Evening Market Update

Equity Markets Kick Off October in the Green

Stocks finished modestly higher in the first trading day of the fourth quarter, after falling off the best levels of the day achieved early this morning. Traders received a mixed-bag of economic news, with an upbeat reading of US personal income and spending, an upward revision to a gauge of consumer sentiment and an unexpected increase in construction spending being somewhat offset by a disappointing reading in the ISM Manufacturing Index. On the equity front, Dow member Hewlett-Packard Co. announced a new CEO, Accenture Plc. beat the Street’s earnings expectations and raised its dividend, and MetLife warned about the potential negative impact of a prolonged low interest rate environment. Meanwhile, major automakers reported September U.S. vehicle sales, with most companies enjoying strong growth year over year and United announced the completion of its merger with Continental, creating the world’s largest airline. Treasuries pared some early losses to finish mostly unchanged.

The Dow Jones Industrial Average gained 42 points (0.4%) to close at 10,830, the S&P 500 Index rose 5 points (0.4%) to 1,146, and the Nasdaq Composite increased 2 points (0.1%) to 2,371. In modest volume, 1.1 billion shares were traded on the NYSE and 1.9 billion shares were traded on the Nasdaq. Crude oil rose $1.62 to $81.59 per barrel, wholesale gasoline gained $0.05 to $2.09 per gallon, and the Bloomberg gold spot price moved $10.14 higher to $1,318.49 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.9% lower at 78.09. For the week, including dividends, the DJIA decreased 0.3%, the S&P 500 Index lost 0.2%, and the Nasdaq Composite fell 0.4%.

Dow member Hewlett-Packard Co. (HPQ $41) announced a new CEO and President of the company, electing Leo Apotheker, the former Chief of German business software firm SAP AG (SAP $50). Apotheker takes over for former CEO Mark Hurd, who was recently ousted following a sexual harassment investigation and hired as the President of Oracle Corp. (ORCL $27)—a main competitor of SAP. HPQ traded lower.

Accenture Plc. (ACN $44) reported fiscal 4Q EPS of $0.66, three cents above the Reuters estimate, with net revenues increasing 5% year-over-year (y/y) to $5.4 billion, above the $5.3 billion that analysts were expecting. The business consulting and technology services firm said its new bookings were $6.5 billion—with its consulting unit accounting for more than half the orders—and despite ongoing challenges in the global economy, it is well positioned for growth and expansion in the year ahead. ACN also raised its full-year 2011 EPS outlook and increased its semi-annual cash dividend by 20% to $0.45 per share. Shares were nicely higher.

MetLife Inc. (MET $39) was higher despite the insurance firm saying it recognizes that a low interest rate environment will adversely affect its earnings, but it does not believe any such impact will be material in 2010 and 2011. MET said its 2011 earnings could be reduced by about $0.20 per share if the interest rate on the Ten-Year Treasury bond is 2.5% through 2011.

Major automakers are reporting US vehicle sales for September, with Ford Motor Co. (F $12) reporting a 46% jump in sales y/y, versus the 37.9% estimate of analysts obtained by CNBC. Elsewhere, General Motors announced a 22.1% y/y increase in sales at its core brands, compared to the estimate of 17.5%, while Chrysler posted a jump of 61%, above the 43% estimate. Among the foreign automakers, Toyota Motor Corp (TM $72) said U.S. sales were up 16.8% y/y, while Nissan Motor Co. (NSANY $18) reported a 34% increase in sales. Shares of F, TM, and NSANY were all higher.

Finally, United Airlines announced the completion of its acquisition of Continental Airlines, creating the world’s biggest airline under the new company name United Continental Holdings Inc. (UAL $25). The company will still operate as two separate airlines for at least the next year, until it obtains a single operating certificate from the Federal Aviation Administration. The new airline will be based in United’s headquarters in Chicago and will be run by former Continental CEO Jeff Smisek. Shares of UAL finished higher.


Manufacturing continues expansion, income and spending higher, sentiment revised up

The ISM Manufacturing Index declined to 54.4 in September from 56.3 in August, compared to the expected fall to 54.5 that was expected by economists surveyed by Bloomberg. The reading marks the fourteenth-consecutive month the manufacturing sector has been above the 50 level that separates contraction versus expansion, and indicates the overall economy grew for the seventeenth-straight month.

Personal income rose 0.5% in August, versus the Bloomberg survey of economists, which called for a 0.3% increase, while July’s 0.2% increase was unrevised. Personal spending was 0.4% higher in August, compared to expectations of a 0.3% rise, and July’s 0.4% rise was left unchanged.  The savings rate moved modestly higher to 5.8% in August, after a downwardly revised 5.7% for July.

Also, the PCE Price Index, which is released with the income and spending data, was up 1.5% year-over-year (y/y) in August, after July’s 1.5% increase was unrevised, and inline with the consensus forecast. The core PCE Price Index, which excludes food and energy, was 0.1% higher month-over-month (m/m), matching the increase that economists expected, while y/y core prices moved 1.4% higher, inline with the consensus estimate.

Elsewhere, the final University of Michigan’s Consumer Sentiment Index improved more than initially forecasted, increasing from 66.6 in the preliminary report to 68.2 for the final reading for September, compared to the increase to 67.0 that was expected. This compares to the 68.9 reading that was posted in August. The better-than-expected reading came as the economic outlook component of the survey improved from 59.1 in the preliminary forecast to 60.9 for September, complimenting an increase from 78.4 to 79.6 in the current economic conditions component. The report also revealed that inflation expectations for the one-year time horizon were unchanged at 2.2%, while the five-year time horizon declined from 2.8% to 2.7%.

In other economic news, construction spending unexpectedly increased, rising 0.4% in August, compared to the 0.4% decline that was expected, but July’s 1.0% decrease was revised to a 1.4% drop. Residential spending was flat, while nonresidential spending posted an increase, with government outlays leading the overall increase.

Treasuries were mostly unchanged, after paring early losses following the ISM Manufacturing release. The yield on the two-year note was flat at 0.42%, the yield on the 10-year note was flat at 2.51%, and the 30-year bond yield increased 3 bps to 3.72%.

Manufacturing data in focus around the globe

The European economic calendar offered a plethora of data, highlighted by an unexpected upward revision to the euro-zone PMI Manufacturing Index, which was adjusted higher from 53.6 in the preliminary reading to 53.7 for September, compared to the expectation that called for the index to remain unchanged. There were a slew of other PMI Manufacturing reports released today, with Italian and French readings accelerating beyond expectations, while German and Great Britain reads came in below expectations. In other economic data across the pond, the euro-zone unemployment rate came in at 10.1% for August, compared to the 10.0% that was anticipated, while Italy’s jobless rate unexpectedly moved lower to 8.2%. Moreover, German retail sales unexpectedly fell in August.

Asia/Pacific economic news was headlined by China’s PMI Manufacturing Index, which improved more than expected in September, rising from 51.7 in August to 53.8—a reading above 50 denotes expansion—and versus the 52.5 reading that economists had expected. In other reports out of the region, South Korea’s exports increased by a larger amount than anticipated leading to a wider-than-forecasted trade surplus, helping limit the sting from data that showed its consumer prices came in hotter than expected and the nation’s Manufacturing PMI fell to a level depicting contraction. Additionally, Australian manufacturing performance deteriorated into contraction and India’s Manufacturing PMI decelerated but remained at a level depicting expansion. Meanwhile, Japan released a slew of economic data, with its consumer prices falling in August to match expectations, while the nation’s job-to-applicant ratio increased to help its jobless rate tick lower, and Japanese household spending rose more than forecasted in August.

Despite lackluster finish, September remained a month to remember

The equity markets were modestly lower for the week despite some favorable economic reports amid profit-taking and posturing as the 3Q and the uncharacteristically-strong month of September came to a close. An unexpected upward final revision to US 2Q GDP and personal consumption, a drop in weekly initial jobless claims, and continued M&A announcements could not prompt traders to favor the buy orders over sell orders. However, global equity markets did show some resiliency and US stocks posted the best September in over 70 years in the face of lingering euro-area debt concerns, exacerbated by the announcement from Ireland that it could cost 40-50 billion euros ($55.1 - 68.9 billion) to rescue its financial sector, and Moody’s Investor Service’s downgrade of Spain’s top credit rating.

Outside the equity markets, US Treasury yields continued to drift back near record lows and the US dollar came under pressure, with the Dollar Index hitting the lowest level since January 2009, as US Federal Reserve official rhetoric and data failed to suppress growing sentiment that the Federal Reserve was nearing the deployment of further stimulus.

Key reading on employment upcoming

Next week starts off slow, with Tuesday’s release of the ISM Non-Manufacturing Index, forecasted to increase to 52.0 in September from 51.5 in August. The level that separates expansion from contraction is 50.0. The ISM Manufacturing Index posted a modest 1.9 point decrease in September to 54.4, but the headline number hid underlying weakness in many components, including a 4.2 point increase in inventories despite a 2.0 point decline in new orders, employment falling 3.9 points and supplier deliveries (a component of the leading indicator index) declining by 4.3 points.

The week concludes with the release of nonfarm payrolls on Friday, expected to be flat in September, after declining by 54,000 in August, while excluding government employment, which has been falling as temporary Census workers are relieved, private sector payrolls are expected to increase 79,000, after expanding by 67,000 in August. The unemployment rate is estimated to increase to 9.7% from 9.6%, as workers re-enter the workforce as job openings increase.

Other releases on the US economic calendar include factory orders, pending home sales, MBA Mortgage Applications, the ADP Employment Change, initial jobless claims, and wholesale inventories.

Elsewhere in the Americas, Canada releases its manufacturing PMI, building permits, employment, and housing starts, and Brazil releases capacity utilization and the results of its weekend general election. In Europe, releases include euro-zone and UK services PMI reports, euro-zone retail sales and PPI, UK PPI, industrial and manufacturing production, as well as German factory orders and industrial production. In Asia/Pacific, Japan is slated to announce its leading index, while Australia will report retail sales, and employment. Additionally, India and China will announce services PMIs. In central bank action, the Bank of Japan, Reserve Bank of Australia, Bank of Korea, Bank of England and European Central Bank meet to discuss monetary policy.