Evening Market Update

Modest Rise in Stocks as Tax Cut Impact on Deficit Weighed

Stocks were modestly higher in tepid trading today, still digesting the extension and expansion of tax cuts announced yesterday. Meanwhile the main impact of the tax news has been a surge in Treasury yields, due to the potential for an increase in the deficit, and a rise in the dollar, as the taxes could result in higher economic growth and reduce the need for the Fed to pursue further quantitative easing. In equity news, Dow member McDonald’s Corp issued disappointing November same-store sales and fellow Dow component Home Depot raised sales and earnings guidance. Elsewhere, Costco Wholesale Corp beat the Street, Orexigen Therapeutics Inc’s obesity treatment received approval from an FDA panel, and American International Group was halted after announcing a recapitalization of the company. In economic news, the MBA Mortgage Application Index fell as the decline in refis offset the increase in purchases.

The Dow Jones Industrial Average rose 13 points (0.1%) to 11,372, while the S&P 500 Index gained 5 points (0.4%) to 1,228, and the Nasdaq Composite advanced 11 points (0.4%) to 2,609. In light volume, 1.1 billion shares were traded on the NYSE and 1.8 billion shares were traded on the Nasdaq. Crude oil lost $0.41 to $88.28 per barrel, wholesale gasoline fell $0.02 to $2.30 per gallon, and the Bloomberg gold spot price declined $20.53 to $1,381.53 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was unchanged at 80.00.

Dow member McDonald’s Corp. (MCD $79) announced global November same-store sales—sales at stores open at least thirteen months—grew 4.8% year-over-year (y/y), with sales in the US and Europe both increasing 4.9%, while in Asia/Pacific, Middle East and Africa, sales gained 2.4%. However, shares were lower as analysts were anticipating global sales to increase 5.6%.

Fellow Dow member Home Depot Inc. (HD $34) updated its full-year 2010 sales and EPS outlook, reporting that it expects earnings to grow 27% y/y to $1.97 per share, up from its prior forecast of $1.94, and revenues are anticipated to rise 2.3% to $67.5 billion, compared to the company’s previous outlook of $67.4 billion. Both forecasts were ahead of analysts’ expectations. Also, the company said it expects 2011 revenues to grow 2.0-2.5% y/y and EPS to increase 11-13%. Shares rose.

Costco Wholesale Corp. (COST $69) reported fiscal 1Q EPS of $0.71, above the $0.69 that analysts were anticipating, with revenues growing 11% y/y to $19.2 billion, versus the $18.8 billion that the Street had forecasted. The retailer said its 1Q same-store sales rose 7% y/y, while excluding inflation in gasoline prices and strengthening foreign currencies, sales rose 5%. Shares were modestly lower.

Orexigen Therapeutics Inc. (OREX $9) was 80% higher after an advisory panel to the US Food and Drug Administration (FDA) voted to recommend the firm’s weight loss drug Contrave. The obesity treatment was co-developed by Japanese-based Takeda Pharmaceuticals Co. Ltd. (TKPHF $47).

American International Group (AIG $42) was halted in late-day trading, after announcing a recapitalization plan, while the Wall Street Journal cited people familiar with the matter as saying the US government was looking to sell at least $15 billion of its shares in early 2011, and that the company could sell additional shares alongside the government. The company did not confirm the plan but said they remain committed to paying off taxpayers.

Mortgage applications tick lower as 30-year rate rises and refinances decline

The US economic calendar remains light, with today’s lone report being the MBA Mortgage Application Index, which dipped slightly by 0.9% last week, after the index that can be quite volatile on a week-to-week basis, fell 16.5% in the previous week. The modest decline came as a 1.4% decrease in the Refinance Index was met by a 1.8% gain in the Purchase Index. The downward move in the overall index came amid a 10 basis-point increase in the average 30-year mortgage rate to 4.66%, above the record low of 4.21% on October 8.

Treasuries were under pressure and yields extended yesterday’s strong advance on the announcement that the Bush-era tax cuts have been tentatively agreed to be extended, while showing little reaction to the housing data. Meanwhile, Treasury auctions resulted in higher-than-expected yields both yesterday and today, for the three-year and 10-year notes, possibly because the tax cuts widen the fiscal deficit. The yield on the two-year note rose 8 bps to 0.62%, the yield on the 10-year note gained 11 bps to 3.24%, and the 30-year bond yield added 6 bps to 4.43%.

Economic releases in the US tomorrow include weekly initial jobless claims, expected to fall to 425,000 from 436,000 the week prior, and wholesale inventories, forecasted to increase 0.8% in October after rising 1.5% in September.

International economic news light, central bank action on the docket tomorrow

Euro-area debt concerns were relatively subdued, with the Irish Parliament voting in favor of the government’s 6 billion euro ($8 billion) austerity budget released yesterday, which included spending cuts and tax increases. However, fears of additional moves to tighten monetary policy in China were stoked after the government moved up the release of key economic releases, including inflation data, by two days to December 11, per Bloomberg.

Meanwhile, the economic calendar across the pond sent conflicting signals, with Germany’s trade surplus narrowing more than economists had forecasted as exports unexpectedly fell 1.1% month-over-month in October, reversing the 3.0% gain in September, while German industrial production rose more than expected in October. In other economic news, the Bank of France said its business sentiment gauge unexpectedly improved.

Elsewhere, Japan’s machine orders fell much more than expected and the nation’s trade surplus unexpectedly contracted, while new reports of artillery fire in a military exercise by North Korea also muted sentiment in overseas trading.

Tomorrow’s international releases will include Japanese machine tool orders and final 3Q GDP, Australian employment, South Korean PPI, French payrolls, German CPI, and Canadian house prices. Additionally, the Bank of England and central banks of Brazil and South Korea meet to discuss monetary policy, and no change in policy is expected at any of the meetings.