Evening Market Update

Stocks Hammered on Euro-Debt Concerns and China Tightening

The equity markets suffered heavy losses today as investors were spooked by the potential of further policy tightening in China, as well as increased uncertainty toward the euro-area debt situation, particularly in Ireland. The domestic economic front did little to boost sentiment, as producer prices rose less than expected, industrial production came in flat, and a gauge of homebuilder sentiment failed to meet the forecast of economists. US equity news took a backseat to the plethora of economic data, although two Dow-members managed to post gains, as Wal-Mart Stores matched the Street’s EPS estimates and Home Depot beat profit expectations. Treasuries moved higher, while the US dollar gained ground.

The Dow Jones Industrial Average fell 178 points (1.6%) to 11,024, the S&P 500 Index lost 19 point (1.6%) to 1,178, and the Nasdaq Composite declined 44 points (1.8%) to 2,470. In moderate volume, 1.3 billion shares were traded on the NYSE and 2.2 billion shares were traded on the Nasdaq. Crude oil fell $2.63 to $82.23 per barrel, wholesale gasoline was $0.04 lower at $2.16 per gallon, and the Bloomberg gold spot price fell $19.80 to $1,340.80 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.8% higher at 79.25.

Dow component Wal-Mart Stores Inc. (WMT $54) announced 3Q EPS ex-items of $0.90, matching the consensus estimate of analysts surveyed by Reuters. Revenues grew 2.6% year-over-year (y/y) to $101.2 billion, compared to the $101.6 billion that the Street had anticipated, while US same-store sales—sales at store open at least a year—decreased 1.3% y/y. Same-store sales at its Sam’s Club rose 2.4% y/y including fuel. WMT raised its full-year EPS outlook. Shares traded higher.

Fellow Dow member Home Depot Inc. (HD $32) reported 3Q EPS of $0.51, three cents above the forecast of analysts, with revenues growing 1.4% y/y to $16.6 billion, roughly inline with the Street’s forecast. The world’s largest home improvement retailer said its 3Q same-store sales grew 1.4% y/y, the fourth-consecutive quarter of growth, and it is exercising good control over its expenses. HD lowered its full-year revenue outlook but it increased its full-year EPS guidance. Shares of HD finished higher.

Producer prices muted, while industrial production and capacity utilization mostly flat

The Producer Price Index showed prices at the wholesale level rose 0.4% month-over-month (m/m) in October, after increasing 0.4% in September, and below the forecast of economists surveyed by Bloomberg, which called for a 0.8% rise. Prices of crude goods—supplies used at the earliest stage of processing—were up 4.3%, possibly reflecting the recent increase in commodities. Meanwhile, the core rate, which excludes food and energy, fell 0.6% m/m, compared to the 0.1% increase that economists had expected. On a year-over-year basis, headline producer prices were 4.3% higher, and the core rate was up 1.5%.

Meanwhile, the October reading of industrial production came in flat m/m, compared to the 0.3% gain that economists had expected, and the 0.2% decline in September—the first since June 2009—was left unrevised. Production in business equipment was strong, a bright spot of the report as it suggests continued demand from the corporate sector, but a decline in nonindustrial supplies weighed on the index. Capacity utilization came in at a slightly lower-than-forecasted 74.8%, unchanged from an upwardly revised figure in September, and compared to the 74.9% that economists had expected. Utilization remains 5.8% below its average from 1972 to 2009.

Today’s data illustrates why the Federal Reserve is concerned about meeting its dual mandate of maximum employment and price stability and felt compelled to deploy another round of asset purchases, known as quantitative easing or QE2. Core inflation remains below the Fed implied rate of about 2%, industrial production failed to get back on the growth track and capacity utilization is running below normal levels.

In other economic news, the NAHB Housing Market Index, a gauge of homebuilder sentiment, increased to 16 in November, from a downwardly revised 15 in October and compared to the increase to 17 that was expected by economists. Any reading below a level of 50 indicates more respondents feel conditions are poor. Treasuries finished higher, as yields pared some of the recent gains that saw the 10-year rate reach over a three-month high. The yield on the two-year note was 4 bps lower at 0.50%, the yield on the 10-year note lost 12 bps to 2.84%, while the 30-year bond yield declined 15 bps to 4.27%.

China tightening and euro-area debt fears in focus

European economic news was dominated by concerns about the sovereign health of Ireland and its potential impact on the rest of the euro-zone nations. Speculation is growing that Ireland will need to tap the near $1 trillion bailout fund set up by the European Central Bank and the International Monetary Fund (IMF) to help its struggling banking sector, but the nation has repeatedly said it does not need assistance. Ireland’s Prime Minister Cowen said in a speech that no request has been made for a bailout of the debt-ridden nation and its government obligations are funded until mid-2011. However, the country’s banking system is of the utmost concern and the Wall Street Journal is reporting that discussions between Irish and EU officials regarding an 80-100 billion euro bailout are ongoing. Cowen did not confirm the report but said it is in discussions about the situation and there is a need to restore market stability. Euro-zone finance ministers are set to hold discussions at a scheduled meeting in Brussels today. Exacerbating the situation, Austria’s Finance Minister Proell said Greece has not fulfilled its deficit reduction commitments agreed to in May in order for the Greek economy to receive its December installment from the EU bailout package and Austria has not contributed its portion of capital to the fund.

The aforementioned uneasiness across the pond overshadowed a favorable report on investor confidence in Germany—Europe’s largest economy—as the ZEW Survey of Economic Sentiment increased for the first time in seven months. The index that tracks German investor and analyst expectations six months from now rose from -7.2 in October to 1.8 in November, compared to the slight improvement to -6.0 that economists had expected. In other economic news, France’s wages and nonfarm payrolls grew more than expected in 3Q, while UK and euro-zone consumer prices both increased more than anticipated in October. Moreover, the euro-zone ZEW Survey of Economic Sentiment improved by an amount that exceeded expectations.

In Asia/Pacific, Reuters reported that a Chinese media outlet said China’s National Development and Reform Commission is preparing a “one-two punch” of actions such as food price controls and measures to crack down on speculation in agricultural commodities to contain inflation. Moreover, Bloomberg reported that Chinese Premier Wen Jiabao said on State TV that the cabinet is drafting measures to counter overly rapid price gains. The tightening concerns overshadowed a report that showed the Conference Board’s Leading Index for China improved 0.6% m/m in September. Meanwhile, South Korea’s central bank unexpectedly increased its benchmark interest rate for the second time this year, raising its seven-day Repo Rate by 25 basis points to 2.50%, with economists expecting the rate to remain unchanged. Also, the South Korean central bank removed its pledge to keep its policy “accommodative” for the first time since the global financial crisis, per Bloomberg. Additionally, Japan’s home loans increased 3.6% y/y in 3Q and the nation’s machine tool orders were revised higher to a surge of 71.0% y/y in October, while the minutes from the most recent monetary policy meeting by the Reserve Bank of Australia revealed that the RBA may be taking a wait-and-see approach before raising rates again.

Another read on prices and housing due out tomorrow

Tomorrow brings the release of the report on housing starts for October, expected to fall 2.0% month-over-month (m/m) to an annual rate of 598,000 units, after rising 0.3% in September. Meanwhile, building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, are forecasted to increase 3.9% m/m to 568,000 units after declining 5.6% in September. Last month’s results were swayed by the volatile multi-family sector, as single-family starts grew 4.4% and permits rose 0.5%.

Adding to today’s report on PPI, tomorrow’s release of the Consumer Price Index (CPI) is forecasted to show a 0.3% m/m increase in October, after rising by 0.1% in September, while ex-food and energy, it is expected to gain 0.1% after being flat the prior month. On a y/y basis, the CPI is expected to increase 1.3% at the headline level and 0.7% at the core level. CPI tends to be less volatile than PPI due to the lag in commodity prices feeding through to final prices, as well as the higher services component within CPI.

The housing market appears to be bumping along the bottom, due to high levels of unemployment, foreclosures and a large number of homeowners underwater on their mortgages.

The other release on the US economic calendar is the MBA Mortgage Applications Index.

International releases will include Japan and Australia’s leading indicators, UK jobless claims, and the minutes from the last meeting of the Bank of England. Additionally, European finance ministers continue to meet to discuss aid for Irish banks, a day ahead of Greece’s submission of its 2011 budget.