Evening Market Update

Korean Clash and Euro-debt Issues Sink US Equity Markets 

Stocks fell into negative territory right at the opening bell and never managed to recover, as sentiment was threatened by news from across the globe. Investors continue to be faced with euro-zone debt worries, and were further spooked by escalating tensions in the Korean peninsula after North Korea fired artillery shells on a South Korean island. The domestic economic calendar was chalk full of data, highlighted by an upward revision to 3Q GDP, a larger drop in existing home sales than expected, and an increase in manufacturing activity in Richmond, although the market showed little reaction to the reports as focus was on international issues. The minutes from the November Fed meeting were released, showing officials clashed over the decision to implement the $600 billion bond purchase program, and Treasuries finished the day higher. On the equity front, Dow member Hewlett-Packard beat the Street’s profit and revenue expectations, Hormel Foods raised its annual dividend, and J. Crew Group agreed to be acquired by private equity funds for $3 billion.

The Dow Jones Industrial Average fell 142 points (1.3%) to 11,036, the S&P 500 Index lost 17 points (1.4%) to 1,181, and the Nasdaq Composite declined 37 points (1.5%) to 2,495. In moderate volume, 1.0 billion shares were traded on the NYSE and 1.9 billion shares were traded on the Nasdaq. Crude oil fell $0.21 to $81.53 per barrel, wholesale gasoline was flat at $2.15 per gallon, and the Bloomberg gold spot price was $9.65 higher at $1,376.10 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 1.3% higher at 79.67.

Dow member Hewlett-Packard Co. (HPQ $44) reported fiscal 4Q EPS ex-items of $1.33, above the $1.27 consensus estimate of analysts surveyed by Reuters, with revenues growing 8% year-over-year (y/y) to $33.3 billion, compared to the $32.7 billion that the Street was expecting. The company said it saw broad-based y/y growth in its commercial segment driven by 25% growth in its enterprise storage and servers business as well as strength in commercial PC clients and printers. Moreover, the company posted 50% y/y organic—excluding acquisitions, divestitures, and foreign exchange—growth in its networking segment. HPQ increased its full-year EPS outlook, which topped expectations, but it issued a 1Q outlook that came in below the Street’s forecasts. Shares were higher.

Hormel Foods Corp. (HRL $49)  nicely higher after the company announced an increase in its annual dividend from $0.84 per share to $1.02 per share. The announcement came before the company released its fiscal 4Q results, which showed it achieved EPS of $0.90, above the $0.79 analyst forecast, on revenues of $2.1 billion, exceeding the $1.9 billion expectation. The food products firm said its volumes rose 14% y/y and its Jennie-O Turkey Store and refrigerated foods segment drove its earnings growth.

J. Crew Group Inc. (JCG $44) announced that it has entered an agreement to be acquired by funds affiliated with private equity firms TPG Capital and Leonard Green & Partners, L.P. JCG shareholders will receive $43.50 per share in cash, for a total transaction value of $3.0 billion. Millard Drexler will continue as Chairman and CEO of JCG. Shares of JCG traded sharply higher. Separately, the company posted 3Q EPS that exceeded analysts’ estimates.

3Q GDP revised higher, existing home sales fall, November Fed minutes released

The second look at 3Q Gross Domestic Product, the broadest measure of economic output, showed an upwardly revised 2.5% quarter-over-quarter annualized rate of growth, compared to the 2.0% increase initially reported, and after expanding by 1.7% in 2Q. Economists surveyed by Bloomberg forecasted a 2.4% rate of growth. Upward revisions occurred to most major categories, notably personal consumption, which rose 2.8%, up from 2.6% in the preliminary report and above the 2.5% estimate.

The GDP Price Index remained at a 2.3% increase as expected by economists, and the core PCE Index, which excludes food and energy, was left unrevised at a 0.8% rate of growth, also inline with economists’ estimates. Within GDP, consumer spending was the largest contributor to growth, adding 2.0%, inventory building contributed 1.3%, and business spending on equipment and software contributed 1.1%. Federal government spending contributed 0.7% and state and local government added 0.1%. Subtractions from growth included 0.75% from residential construction, and while revised positively, the main negative impact to the quarter was net exports, which detracted 1.8% from output, as imports (a subtraction from growth) grew 16.8% q/q and outpaced exports, which grew 6.3% q/q. Real gross domestic purchases - purchases by US residents of goods and services wherever produced - increased 4.2% in the third quarter, compared with an increase of 5.1% in the second.

Existing-home sales fell 2.2% month-over-month (m/m) in October to an annual rate of 4.43 million units, compared to the 1.1% decrease to 4.48 million units forecasted by economists surveyed by Bloomberg, and from September’s unrevised 4.53 million units. The median existing-home price fell 0.9% from a year ago to $170,500, and was 0.7% lower m/m. The supply of homes fell by 4.5% m/m to 3.86 million units, equating to 10.5 months of supply at the current sales pace. Sales of existing homes reflect closings from contracts entered one to two months earlier. The National Association of Realtors, who releases the report, said that the decline in sales may be partly due to the temporary foreclosure moratorium, as buyers of distressed properties stepped out of the market.

In other economic news, the Richmond Fed Manufacturing Index rose to 9 in November from 5 in October, compared to the increase to 6 expected by economists. The index moved further into expansion territory as noted by a reading above zero.

The minutes from the November Federal Open Market Committee (FOMC) meeting were released midday. Participants viewed progress in output and employment as “disappointingly slow,” and that when combined with high levels of excess slack, could leave the recovery vulnerable to negative shocks. The Fed updated its three year forecasts, downwardly adjusting GDP growth and notably upwardly revising their unemployment estimates from the June projections.

There was considerable discussion regarding the outlook for hiring, with staff members citing headwinds of uncertainty over demand, as well as a prevailing attitude toward cost-cutting, uncertainty over taxes, health care costs and regulations. With regard to inflation, participants saw only a small risk of deflation, but felt inflation would be below the level consistent with maximum employment and price stability for “some time.” However, there was considerable debate over the risks to the inflation outlook, both on the upside and downside.

While the group ultimately judged it appropriate to take action to promote a stronger recovery by purchasing an additional $600 billion in assets, there was debate over the impact and necessity of the program. Debate ranged from the need to avoid the costly risk of persistent deflation to the view that purchases could stoke inflation and “unwanted downward pressure on the dollar’s value.” The minutes also revealed an unscheduled videoconference that took place on October 15, where alternative ways to express and communicate the Fed’s objectives, supplemental communication, the merits of making small frequent adjustments to the balance sheet and the use of targeting a term interest rate were discussed but no actions were taken.

Last week Fed Chair Bernanke said that that the best way to deliver strong fundamentals to underpin the value of the dollar and support the global recovery is through policies that lead to a resumption of robust growth in a context of price stability in the US. He added that a two-speed global recovery, where advanced economies grow at a much slower rate than emerging nations, may not be sustainable, in part because strong expansion in the emerging economies will ultimately depend on a recovery in advanced economies.

Treasuries were higher as the global concerns in Asia and Europe overshadowed the aforementioned data and Fed minutes. The yield on the two-year note fell 3 bps to 0.43%, the yield on the 10-year note lost 3 bps to 2.78%, and the 30-year bond yield declined 2 bps to 4.19%. Note: Markets will be closed on Thursday for Thanksgiving, but will be open for a shortened session on Friday.

Korean conflict and euro-area debt concerns in focus

European debt concerns continued to stymie sentiment, even after the weekend’s announcement that Ireland agreed to a bailout from the European Union (EU) and International Monetary Fund (IMF). Uneasiness regarding the fate of other debt-ridden nations and political uncertainty in Ireland as a result of austerity measures that will be needed to receive financial support pressured the European financial sector. Some of the concerns were evident by a short-term debt auction in Spain today, which had demand at the low end of expectations and rates were solidly higher compared to similar maturities in previous auctions, per Reuters. Meanwhile, the unnerved sentiment overshadowed some favorable economic data in Europe. PMI readings of the service and manufacturing sectors in France, Germany—Europe’s largest economy—and the euro-zone all exceeded economists’ forecasts. Moreover, Italy’s consumer confidence unexpectedly improved, Spain’s trade deficit narrowed, and Germany’s 3Q GDP was left unrevised at a 0.7% rate of growth compared to 2Q, and a 3.9% expansion y/y.

The biggest story in the Asia/Pacific region came from the Korean peninsula, as North Korea fired artillery shells at a South Korean island, causing causalities and prompting South Korea to return fire. Meanwhile, back in the Americas, Canada’s consumer price index increased 2.4% in October, compared to the 2.2% advance expected by economists. The core inflation rate, which excludes eight volatile items, increased 1.8%. A separate report showed that Canadian retail sales grew 0.6% in September, which fell slightly short of expectations. Additionally, Brazil’s consumer price index rose 0.86% in November on a m/m basis, compared to expectations of a 0.72% increase.

Durable goods orders to headline busy day on economic calendar

Due to the Thanksgiving holiday on Thursday, tomorrow’s economic calendar is jam-packed with reports to be released, highlighted by the volatile durable goods orders report for October, forecasted to increase by 0.1% m/m and excluding transportation, orders are expected to rise 0.6%. The durable goods orders report carries a lot of weight among economists as it provides a good indication of future manufacturing as they represent demand for goods intended to last at least three years. Moreover, after stripping out certain volatile components, the data can give a timely indicator of consumer confidence as purchases of big-ticket items can be more easily delayed in times of financial despair compared to non-discretionary items. Also, the compliment to today’s existing home sales will be released in the form of new home sales, expected to increase 1.6% m/m in October, and is considered a more timely indicator of housing demand as they reflect contracts signed as opposed to closings.

Other reports on tomorrow’s docket include: weekly initial jobless claims, personal income and spending, the final University of Michigan’s Consumer Sentiment Index, and MBA mortgage applications.

Reports due out on the international front include the German IFO survey of business confidence, Italian retail sales, the final 3Q reading of GDP in the UK, and Australia’s leading index.