Evening Market Update

Markets Lose Steam Late-Day

Optimism surrounding the preliminary agreement to extend tax cuts to all Americans and maintain unemployment benefits waned in late-day trading, as a report that the Securities and Exchange Commission will expand its insider trading probe may have taken some of the shine off of the agreement, with US equities finishing mixed and near the unchanged mark. In equity news, Dow member 3M Co issued full-year 2011 guidance, AutoZone bested analysts’ earnings forecasts, while Talbots disappointed the Street by issuing 4Q guidance that was below expectations. Treasuries ended solidly lower on the tax announcement and as the lone report on today’s US economic calendar showed a surprising rise in consumer credit.

The Dow Jones Industrial Average fell 3 points (0.03%) to 11,359, while the S&P 500 Index inched 1 point higher (0.1%) to 1,224, and the Nasdaq Composite gained 4 points (0.1%) to 2,598. In moderate volume, 1.6 billion shares were traded on the NYSE and 1.9 billion shares were traded on the Nasdaq. Crude oil lost $0.69 to $88.69 per barrel, wholesale gasoline fell $0.02 to $2.32 per gallon, and the Bloomberg gold spot price was $23.73 lower at $1,400.03 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.4% higher at 79.91.

Dow member 3M Co. (MMM $84) announced that it expected full-year 2011 revenues to be in the range of $29.0-30.5 billion, compared to the $29.0 billion that analysts surveyed by Reuters had expected. Also, the diversified manufacturer said 2011 EPS, excluding a pension expense of $0.27 per share, is forecasted to come in between $6.17-6.37, versus the Street’s forecast of $6.20. MMM said, “Our continuing strong performance clearly demonstrates that our growth strategy is working.” Shares were lower.

AutoZone Inc. (AZO $260) reported fiscal 1Q EPS of $3.77, well above the $3.43 that analysts anticipated, with revenues growing 12.7% year-over-year (y/y) to $1.8 billion, exceeding the $1.7 billion that the Street was forecasting. The auto parts retailer also said its same-store sales—sales at stores open at least a year—jumped 9.5% y/y. However, shares finished lower.

Talbots Inc. (TLB $9) was down over 20% after the specialty retailer issued 4Q guidance that missed analysts’ forecasts and lowered its full-year outlook. Exacerbating the situation, the company reported 3Q revenues of $299 million, a decline of 3.2% y/y, below the $303 million that the Street was forecasting. The company said its customer traffic and sales from Thanksgiving through Cyber Monday improved greatly, however, it believes the challenging and promotional environment will continue. TLB’s 3Q EPS ex-items of $0.27, which topped analysts’ forecasts by three cents, had little success at limiting the pressure on its shares.

Developments in Washington help fill the void in the economic calendar

President Barack Obama reached a preliminary agreement on extending the tax cuts for all Americans that were enacted under President George W. Bush. The extension will be for two years and will also include a thirteen-month extension of unemployment benefits but the agreement needs to be approved by Congressional Democrats. Per Reuters, other aspects of the agreement included: dividends and capital gains taxes remaining at 15%, the payroll tax for one year being reduced by two percentage points, and an estate tax coming in at 35%, with a $5 million exemption.

The lone release on today’s US economic calendar came in the final hour of trading, with consumer credit, increasing $3.4 billion in October, well ahead of the $1 billion decline expected by economists, while September’s figure was revised to an increase of $1.2 billion from the preliminary $2.1 billion rise reported. Revolving debt, which includes credit cards, fell by $5.6 billion during the month, while non-revolving debt, which includes loans for cars, rose by $9.0 billion.

Treasuries finished solidly lower on the agreement to extend the tax cuts and unemployment benefits, despite the pullback in equities. The yield on the two-year note rose 10 bps to 0.53%, the yield on the 10-year note gained 19 bps to 3.13%, and the 30-year bond yield added 13 bps to 4.37%.

US tax agreement aids Europe, but debt anxiety remains

The preliminary agreement in the US to extend its tax cuts for all Americans for two years aided in sentiment overseas. However, the region continued to grapple with the ongoing debt crisis in the region and all eyes were on the release of Ireland’s 2011 budget, which showed about 6 billion euros ($8 billion) in savings, through tax increases and spending cuts. Also, the Irish Parliament voted to approve the budget proposal today, which will potentially help avoid a political shakeup in the nation that could exacerbate the debt crisis in the euro-area. Moreover, European finance ministers met again today to continue discussions surrounding the euro-area debt situation. Yesterday’s gathering resulted in no changes to how they will combat the potential contagion of the debt crisis and the euro-area’s near $1 trillion bailout package, but following today’s meeting, it was reported that a new round of bank stress tests on European financial institutions is planned for February.

Economic data across the pond offered a mixed bag of reports, including an unexpected drop in UK industrial production, smaller-than-anticipated growth in factory orders in Germany—Europe’s largest economy, and a solid increase in UK retail sales.

In the Asia/Pacific region, the Reserve Bank of Australia expectedly kept its benchmark interest rate unchanged at 4.75%, but Governor Stevens noted that inflation is expected to be little changed over the next few quarters, suppressing expectations of further policy tightening by the central bank. Elsewhere, Japan’s Leading Index for October declined by a slightly larger-than-anticipated amount.

Back in the Americas, the Bank of Canada kept its benchmark interest rate unchanged at 1.00%, as expected, noting that “the global economic recovery is proceeding largely as expected, although risks have increased.”

In continuing with the theme of light economic news in the US this week, tomorrow’s docket will only offer the MBA Mortgage Application Index. However, the international economic calendar will provide a few more items of note, including Germany’s trade balance and industrial production, housing prices in the UK, while Japan will release machinery orders, bank loans and its trade balance. Also, Canada will report housing starts.