Evening Market Update

Dollar Swings on Europe and US Debt Demand, Stocks Follow

Stocks spent time above and below the flatline in trading today, following moves on the US dollar. The dollar and Treasuries started the day higher in reaction to refocused concerns regarding European debt, sold off after a disappointing 30-year Treasury bond auction, and pared losses after the Fed issued the details of its first month of purchases as part of QE2, with Treasuries ending mixed. Meanwhile, a slew of positive US economic data was issued, including a drop in jobless claims, reduction in the trade deficit, rise in mortgage applications and cooler import prices. In late day trading, a bipartisan commission detailed a proposal of steep cuts to the US fiscal deficit. Crude oil and gasoline prices bucked the trend in the dollar, rising due to smaller-than-expected inventories. In equity news, the Dow was pressured by Boeing’s continued problems with the 787 Dreamliner, however better news was released by Macy’s and Polo Ralph Lauren Corp. Over-the-counter bond trading will be closed tomorrow in observance of Veterans Day.

The Dow Jones Industrial Average rose 10 points (0.1%) to 11,357, the S&P 500 Index gained 5 points (0.4%) to 1,219, and the Nasdaq Composite advanced 16 points (0.6%) to 2,579. In moderate volume, 1.1 billion shares were traded on the NYSE and 2.0 billion shares were traded on the Nasdaq. Crude oil rose $1.09 to $87.81 per barrel, wholesale gasoline gained $0.05 to $2.24 per gallon, while the Bloomberg gold spot price gained $11.90 to $1,404.80 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.1% lower at 77.65.

Dow member Boeing Co. (BA $67 ¹) was under pressure after the company had to make an emergency landing during a test flight of its 787 Dreamliner, after the crew reported smoke in the cabin. The event sparked concerns that the company may have to delay the delivery of the Dreamliner, which the first delivery of has been pushed back several times. The company has not commented on whether its delivery schedule will be impacted by the incident.

Macy’s Inc. (M $25) reported 3Q earnings ex-items of $0.08 per share, compared to the $0.04 that analysts surveyed by Reuters had anticipated, with revenues rising 6.6% year-over-year (y/y) to $5.6 billion, matching the Street’s forecast. Same-store sales—sales at stores open at least a year—rose 3.9% y/y. the company said it has gained confidence and momentum as customers have responded “favorably” to its key strategies, which “bodes well” for its business as it enters the holiday selling season. The company increased its guidance for the second-half of the year, and it boosted its full-year EPS outlook. Shares were lower.

Polo Ralph Lauren Corp. (RL $108) posted fiscal 2Q EPS of $2.09, above the $1.71 that analysts anticipated, with revenues growing 11% y/y to $1.5 billion, roughly matching the Street’s forecast. The apparel firm said while it is still operating in the context of “considerable macroeconomic and geopolitical uncertainty,” and it expects to encounter more intense sourcing costs and exchange rate headwinds in the back half of the year, it is encouraged by its current business momentum heading into the holiday season. RL increased its full-year revenue forecast and shares were solidly higher.

Jobless claims fall, trade deficit narrows, and import prices come in cooler than expected

Weekly initial jobless claims fell by 24,000 to 435,000, versus last week's figure which was upwardly revised by 2,000 to 459,000, and versus the consensus estimate of economists surveyed by Bloomberg, which called for claims to decline to 450,000. The four-week moving average, considered a smoother look at the trend in claims, dropped by 10,000 to 446,500, and continuing claims fell by 86,000 to 4,301,000, compared to the 4,305,000 that was anticipated by economists.

Meanwhile, the trade deficit narrowed by a larger amount than expected, declining from an upwardly revised $46.5 billion in August to $44.0 billion in September, versus the estimate of economists calling for the deficit to come in at $45.0 billion. Exports increased 0.3% to $154.1 billion in September, while imports decreased 1.0% to $198.1 billion.

Elsewhere, the Import Price Index rose 0.9% month-over-month (m/m) for October, compared to the expectation of economists, which called for the index to increase by 1.2%. Year-over-year (y/y), import prices are higher by 3.6%, versus the 3.9% forecast of economists.

In other economic news, the MBA Mortgage Application Index rose 5.8% last week, after the index that can be quite volatile on a week-to-week basis, fell 5.0% in the previous week. The increase came as the Refinance Index gained 6.0%, joining a 5.5% rise in the Purchase Index. The upward move in the overall index came amid an unchanged 4.28% average 30-year mortgage rate, just above the record low of 4.21% on October 8.

In late-day trading, an unscheduled release was issued by President Obama’s bipartisan deficit commission. The proposal outlined detailed plans to cut the deficit by $3.8 trillion to 2.2% of gross domestic product by 2015, with savings starting in 2012. The plan could reduce Social Security and Medicare, eliminate tax breaks such as the mortgage-interest deduction, and raise the retirement age for Social Security to 68 in 2050 and 69 in 2075. The lack of popularity of many aspects of the proposal means it is unlikely to be passed in current form, but the size of the problem and necessary steps to reduce the deficit will likely be heavily debated going forward.

Treasuries were slightly higher in a volatile session that began with a flight-to-safety to the US dollar and Treasuries on renewed euro-zone debt fears. However, a weak mid-day 30-year auction saw the dollar and Treasuries sell-off. The dollar and Treasuries pared losses after the Fed unveiled the schedule to purchase $105 billion in Treasuries over 18 days in the first month of asset purchases known as QE2. The yield on the two-year note was flat at 0.44%, the yield on the 10-year note lost 4 bps to 2.61%, while the 30-year bond yield was unchanged at 4.25%.

Over-the-counter trading in the bond market will be closed tomorrow in observance of Veterans Day.

Renewed sovereign debt concerns

Sentiment took a hit on continued concerns about the sovereign health of some of the peripheral nations in the euro-zone, with the yields of bonds from Ireland, Portugal, Greece all surging to record highs, when compared to the benchmark German bond known as the bund. Interest rates in the debt-ridden nations’ bonds were exacerbated by the announcement from a UK asset clearing house that it will increase the margin requirement—the minimum amount of capital needed by an investor to hold a security in good standing—on Irish bonds, causing these securities to tumble and yields jump. However, Portugal carried out a debt auction of six and ten-year bonds today, which fetched higher than expected demand.

Meanwhile, the European economic calendar had plenty of reports for traders to digest, highlighted by the Bank of England releasing its quarterly inflation report, which revealed the 2011 inflation forecast was raised and policymakers are mixed on their economic outlooks. Elsewhere, France’s industrial and manufacturing readings disappointed economists, while its consumer prices were inline with expectations, and Germany’s wholesale prices declined m/m. In other economic reports in the area, Italy’s industrial production came in below expectations.

In Asia, the Chinese government reportedly raised the reserve ratio requirements—the amount of cash banks need to keep in reserve—for some banks, but the Chinese government did not comment on the reports. Elsewhere, China’s property prices decelerated by a larger amount than forecasted, and the trade balance jumped more than expected to $27.2 in October from $16.9 billion September, above the $25.0 billion expectation, as exports rose 22.9% and imports grew 25.3%, however both these figures were below forecasts. Elsewhere, Japan’s consumer confidence was better than expected and South Korea’s unemployment rate moved lower. Lastly, the Financial Times reported that this week’s G20 meeting of world leaders may lead to an exemption of some Japanese banks from stricter global regulations.

Economic focus will be international tomorrow

There are no scheduled US economic releases tomorrow, due in part to the Veteran’s Day holiday.  However, a slew of economic releases from China will be released, including PPI, CPI, retail sales, industrial production and fixed asset investment, which includes housing and infrastructure spending.

Meanwhile, the G-20 meetings are beginning in Seoul, South Korea, with currency issues at the forefront. Despite concerns about an undervalued Chinese currency, the yuan, also known as the renminbi, China has been able to deflect criticism to the US’s quantitative easing program, which has been weakening the dollar. Brazil has called for a reduction in the dollar’s role in international trade, and China said the U.S. isn't living up to its responsibility as an issuer of a global reserve currency and obligation to stabilize capital markets by pursuing QE. Divergent economic recoveries have resulted in recent policies moving in different directions.
Other releases will include Japan’s machine orders and Australian employment data.