Evening Market Update

Stocks Drift Higher on Encouraging Economic Data

The US equity markets inched higher throughout the day to finish in the green, after a report showed consumer sentiment climbed to a six-month high and the U.S. trade deficit narrowed to its lowest level in nine months, indicating a growing demand for American goods overseas. Treasuries finished the day lower, as the only other report on the economic docket showed a larger-than-expected increase in import prices. The equity front was highlighted by news that Dow member General Electric is increasing its dividend for the second time this year, and an announcement that Tenant Healthcare Corp has rejected a takeover offer from Community Health Systems Inc. In other equity news, National Semiconductor missed the Street’s 2Q revenue target, while Green Mountain Coffee Roasters Inc issued a disappointing outlook for the current quarter.

The Dow Jones Industrial Average was 40 points (0.4%) higher at 11,410, while the S&P 500 Index gained 7 points (0.6%) to 1,240, and the Nasdaq Composite advanced 21 points (0.8%) to 2,638. In light volume, 972 million shares were traded on the NYSE and 1.7 billion shares were traded on the Nasdaq. Crude oil fell $0.58 to $87.79 per barrel, wholesale gasoline declined $0.03 to $2.31 per gallon, and the Bloomberg gold spot price lost $0.48 to $1,386.63 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was unchanged at 80.07. For the week, including dividends, the DJIA rose 0.25%, the S&P 500 Index gained 1.28%, and the Nasdaq Composite advanced 1.78%.

Dow member General Electric Co. (GE $18 ¹) was higher after the company announced that it raised its quarterly dividend 17% to $0.14 per share. The company’s CEO Jeff Immelt said it was able to increase the dividend for the second time this year because of continued strong cash generation, accelerated recovery at GE Capital and solid underlying performance in its industrial businesses through year-end 2010. He added that in addition, the company plans to continue capitalizing on complementary and financially attractive inorganic growth opportunities and opportunistic share repurchases.

Tenet Healthcare Corp. (THC $7) confirmed that it has received a takeover proposal from Community Health Systems Inc. (CYH $36) for $6.00 per share in cash and stock. THC said the proposal is “identical in all material respects” to a CYH proposal received by THC on November 12, 2010, and it had determined that the prior proposal was not in the best interests of THC or its shareholders. THC added that it believes the company and its shareholders will be better served by benefitting from 100% of the upside inherent in THC rather than accepting CYH’s “inadequate proposal.” CYH said it is “surprised and disappointed” by THC’s flat rejection of a transaction that would provide a premium of about 40% to THC shareholders and it is convinced this transaction would be very attractive to THC shareholders. THC traded up over 50%, while CYH finished nicely higher as well.

National Semiconductor Corp. (NSM $14) reported fiscal 2Q EPS of $0.34, two cents above the Street’s forecast, but although revenues increased 13% year-over-year (y/y) to $390.4 million, analysts were looking for revenues of $399.5 million. The chipmaker also issued 3Q revenue guidance that missed the Street’s forecasts. Shares were down about 7%.

Green Mountain Coffee Roasters Inc. (GMCR $34) announced 4Q EPS ex-items of $0.20, two cents higher than the expectations of analysts, as sales grew 73% y/y to $373.1 million. However, shares of the specialty roaster traded lower after the company gave a disappointing outlook for the current quarter and warned of volatility in coffee prices for the new year.

Trade deficit narrows, consumer sentiment improves, while import prices jump

The trade deficit narrowed by a larger amount than expected, falling from an upwardly revised $44.6 billion in September to $38.7 billion in October, versus the estimate of economists surveyed by Bloomberg, which called for the deficit to come in at $43.8 billion. Exports led the way, rising more than 3% month-over-month (m/m), with exports to China increasing almost 30% to help shrink the trade deficit with the Asian nation by 8.3%. However, imports decreased 0.5% m/m as Chinese imports dipped slightly.

Meanwhile, the preliminary University of Michigan Consumer Sentiment Index improved more than expected, rising from 71.6 in November to 74.2 for December, above the 72.5 level that economists had expected. The index sits at the highest level since June 2010 and was supported by improvements in the economic conditions and outlook components of the report. On inflation, consumers downgraded their outlooks slightly for both the one-year and five-year time frames.

Treasuries moved lower on the positive economic data, extending the recent surge in yields. The yield on the two-year note was 1 bp higher at 0.63%, the yield on the 10-year note rose 12 bps to 3.32%, and the 30-year bond yield advanced 3 bps to 4.43%.

Elsewhere, the Import Price Index rose 1.3% m/m for November, compared to the expectation of economists, which called for the index to increase by 0.8%. Year-over-year (y/y), import prices are higher by 3.7%, versus the 2.8% forecast of economists.

Europe data mixed, concerns of a Chinese rate hike persist

A plethora of economic data was released across the pond for traders to digest, with separate reports showing France’s industrial and manufacturing production unexpectedly fell m/m in October, wholesale prices in Germany—Europe’s largest economy—rising in November, and UK producer prices increasing roughly inline with economists’ forecasts. Elsewhere, data out of Italy was mixed, with the nation’s 3Q GDP being revised higher unexpectedly, while a separate report showed its industrial production increased by an amount that missed expectations.

In Asia/Pacific, focus remained on whether the Chinese government will increase its benchmark interest rate ahead of key reports on inflation that are due out tonight. Meanwhile, expectations of further policy tightening were supported by data last night that showed China’s trade surplus narrowed by a smaller amount than economists expected, as exports and imports surged well above forecasts. In other Chinese economic news, new yuan loans came in above expectations and the nation’s money supply topped forecasts, adding to the policy uneasiness. Moreover, after today’s close in Asia, the Chinese government did increase the reserve requirement rate—the amount the nation’s banks must keep in reserve—by another 50 basis points to 18.5%, marking the third increase in five weeks. Elsewhere in the region, Japan’s consumer confidence deteriorated, while India reported a larger-than-expected increase in industrial production.

Tax-cut policy fills the void for the week

With the economic calendar light and equity news lacking any major market-moving releases, the biggest event this week came from Washington as we received some clarity on tax policy. 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 agreement will be for two years and will also include a thirteen-month extension of unemployment benefits but needs to be approved by Congress. Optimism initially followed the announcement as the tax cuts were seen as additional economic stimulus, possibly alleviating some of the workload of the Federal Reserve, causing Treasury yields to surge and the US dollar to gain ground. However, some of the luster from the tax-policy agreement was tarnished somewhat by House Democrats objecting to the deal and voting to not allow the package to reach the floor for a vote, suggesting the final tax policy may change.

Meanwhile, the advance in stocks for the week was stunted by continued euro-area debt concerns, uneasiness regarding the possibility of policy tightening in China, and comments from the Federal Reserve Chairman that the pace of economic growth is only strong enough to sustain the current rate of unemployment.

Economic data heats up next week

The economic calendar starts with Tuesday’s release of advance retail sales, forecasted to rise 0.6% month-over-month (m/m) in November, adding to October’s 1.2% increase, while sales ex-autos are also estimated to grow 0.6% in November, after rising 0.4% in October. Same-store sales results - sales at stores open at least a year - reported by retailers last week were generally better-than-expected. The retail sales report includes spending at supermarkets and gas stations.

Additionally, the Producer Price Index (PPI) will be released on Tuesday, expected to show prices at the wholesale level rose 0.6% m/m in November after rising 0.4% in October, while the core rate, which excludes food and energy, is expected to increase 0.2% after falling 0.6% the prior month. On a year-over-year (y/y) basis, the PPI is expected to grow 3.3% in November versus a rise of 4.3% in the prior month on a headline basis, and increase 1.2% at the core level, down from a 1.5% gain in October. The release precedes Wednesday’s report on the Consumer Price Index (CPI), forecasted to show a 0.2% m/m increase in November, the same rate as October, while ex-food and energy, it is expected to gain 0.1% after being flat the prior month. On a y/y basis, the CPI is expected to increase 1.1% at the headline level and 0.6% at the core level.

Wednesday also brings the November reading on industrial production, expected to rise 0.3% m/m after being unchanged in October, and capacity utilization is forecasted to increase to 75.0% from 74.8% in October. Lastly, housing starts for November will be reported Wednesday, expected to rise 6.0% m/m to an annual rate of 550,000 units, after falling 11.7% in October. Meanwhile, building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, are forecasted to gain 1.5% m/m to 560,000 units after rising 0.5% in October.

However, markets will likely focus on the midday statement release on Tuesday that concludes the one-day Federal Open Market Committee (FOMC) meeting. No changes are expected to the fed funds target rate, currently at a level between 0-0.25%, or the $600 billion asset purchase program, but markets will likely attempt to discern the Fed’s commitment to the program given better economic news recently, as well as the announcement to extend and expand tax cuts.

Treasury yields shot up this week after the tax deal was announced, as it could increase the deficit. Traders have debated the impact of the tax deal on the potential for the Fed to complete its announced purchase program, dubbed quantitative easing, or QE2. One camp notes that the tax deal amounts to renewed fiscal stimulus for the economy, increasing the economic growth prospects for 2011, which could reduce the need for monetary stimulus. However, the resulting surge in yields has others wondering if the Fed will need to continue with its program in order to keep financial conditions stimulative, given the Fed’s forecast that it would take five-to-six years for the economy to return to its longer-term rate of output growth, inflation and employment levels.

Other releases on the US economic calendar include the NFIB Small Business Optimism Index, business inventories, the Empire Manufacturing Index, the NAHB Housing Market Index, MBA Mortgage Applications, initial jobless claims, the Philadelphia Fed’s Business Activity Index, and the Conference Board’s Index of Leading Indicators. Other reports in the Americas include Canada’s leading indicator and Brazil retail sales.

In Asia/Pacific, releases include Japanese industrial production and the Tankan survey of business confidence, Australian business and consumer confidence, and dwelling starts, and a slew of data comes out of China, including 3Q GDP, PPI, CPI, retail sales, industrial production and fixed asset investment, which includes housing and infrastructure spending.

Economic releases in Europe will include the euro-zone industrial production, employment, trade balance and CPI, the German Zew survey of economic conditions and IFO survey of business confidence, UK house prices, CPI, retail price index, and retail sales.