Evening Market Update

Lack of Conviction Amid Persistent Concerns Overseas

After posting a steep loss yesterday, stocks were mixed in trading today, as anxiety over the dual threat of funding issues in Europe and inflation in China continued to weigh on markets, and the US dollar paused after rising in recent sessions. In US economic news, core inflation grew at the slowest rate on record, housing starts missed forecasts and mortgage applications fell, while Treasuries were mixed. Consumer discretionary stocks were session leaders after Target issued optimistic comments. Elsewhere, Dow member Merck & Co Inc, GlaxoSmithKline, and Human Genome Sciences issued positive drug announcements. Meanwhile, investors are closely monitoring the initial public offering of General Motors, which will price tonight and begin trading tomorrow.

The Dow Jones Industrial Average lost 16 points (0.1%) to 11,008, the S&P 500 Index was unchanged at 1,179, and the Nasdaq Composite gained 6 points (0.3%) to 2,476. In moderate volume, 955 million shares were traded on the NYSE and 1.8 billion shares were traded on the Nasdaq. Crude oil fell $1.90 to $80.44 per barrel, wholesale gasoline was flat at $2.16 per gallon, and the Bloomberg gold spot price fell $4.20 to $1,335.50 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.1% lower at 79.10.

Target Corp. (TGT $56) reported 3Q EPS, excluding a tax benefit, of $0.68, matching the consensus estimate of analysts surveyed by Reuters, with revenues growing 2.2% year-over-year (y/y) to $15.6 billion, also inline with what the Street had expected. The company said based on its merchandising and marketing plans, combined with the expected impact of its REDcard rewards, it expects its 4Q same-store sales—sales at stores open at least a year—performance “will be the best of any quarter in the last three years.” Shares were nicely higher.

Dow member Merck & Co. Inc. (MRK $34) rose after the company’s experimental drug anacetrapib met key safety goals in a study, which also showed the amount of good cholesterol was increased and bad cholesterol was reduced. MRK said, “These results are promising and serve as the basis for our decision to further develop anacetrapib,” which it will study the treatment through a large cardiovascular outcomes trial.

Shares of GlaxoSmithKline Plc. (GSK $40) were higher after a US Food & Drug Administration (FDA) panel recommended approval of the first new treatment for lupus in over 50 years, co-created by the company along with Human Genome Sciences Inc. (HGSI $25). Shares of HGSI were hampered by concerns about labeling restrictions on the drug and a run-up in the price of the stock going into the decision.

Consumer prices benign, housing starts and building permits soft, mortgage apps fall

The Consumer Price Index showed prices at the consumer level were up 0.2% month-over-month (m/m) in October, less than the forecasted gain of 0.3% by economists surveyed by Bloomberg, and above the 0.1% increase seen in September. Meanwhile, the core rate, which strips out food and energy, was flat in October, after also being unchanged in September, and compared to estimates calling for a 0.1% gain. On a year-over-year basis, consumer prices were up 1.2% in October, up from 1.1% in September, and the core CPI was 0.6% higher y/y, the smallest gain since records began in 1957 according to Bloomberg, after rising 0.8% in September.

Elsewhere, housing starts for October came in below expectations, falling 11.7% m/m from a downwardly revised 588,000 annual rate of units in September to a rate of 519,000 units, and compared to expectations of economists, which called for starts to come in at 598,000. Building permits increased slightly m/m in October, rising 0.5% to an annual rate of 550,000, while September’s figure was upwardly revised by 8,000 to 547,000. The expectation was for permits to increase to 568,000 units. Excluding the volatile multi-family sector, single-family starts fell 1.1% and permits rose 1.0%

Among the components within the CPI report, owners-equivalent rent rose 0.1% after being unchanged the prior two months, and is unchanged versus the year ago period. Today’s reports indicate that the excess slack in the economy, in the form of housing, factory capacity, and workers is not threatening inflation. In fact, the specter of deflation, or falling prices, is the worry for the Fed, as expectations that prices will be lower in the future can create a deflationary spiral as consumers postpone purchases, reducing the need for production to meet demand, and diminishing employment requirements.

In other economic news, the  MBA Mortgage Application Index fell 14.4% last week, after the index that can be quite volatile on a week-to-week basis, increased 5.8% in the previous week. The decline came as the Refinance Index fell 16.5%, teaming up with a 5.0% drop in the Purchase Index. The downward move in the overall index came amid an 18 basis-point increase in the average 30-year mortgage rate to 4.46%, above the record low of 4.21% on October 8.

Treasuries were mixed after overcoming early losses following the inflation and housing data. The yield on the two-year note was 1 bp lower at 0.48%, the yield on the 10-year note gained 3 bps to 2.87%, while the 30-year bond yield added 1 bp to 4.28%.

Irish bank woes and China inflation concerns dominate global conversation

The situation in Ireland continues under the microscope as estimates of large bank losses have resulted in Ireland’s deficit surging to over 30% of gross domestic product, indicating the need for outside help. While Ireland has repeatedly said they are fully funded through mid-2011, Irish banks have had to increasingly rely on capital from the European Central Bank’s (ECB) emergency funding facility. With other weak countries also facing high debts and deficits, and due to the threat of contagion, where the issues of one country spread to others, European countries have been pressing Ireland to address the situation and recapitalize the banks. As such, European Union (EU) and International Monetary Fund (IMF) officials are set to review the books of Irish banks tomorrow. Ireland’s Finance Minister Lenihan said that bank “dislocation has persisted” and that “Intensive engagement will now take place so we can ensure that we can stabilize our banking sector.” He added that as Ireland one of the 16 countries using the euro, and to “ensure that the currency itself is protected,“ the country will work to “ensure everything possible is done to secure the Irish banking system.” Lastly, Lenihan said that “The ECB stands fully behind the Irish banking system.”

Meanwhile, concerns about potential moves by China to address inflation continued to fester, after Chinese Premier Wen Jiabao said that the cabinet is drafting measures to counter overly rapid price gains.

Economic data took a back seat in trading today, but releases included Spain’s 3Q GDP was unrevised at a flat level of output, UK jobless claims unexpectedly fell in October and euro-zone construction output declined in September, Japan’s Leading Index for September was revised slightly lower, and Australia’s Leading Index was flat for September.

Elsewhere, the minutes from the most recent Bank of England monetary policy meeting revealed that although some committee members were concerned that the risks to inflation expectations was somewhat greater than previously thought, overall, most felt that the balance of risks had not altered decisively and that the right action at this meeting was to maintain the current, highly expansionary, stance of monetary policy.

Tomorrow releases include reading on jobs in the US

The US economic calendar will yield the weekly initial jobless claims, expected to rise to 441,000 from 435,000 the week prior, the Conference Board’s Index of Leading Indicators for October, forecasted to rise 0.5% after gaining 0.3% in September, and the Philly Fed Manufacturing Index, anticipated to increase to 5.0 in October from 1.0, where zero is the level that demarks contraction versus expansion.

International releases include UK retail sales, Canada’s leading indicator and wholesale sales, and Taiwan announces 3Q GDP.