibility of its capital structure. The company said the amount of the offering, which is expected to be at least $500 million, has not been finalized.

Dow member Boeing Co. (BA $67 ¹) announced that it changed the schedule for the first delivery of its 747-8 Freighter to mid-year 2011, from the prior target of the end of 2010, and is adding a fifth plane to the flight-test fleet to support the new schedule. Separately, the company announced yesterday that the Pentagon awarded it with a $11.9 billion eight-year contract for the Air Force’s B-52 jet bomber program. BA is higher.

Final 2Q GDP revised slightly higher, jobless claims fall, Midwest activity stands tall

The final look at 2Q Gross Domestic Product, the broadest measure of economic output, was released this morning and showed a 1.7% quarter-over-quarter (q/q) annualized rate of growth, compared to the 1.6% expected by a survey of economists by Bloomberg, and the 3.7% expansion seen in 1Q. Personal consumption was upwardly revised to 2.2% from 2.0%, and was expected to remain unadjusted.

The GDP Price Index was unchanged at a rise of 1.9%, matching the consensus of economists, and the core PCE Index, which excludes food and energy, was revised down 0.1% to an increase of 1.0%.

Breaking down the report, consumer spending added 1.5%, inventory building contributed 0.8%, and business spending on equipment and software, which grew 24.8% q/q, contributed 1.5%, all of which were better contributions than in 1Q. Even construction added to growth, with 0.6% from residential and commercial real estate investment nearly unchanged. Federal government spending contributed 0.7%, and state and local government added 0.1%.

The main negative impact to the quarter was net exports, which detracted 3.5% from output, as imports (a subtraction from growth) grew 33.5% q/q and outpaced exports, which grew 9.1%. Real gross domestic purchases - purchases by US residents of goods and services wherever produced -- increased 5.1% in the second quarter, compared with an increase of 3.9% in the first.

Consumer spending has been surprisingly strong despite the ongoing headwinds of high unemployment, lower net worth and tight credit. While the rate of spending remains below the pace before the recession, consumers are spending on both ends of the spectrum, funding necessities by keeping a close eye on prices, while occasionally splurging on high end goods. Inventory at retailers remains low, with the inventory-to-sales ratio hitting an eight-year low in the spring, while just barely growing over recent months. Additionally, estimates of the holiday season this year remain above the levels of last year, with Deloitte LLP’s retail group estimating a 2% increase, after rising 1% in 2009. However, the forecast for continued contribution from consumer spending will be influenced by the state of the jobs market, which remains murky.

Meanwhile, weekly initial jobless claims fell by 16,000 to 453,000, versus last week's figure which was upwardly revised by 4,000 to 469,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to come in at 460,000. The four-week moving average, considered a smoother look at the trend in claims, fell by 6,250 to 458,000, while continuing claims fell by 83,000 to 4,457,000, compared to the 4,473,000 that was anticipated by economists.

In other economic news, the Chicago PMI  unexpectedly improved, increasing from 56.7 in August—which was the lowest level since November 2009—to 60.4 in September, compared to the decline to 55.5 that was forecasted. A reading of 50 is the demarcation point between expansion and contraction and the index showed the pace of business activity in the Midwest accelerated. Solid increases in production and new orders led the way but the employment component of the report, although remaining in expansion mode, deteriorated from 55.5 to 53.4.

US data helps Europe stomach continued sovereign debt news

Major equity markets in Europe finished mixed as traders grappled with the upbeat US GDP revision and employment data, and more news from the euro-area sovereign debt front. However, stocks in Spain and Ireland showed some resilience in the face of Moody’s Investors Service cutting Spain’s top credit rating one notch to Aa1 from Aaa, due to a “weak” outlook for the nation’s economy and the tough austerity measures that face the debt-laden country. Also, Ireland unveiled its final bill for rescuing troubled banks in the nation, most notably 29.3 billion euros ($40 billon) for Anglo Irish Bank, under a base-case scenario of losses facing the bank, with an additional 5 billion euros potentially being needed given a “stress case scenario.” Moreover, Ireland’s finance minister announced that Allied Irish Banks (AIB $1) must raise 7.4 billion by the end of 2010—AIB has already raised 2.5 billion euros thus far—to meet its capital requirements and it “is likely that the State will hold a majority shareholding in AIB,” given the bank’s options for raising capital. AIB was down sharply. Ireland’s finance minister said as a result of the capital support that the government is providing to its banking system, its general government deficit for 2010 will be around 32% of GDP.

On the European economic front: UK consumer confidence deteriorated more than expected—but a separate report showed home prices in the nation unexpectedly gained ground—unemployment in Germany fell by an amount that doubled expectations, French producer prices were cooler than expected, while the estimate for euro-zone CPI rose to a level that matched expectations.

The UK FTSE 100 Index was down 0.4%, France’s CAC-40 Index finished 0.6% lower, and Germany’s DAX Index declined 0.3%, while Spain’s IBEX 35 Index gained 0.3%, and Ireland’s Irish Overall Index was 0.7% higher.