Evening Market Update

Traders Cheer Upbeat ISM Manufacturing Report

The equity markets were able to stage a triple-digit rally in trading today, as a stronger-than-forecasted ISM Non-Manufacturing Index report helped to extend early gains that came following surprising announcements from the Bank of Japan and the Reserve Bank of Australia. Treasuries moved lower following the service sector report, but ended the day mixed and little changed. On the equity front, agriculture firm Mosaic Co fell short of analysts’ EPS forecasts, but beat top-line estimates, Dow member Chevron said it will begin purchases of its common stock in 4Q under a previously-announced repurchase program, while Walgreen surprised to the upside with its September same-store sales report.

The Dow Jones Industrial Average jumped 193 points (1.8%) to close at 10,945, the S&P 500 Index added 24 points (2.1%) to 1,161, and the Nasdaq Composite saw a 55 point (2.4%) gain to 2,400. In moderate volume, 1.2 billion shares were traded on the NYSE and 2.2 billion shares were traded on the Nasdaq. Crude oil gained $1.35 to $82.82 per barrel, wholesale gasoline rose $0.04 to $2.09 per gallon, and the Bloomberg gold spot price surged $25.35 to $1,340.60 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.3% lower at 77.82.

Mosaic Co. (MOS $61) reported fiscal 1Q EPS of $0.67, three cents shy of the Reuters estimate, but revenues jumped 50% year-over-year (y/y) to $2.2 billion, exceeding the $2.0 billion that the Street had expected. The agriculture firm said its gross margin as a percent of sales improved to 23%, versus 15% last year. MOS added that recent market developments reinforce the long-term attractiveness of the crop nutrient sector as farmers need to plant record areas and harvest ever increasing yields to meet the world’s accelerating appetite for grains and oilseeds. Shares were solidly higher.

Dow member Chevron Corp. (CVX $83) was nicely higher after it announced that it would begin purchases of its common stock in 4Q 2010 under an ongoing share repurchase program communicated previously, and is targeting a buyback rate of $500 million to $1 billion a quarter. CVX said initiating repurchases at this time is evidence of its ongoing capital discipline and strong cash flows, including from newly developed oil and gas projects.

Walgreen Co. (WAG $34) reported that September same-store sales—sales at stores open at least a year—increased 0.4%, with the effect of calendar day shifts negatively impacting sales by 0.1 percentage point. The drugstore and grocery chain said same-store pharmacy sales, which accounted for 66.9% of total sales, were up 0.3%, negatively impacted by generic drug introductions, and lower incidence of cough, cold and flu, but prescriptions filled increased 0.8%. Analysts per Dow Jones Newswires expected total same-store sales to decline 1.1% and pharmacy sales to fall 1.7%. Shares finished solidly higher.

Non-manufacturing data dominates US economic calendar 

The ISM Non-Manufacturing Index, increased more than anticipated, rising from 51.5 in August, to 53.2 in September, compared to the increase to 52.0 that economists surveyed by Bloomberg had forecasted. A reading above 50 denotes expansion in the non-manufacturing sector and September’s data denotes that economic activity in the sector, which accounts for about 75% of the total economy, grew for the ninth-consecutive month. In contrast to last week’s ISM Manufacturing counterpart, underlying components of the non-manufacturing report showed strength to contribute to the better-than-expected reading. New orders rose 2.5 points to 54.9, the employment component improved from 48.2 to 50.2—showing expansion for the third time in the last five months—and supplier deliveries (a component of the leading indicator index) gained 4 points to 55.0. Moreover, new export orders of services showed the largest increase, rising 11.5 points to 58.0 for the month. Treasuries have erased early gains and are modestly lower.

Given the weight of the non-manufacturing sector to overall economic prosperity, the stronger-than-forecasted figure and optimism that global central banks remain willing to keep their monetary policy geared toward supporting further recovery, following surprising moves by the Bank of Japan and the Reserve Bank of Australia.

Surprising central bank moves overseas

Following the conclusion of its two-day monetary policy meeting, the Bank of Japan surprised investors by announcing that it will implement “a comprehensive monetary easing policy,” which is comprised of three measures: maintain the virtually zero interest rate policy it currently has, within a range of 0.00% – 0.10%, until it judges, on the basis of the “understanding of medium-to long-term price stability,” that price stability is in sight, clarifying the policy time horizon based on the “understanding of medium-to long-term price stability,” and examining the establishment of an asset purchase program of up to 5 trillion yen ($60 billion). The asset purchase campaign will consist of buying government securities, commercial paper, corporate bonds, exchange traded funds (ETFs), and Japan real estate investment trusts (J-REITs) and to conduct the fixed-rate funds-supplying operation against the pooled collateral. The BoJ added that, “Although Japan’s economy still shows signs of a moderate recovery, the pace of recovery is slowing down partly due to the slowdown in overseas economies and the effects of the yen’s appreciation on business sentiment.”

Meanwhile, traders were also taken aback by the Reserve Bank of Australia announcing that it will keep its benchmark interest rate unchanged at 4.5% for the fifth-month in a row, where economists had anticipated an increase to 4.75%. The RBA said the global economy grew faster than trend over the year to mid 2010, but will probably “ease back to about trend pace over the coming year.” Moreover, the central bank noted that in Europe and the US, “growth prospects appear to be modest” in the near term, but recent information is consistent with “a more sustainable, but still strong, pace of growth in China and most of the Asian region.” Also, it pointed out that commodity prices that are most important to Australia remain very high. The RBA concluded that the current stance of monetary policy is “appropriate for the time being,” but if economic conditions evolve as it expects, it is likely that “higher interest rates will be required, at some point, to ensure inflation remains consistent with the medium-term target.” Other economic news from down under included: a smaller-than-forecasted increase in retail sales, a wider-than-anticipated trade surplus, and a deceleration in the amount of nation’s job advertisements versus the previous month.

Europe offered up a mixed bag of economic data. Services PMI releases across the pond were mostly better-than-expected, with separate readings from the euro-zone, UK, Germany, and Italy all exceeding expectations, while France’s report came in softer than forecasted. Moreover, euro-zone retail sales unexpectedly dropped 0.4%, well below the 0.2% increase forecast by economists.

Tomorrow’s US economic calendar will be fairly light, with the ADP Employment Change report set for release, forecasted to show the private sector gained 20,000 jobs during the month of September, while the MBA Mortgage Applications Index will also be reported.

Economic reports on tomorrow’s international docket include: industrial output in Spain, housing prices in the UK, the final revision to 3Q GDP in the euro-zone, factory orders in Germany, and Canadian PMI numbers.