Evening Market Update

Economic Data and Hopes of European Help Buoy Stocks

Sentiment took an uptick today after a spate of stronger-than-expected economic news, headlined by upbeat manufacturing reports in the US and China, the world’s two largest economies, as well as an improvement in US private sector jobs. Comments from European Central Bank President Trichet that suggested the possibility of additional government debt purchases and a survey from the Federal Reserve that indicated an expansion in US growth added to the bullishness of the day. Equity news was mixed, with reports of strong vehicle sales from major carmakers offsetting a layoff at State Street Corp. Treasuries were lower amid the rise in equities, showing little reaction to an upward revision to 3Q productivity, an unexpected increase in construction spending, and a drop in mortgage applications.

The Dow Jones Industrial Average surged 250 points (2.3%) to 11,256, the S&P 500 Index jumped 26 points (2.2%) to 1,206, and the Nasdaq Composite gained 51 points (2.1%) to 2,549. In moderate volume, 1.1 billion shares were traded on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil gained $2.64 to $86.75 per barrel, wholesale gasoline advanced $0.11 to $2.30 per gallon, and the Bloomberg gold spot price rose $1.48 to $1,387.50 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.8% lower at 80.68.

General Motors Co. (GM $35) reported that US auto sales in November for its four core brands—Chevrolet, Buick, GMC, and Cadillac—rose 21% year-over-year (y/y). Also, sales at Ford Motor Co. (F $16) rose 24% y/y, Chrysler gained 16.7% y/y, Honda Motor Co. (HMC $37) grew 21.1% y/y, and Nissan (NSANY $20) advanced 24.8% y/y. The lone decliner amid the majors was Toyota Motor Corp (TM $80), which reported that sales fell 3.3% y/y in November, however shares of all the carmakers mentioned traded higher.

State Street Corp. (STT $45) announced that it will reduce its workforce by 1,400 employees, beginning in December, as the company announced a four-year restructuring plan. The financial firm also said its plans to record pre-tax restructuring charges of $400-450 million, with $160-165 million being recognized in the current quarter. STT was solidly higher.

US manufacturing activity expands, private payrolls jump, Fed says growth expands

The ISM Manufacturing Index came in slightly above expectations, dipping from 56.9 in October to 56.6 in November, compared to the decline to 56.5 that was expected by economists surveyed by Bloomberg. The reading marks the sixteenth-consecutive month the manufacturing sector has expanded as denoted by a reading above the 50 level, and indicates the overall economy grew for the nineteenth-straight month. Underlying components of the report that led the higher-than-forecasted level of manufacturing activity came from increases in inventories and supplier deliveries, while new orders, production, exports, and employment components decelerated but remained in expansion mode. However, the prices paid component unexpectedly dropped from 71.0 in October to 69.5 in November.

Meanwhile, the Federal Reserve released its Beige Book in afternoon action, which is a compilation of anecdotal economic data from all twelve Federal Reserve Districts in preparation for the next Federal Open Market Committee (FOMC) meeting scheduled for December 14. The report said the economy continued to improve, on balance, during the reporting period from early/mid-October to mid-November. Also, manufacturing continued to expand in almost all Districts, and consumer spending tended to be positive, but several Districts noted that households remain price sensitive and focused on buying necessities. Moreover, the housing markets remain depressed, with several Districts reporting further weakening during the past six weeks, while lending activity remained stable across most Districts. Most regions that weighed in said credit quality has been steady to improving. On inflation, prices for final goods and services were fairly stable, despite rising input costs. On employment conditions, most Districts said hiring activity showed some improvement.

Meanwhile, the ADP Employment Change Report showed private sector payrolls rose by 93,000 jobs in November, compared to the forecast of economists surveyed by Bloomberg, which called for a 70,000 increase, and October’s 43,000 job gain was upwardly revised to a growth of 82,000 jobs. The release does not include government hiring and firing and comes ahead of Friday’s broader nonfarm payrolls report, where economists expect an increase of 145,000 jobs in November, after rising a better-than-expected 151,000 in October. Excluding government hiring, November private sector payrolls are expected to increase 155,000, after expanding by a larger-than-forecasted 159,000 in October.

Additionally, the final reading on nonfarm productivity was upwardly revised to a 2.3% increase on an annual basis, compared to the 1.9% increase reported in the preliminary report, and inline with what economists expected. Unit labor costs were 0.1% lower, unrevised from the initial report, versus a decline of 0.2% that was estimated.

Moreover, construction spending unexpectedly rose, increasing 0.7% in October, compared to the 0.3% decline that was expected, and September’s 0.5% increase was revised to a 0.7% gain. Residential spending rose, offsetting a modest decline in nonresidential spending.

In other economic news, the MBA Mortgage Application Index fell 16.5% last week, after the index that can be quite volatile on a week-to-week basis, gained 2.1% in the previous week. The drop came as a 21.6% tumble in the Refinance Index easily offset a 1.1% gain in the Purchase Index. The downward move in the overall index came amid a 6 basis-point increase in the average 30-year mortgage rate to 4.56%, above the record low of 4.21% on October 8.

Treasuries were lower amid the improved global sentiment. Meanwhile, a mid-day Reuters report that a US official said it would be ready to support the extension of the near $1 trillion European Financial Stability Facility via an extra commitment of money from the International Monetary Fund (IMF) was later refuted by a US government official according to the Wall Street Journal. The yield on the two-year note gained 8 bps to 0.53%, the yield on the 10-year note jumped 17 bps to 2.97%, and the 30-year bond yield rose 13 bps to 4.24%.

Sentiment rebounds on strong Chinese PMI and hope of European stimulus

Markets began the day with a larger-than-forecasted improvement in the Chinese PMI Manufacturing Index to 55.2 in November from 54.7 in October, marking the fastest pace in seven months, per Bloomberg, and higher than the 54.8 expected. Additionally, the HSBC Manufacturing PMI Index for China increased from 54.8 in October to 55.3 in November, but was just shy of the 55.4 forecast. Elsewhere, Australia’s 3Q GDP grew at a 0.2% quarter-over-quarter (q/q) pace, which was half the forecast of economists, South Korea’s exports were strong, India’s manufacturing activity expanded, and Taiwan’s PMI Manufacturing Index moved into expansionary territory.

Sentiment in Europe rebounded amid comments from European Central Bank (ECB) President Jean-Claude Trichet yesterday, in which he suggested that the ECB could expand its purchases of government debt. The ECB is set to conduct its monetary policy meeting tomorrow and although it is expected to leave its benchmark interest rate unchanged at 1.0%, Trichet’s customary press conference following the announcement will be a key focus for traders. The ECB has recently hinted at reining in its crisis-induced stimulus measures but given the emergence of contagion fears, traders will be looking to see if Trichet softens his stance and offers further assistance to help the euro-area debt situation.

In other economic news in across the pond, UK home prices fell at a smaller pace than economists forecasted, and the nation’s Manufacturing PMI unexpectedly jumped to a 16-year high in November. Moreover, reports out of Ireland and France improved, while similar manufacturing reads out of Germany, the euro-zone, and Italy all remained in expansionary territory but were below expectations. Also, Spain’s Manufacturing PMI fell to a level of 50.0—the demarcation point between expansion and contraction. Elsewhere, Germany reported a much stronger-than-forecasted increase in retail sales.

Economic focus tomorrow on US jobs and European Central Bank

The US economic calendar will yield the weekly initial jobless claims, which are expected to increase to 424,000 from 407,000 and pending home sales, forecasted to fall 1.0% in October after declining 1.8% in September. Additionally, retailers will report same-store sales results.

Additionally, as discussed previously, all eyes will be on whether the ECB moves to provide support to ease concerns over debt and weak economic growth in some nations.

Other international releases will include euro-zone PPI and 3Q GDP, Japan capital spending, Australian retail sales, and Brazil industrial production.