Evening Market Update

Fed Opens Door Wider for More Stimulus

After spending most of the day in negative territory, stock moved modestly to the plus side following the release of the minutes to the Fed’s September monetary policy meeting which further opened the door for additional economic stimulus. On the earnings front, Intel beat the Street, Fastenal Co reported better-than-anticipated 3Q results, and Johnson Controls issued full-year 2011 revenue guidance that exceeded analysts’ forecasts. In other equity news, Dow member Pfizer will acquire King Pharmaceuticals Inc for $3.6 billion, Nike is the NFL’s new uniform maker, and oil-drillers benefitted from the lifting of the Obama administration’s moratorium on deep-water drilling. Treasuries finished lower following the FOMC minutes release, showing little reaction to an earlier report that showed small business optimism ticked higher.

The Dow Jones Industrial Average rose 10 points (0.1%) to close at 11,020, the S&P 500 Index added 4 points (0.4%) to 1,170, and the Nasdaq Composite gained 16 points (0.7%) to 2,418. In moderate volume, 921 million shares were traded on the NYSE and 2.0 billion shares were traded on the Nasdaq. Crude oil fell $0.54 to $81.67 per barrel, wholesale gasoline lost $0.05 to $2.12 per gallon, and the Bloomberg gold spot price fell $3.80 to $1,350.25 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.2% higher at 77.33.

After the closing bell, Dow member Intel Corp. (INTC $20) posted 3Q EPS of $0.52, above the $0.50 expected by analysts, on revenues of $11.0 billion, compared to the $10.99 billion forecasts. INTC lowered its revenue forecast in August due to weaker-than-expected demand for consumer PCs in mature markets.

Elsewhere on the earnings front, industrial and construction supply firm Fastenal Co. (FAST $52) reported 3Q EPS of $0.51, one penny above the Reuters estimate, with revenues increasing 23.4% year-over-year (y/y) to $604 million, above the $596 million that the Street was anticipating. The company said daily sales at its non-residential construction unit rebounded during the quarter while the pace of annualized sales growth to its manufacturing customers continued to accelerate. Despite the results, shares closed lower.

Also, Johnson Controls Inc.  (JCI $32) announced that it expects to post fiscal 2011 revenues of about $37 billion, a rise of 9% y/y, compared to the $36 billion that analysts were expecting. Also, the auto parts and building air systems maker said it expects EPS for 2011 to be between $2.30-2.45, a double-digit improvement, versus the $2.37 that the Street was expecting. JCI said it expects moderately higher 2011 automotive production in North America, and the global building efficiency market to improve in 2011 led by the recovery in the emerging markets, especially China and the Middle East, offsetting softness in mature geographic markets. Shares were lower.

The financial sector may dominate the attention during the early part of the profit season, christened by tomorrow morning’s release from fellow Dow member JPMorgan Chase & Co. (JPM $40), forecasted to post 3Q EPS ex-items of $0.90, on revenues of $24.76 billion. Brad has an “underperform” rating on the group, noting that the new regulations—“FinReg” in the US and the new “Basel Agreement”—limit trading that financial institutions can do for themselves, which has been a major profit driver for some companies. And new capital requirements restrict the amount of money banks can lend, limiting profit potential for many of them. This continues a trend of governments around the world imposing new taxes, fees and regulations on the financial industry, which we believe will start to weigh down the group.

M&A news remained in the headlines, with Dow member Pfizer Inc. (PFE $17) announcing that it has reached an agreement to acquire King Pharmaceuticals Inc.(KG $14) for $3.6 billion in cash, or $14.25 per share, representing a 40% premium to KG’s closing price yesterday. PFE said the acquisition will advance the firm’s strategic objectives by strengthening its position within the rapidly growing pain relief market. Also, PFE said the deal is expected to be accretive to its adjusted EPS and will provide additional revenue diversification across existing business units. PFE is lower while KG is up almost 40%.

Shares of Nike (NKE $82) got a modest boost after the sporting goods company was chosen by the National Football League (NFL) as its official uniform maker, beginning in 2012, edging out rival Reebok International Ltd, which has been the NFL’s supplier for the past ten years. NKE will also be the supplier of all sideline personnel and fan apparel.

The controversial deep-water drilling moratorium was lifted by the Obama administration today, a hot-button topic that has been a source of contention throughout the political landscape leading up to the November elections. In a statement, Interior Secretary Ken Salazar said that, as long as companies can confirm that they can act in accordance with new safety regulations put in place following the disastrous Deepwater Horizon explosion and resulting three-month oil spill in the Gulf of Mexico that plagued BP Plc (BP $41), drilling in waters deeper that 500 feet can resume. Oil-drilling firms, including Diamond Offshore Drilling (DO $69), Transocean Ltd (RIG $65) and Noble Corp (NO $35) gained on the news.

Fed meeting minutes add to speculation of more easing

The midday release of the minutes from the September Federal Open Market Committee (FOMC) meeting supported increased expectations that the Fed was near the deployment of further economic stimulus. The report revealed that many participants noted that “if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate or if inflation continued to come in below levels consistent with the FOMC’s dual mandate, it would be appropriate to provide additional monetary policy accommodation.” But the minutes also pointed out that other members thought that additional accommodation would be warranted only if the outlook worsened and the odds of deflation “increased materially.”

Policy makers did not discuss quantity but participants discussed several possible approaches to providing additional accommodation but focused primarily on further purchases of longer-term Treasuries and on possible steps to affect inflation expectations. Also, Fed members wanted to consider further the most effective framework for calibrating and communicating any additional steps to provide such stimulus. Finally, the release showed several members noted that unless the pace of economic recovery strengthened or underlying inflation moved back toward a level consistent with the Committee’s mandate, they would consider it “appropriate to take action soon.” Meanwhile, FOMC members lowered its projection for the increase in real economic activity over the second-half of 2010 and also reduced “slightly” its forecast of growth next year but continued to anticipate a moderate strengthening of the expansion in 2011 as well as a further pickup in economic growth in 2012.

These views are inline with today’s comments from Thomas Hoenig, the Kansas City Fed President and lone dissenter at every Fed policy meeting this year, noting that “There simply is no strong evidence the additional liquidity would be particularly effective in spurring new investment, accelerating consumption, or cushioning or accelerating the deleveraging that is hopefully winding down.”

In other economic news, after posting the first increase since May for the previous month’s reading, the  NFIB Small Business Optimism Index inched higher in September, rising from 88.8 in August to 89.0, but below the expectation of economists surveyed by Bloomberg, which called for the index to improve to 89.6. The slight increase came as the number of firms reporting expectations of a better economy improved but remained in negative territory, while those expecting the higher sales and selling prices deteriorated. Moreover, firms’ plans to hire weakened.

Treasuries moved lower following the release of the FOMC minutes. The yield on the two-year note added 1 bp to 0.36%, the yield on the 10-year note rose 3 bps to 2.42%, and the 30-year bond yield gained 6 bps to 3.81%.

European economic reports varied

The European economic calendar offered up a number of reports with diverse results. In the UK, retail sales growth slowed in September, separate reports on housing prices were mixed, while core consumer prices were slightly higher than expected, retail prices were higher than anticipated, and the nation’s trade deficit narrowed by a smaller-than-expected amount. Meanwhile, in Germany, consumer prices were unrevised at a slight month-over-month (m/m) decline for September, while wholesale prices in Europe’s largest economy rose 1.0%, far more than the 0.4% increase expected. Elsewhere, Sweden’s consumer prices rose more than expected.

In the Asia/Pacific region, Japanese markets suffered on the first day back from a holiday, reacting to the mixed US labor report on Friday, a fresh fifteen-year high in the yen versus the dollar, and a read on Japanese consumer confidence that deteriorated in September. Elsewhere, India’s industrial production rose by a smaller amount than expected, while down under, consumer confidence in Australia deteriorated.

Tomorrow’s US economic calendar will be light, offering only a couple of reports: the Import Price Index, forecast to register a 0.2% m/m declinein September following a gain of 0.6% m/m in the month prior, as well as the MBA Mortgage Application Index. Elsewhere in the Americas, Canada will report new home prices.

Overseas, the euro-zone will release industrial production, the UK will provide employment numbers, France will report CPI, while further east, Japan releases machinery orders and China will disclose its trade balance.