Evening Market Update

Strong Start to Earnings Season

Stocks rose after robust earnings reports across several sectors added to bullish sentiment that was boosted by positive early morning economic releases overseas and yesterday’s release of the minutes from the last Fed policy meeting, which indicated the likelihood of additional stimulus. Bulls were encouraged by solid reports from Dow components JPMorgan Chase & Co and Intel Corp, and an earnings beat by railroad firm CSX Corp., which gave credence to further economic recovery. In other equity news, Dow member Chevron Corp. warned about the impact of a weak US dollar on its 3Q earnings, and Walgreen Co. announced a new $1 billion share repurchase program. In economic news, import prices fell slightly more than forecast and mortgage applications gained ground on an increase in refinancing. Treasuries were mixed.

The Dow Jones Industrial Average rose 76 points (0.7%) to close at 11,096, the S&P 500 Index added 8 points (0.7%) to 1,178, and the Nasdaq Composite gained 23 points (1.0%) to 2,441. In solid volume, 1.2 million shares were traded on the NYSE and 2.3 billion shares were traded on the Nasdaq. Crude oil gained $1.34 to $83.01 per barrel, wholesale gasoline advanced $0.05 to $2.17 per gallon, and the Bloomberg gold spot price gained $22.30 to $1,372.65 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—fell 0.3% to 77.09.

Dow member JPMorgan Chase & Co. (JPM $40) announced 3Q earnings of $1.01 per share, well above the $0.90 Reuters estimate, but revenues declined 15.4% year-over-year (y/y) to $24.3 billion, compared to the $24.8 billion that the Street was forecasting, but it is unclear if the analyst estimate was fully comparable. The company said its investment bank posted solid earnings, its commercial banking unit recorded record revenue, and its asset management has strong net asset inflows. In its card services unit, JPM said its net charge-offs—loans that the company does not expect to be repaid—and delinquencies—a gauge of future charge-offs—continued to improve, and it reduced its loan loss reserves by $1.5 billion. JPM’s CEO Jamie Dimon said the company is pleased to report a continued overall decline in credit costs, although its mortgage and credit card portfolios continued to bear “very high net charge-offs.”

However, JPM’s investment banking unit saw its revenues fall 14% compared to last quarter and 28% y/y to $5.4 billion, with its fixed income business revenues falling about 14% to $3.1 billion versus 2Q. The company said the decline in its fixed income unit compared to last year largely reflected lower results in credit and rates markets.

Meanwhile, fellow Dow member Intel Corp. (INTC $19) reported 3Q EPS of $0.52, two cents above analysts’ expectations, with revenues gaining 18% y/y to $11.1 billion, versus the $11.0 billion that the Street had expected. The world’s largest chipmaker’s PC client group posted record mobile microprocessors revenue, and record server microprocessor revenue aided its data center group. Also, the company said the average selling price for microprocessors was approximately flat quarter-over-quarter (q/q) and “up significantly” y/y. INTC said its results were driven by solid demand from corporate customers, and continued growth in emerging markets. The company said looking ahead, it continues to see healthy worldwide demand for computing products of all types and it expects 4Q revenues of $11.4 billion, plus or minus $400 million. Analysts were expecting the company report 4Q revenue of $11.2 billion. INTC shares fell.

However, Dow component Chevron Corp. (CVX $84) warned that 3Q earnings are expected to be lower than in 2Q, as the weakening of the US dollar is forecasted to reduce earnings by about $400 million, primarily in the international upstream—exploration and production—business segment. Also, CVX said higher expenses and lower crude oil realizations are expected to further reduce upstream earnings. Shares fell.

Elsewhere, CSX Corp. (CSX $60) was the first railroad firm to report earnings for 3Q, posting a 48% y/y increase in profits to $1.08 per share, four cents above the Street’s expectation. Revenues rose 16% y/y to nearly $2.7 billion, which was roughly inline with analysts’ forecasts, as volume rose 10% y/y “in an improving marketplace.” CSX was solidly higher, leading a broad-based advance in the transportation sector.

Outside of earnings news, Walgreen Co. (WAG $35) moved higher after the pharmacy retailer reported that its Board of Directors authorized a new $1 billion share repurchase program. The company completed its previous $2 billion share repurchase program last month.

Import prices decline, mortgage applications rise

The Import Price Index declined 0.3% month-over-month (m/m) for September, compared to the expectation of economists surveyed by Bloomberg, which called for the index to decrease by 0.2%. Year-over-year (y/y), import prices are higher by 3.5%, versus the 3.8% forecast of economists.

In other economic news, the MBA Mortgage Application Index gained 14.6% last week, after the index that can be quite volatile on a week-to-week basis, inched 0.2% lower in the previous week. The solid increase came as the Refinance Index jumped 21.0%, to more than offset an 8.5% drop in the Purchase Index. The increase in the overall index came amid a 4 basis-point drop in the average 30-year mortgage rate to a new record low of 4.21%.

Treasuries were mixed, with the yield on the two-year note flat at 0.36%, the yield on the 10-year note falling 1 bp to 2.42%, and the 30-year bond yield unchanged at 3.82%.

Internationally, euro-zone industrial production and Chinese lending strong

Overseas economic releases added to the bullish sentiment, with euro-zone industrial production rising 1.0% m/m in August, compared to the 0.8% increase that was anticipated, and y/y, production was 7.9% higher, topping the 7.4% gain that was expected. However, data out of the UK was mixed, with a gauge of consumer confidence in the region deteriorating more than expected, and jobless claims rising more than forecasted, while UK weekly earnings rose more than expected and the unemployment rate surprisingly ticked lower to 7.7%. Inflation was also in focus in Europe, with reports showing France’s consumer prices unexpectedly declined m/m in September, along with import and producer prices in Switzerland for September.

In Asia, Chinese new yuan loans unexpectedly rose to 595.5 billion yuan in September from 545.2 billion yuan in August, higher than the 500.0 billion expected by economists. However, a larger than expected contraction in the size of China’s trade surplus was a minor negative, but exports still rose 25.1% and imports gained 24.1%, both only slightly lower than forecasted. Elsewhere, Hong Kong announced that it would increase housing supply and restrict immigration-based property investment aimed at cooling off the property markets, per Reuters.

Elsewhere, Japanese machine orders unexpectedly jumped 10.1% m/m in August, versus the expected decline of 3.9%, and Australia’s gauge of consumer confidence rebounded.

Another read on inflation due tomorrow

Thursday brings the Producer Price Index (PPI), expected to show prices at the wholesale level advanced by 0.1% month-over-month (m/m) in September, and the core rate, which excludes food and energy, is also expected to rise 0.1%. On a year-over-year (y/y) basis, the PPI is expected to advance 3.7% in September, and 1.5% at the core level. The release precedes Friday’s report on the Consumer Price Index (CPI), forecasted to show a 0.2% m/m increase in September, while ex-food and energy, it is expected to rise 0.1% m/m. On a y/y basis, the CPI is expected to increase 1.2% at the headline level and 0.9% y/y at the core level.

Other releases on the US economic calendar tomorrow include the trade balance for August, expected to be a deficit of $44.0 billion, and weekly initial jobless claims, expected to remain at 445,000.

International releases scheduled include Japan machine tool orders and Brazil retail sales, while the Bank of Korea meets to discuss monetary policy, where no change in rates is expected.