Evening Market Update

 

Early Momentum on China Inaction Loses Steam

US equities opened higher and gained strength throughout the day on the heels of the Chinese government’s decision not raise interest rates despite inflation data out of the Asian nation that was far above expectations. However, weakness in technology shares pressured the upward momentum and stocks finished mixed, with the Nasdaq ending in negative territory. Elsewhere, the dollar lost ground against its major counterparts, supporting commodities. M&A news dominated relatively light equity news, as Dow member General Electric Co announced its plans to acquire UK-based Wellstream Holdings Plc for roughly $1.3 billion, Thermo Fisher Scientific inked a deal to buy Dionex Corp for $2.1 billion, while Dell confirmed that it has agreed to purchase Compellent Technologies for $960 million. Treasuries recovered from early losses and finished higher amid a lack of economic news in the US.

The Dow Jones Industrial Average was 18 points (0.2%) higher at 11,429, the S&P 500 Index was flat at 1,240, while the Nasdaq Composite lost 13 points (0.5%) to 2,625. In light volume, 963 million shares were traded on the NYSE and 1.8 billion shares were traded on the Nasdaq. Crude oil gained $0.82 to $88.61 per barrel, wholesale gasoline added $0.01 to $2.32 per gallon, and the Bloomberg gold spot price rose $7.80 to $1,393.80 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—fell 0.9% to 79.33.

Dow member General Electric Co. (GE $18 ¹) announced that it is proposing to acquire UK-based Wellstream Holdings Plc. (WSHOY $59), an oil & gas pipeline engineer and manufacturer, for 800 million pounds ($1.3 billion). GE said the acquisition will broaden its subsea production systems equipment and service capabilities, while enhancing its ability to capitalize on growth in Brazil, Africa and Asia. GE added that WSHOY’s Board intends to unanimously recommend the transaction to shareholders. GE was modestly lower, while WSHOY traded higher in the European session.

In other corporate deal making, Thermo Fisher Scientific Inc. (TMO $56) reached an agreement to acquire chromatography firm Dionex Corp.(DNEX $118) for $118.50 per share in cash, or about $2.1 billion. The deal is expected to be immediately accretive to TMO’s adjusted EPS by $0.13-0.15 in the first twelve months following the close of the deal. Separately, Dell Inc.(DELL $13) confirmed that it has reached an agreement to acquire storage solutions firm Compellent Technologies Inc. (CML $28) for $27.75 per share in cash or about $960 million. TMO and DNEX were higher, while DELL and CML were lower.

Economic data dormant today, retail spending, inflation and Fed meeting tomorrow

A full day of economic releases tomorrow starts with 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 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, 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.

However, markets will likely focus on the midday statement released at the conclusion of 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.

Since the last FOMC meeting, the unemployment rate has increased and inflation as measured by CPI fell to the slowest rate since records began, at 0.6% y/y in October. Additionally, the Fed Chairman noted during his interview on 60 Minutes that the economy is not far from the level of self-sustaining growth.

Other releases on the US economic calendar include the NFIB Small Business Optimism Index, expected to increase to 92.3 from 91.7, and business inventories, forecasted to rise 1.0% in October after increasing 0.9% the prior month.

China surprises, refrains from raising rates

In the midst of hotter-than-expected inflation data, the Chinese government surprised economists by not making any moves in its benchmark interest rate, where most felt the Asian nation, which has led the global recovery and faces the threat of an overheating economy, would bump rates higher. Economists’ anticipation of a move ramped higher following Friday’s release of stronger-than-anticipated price data, which showed the country’s Producer Price Index rose 6.1% year-over-year (y/y) in November, compared to the 5.1% increase that economists had anticipated, and its Consumer Price Index advanced 5.1% y/y in November, above the 4.7% that was expected. However, prior to the release of the inflation data, 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. Other data out of China that fostered interest-rate hike uneasiness included, retail sales rising over 18% y/y, which matched expectations, while industrial production and fixed asset investment both grew more than anticipated. Elsewhere in the region, Australia released government reforms in the banking sector that were seen as less strict than had been anticipated.

The economic calendar in Europe was limited with only a couple of items out of the UK worth a mention, as separate reports showed home prices declined 3.0% m/m in December, while producer input prices rose more than economists had expected.

Back in the Americas, industrial production in Canada increased more than what economists forecasted, while Bank of Canada Governor Carney said in a speech today that as a result of some countries refusing to allow their respective currencies to float, creating inflation in emerging markets and disinflation in advanced economies, it “reinforces the low-interest rate strategies of major advanced economies and may necessitate further rounds of quantitative easing.”

International releases tomorrow include Canada’s leading indicator, Brazil retail sales, Japanese industrial production, Australian business confidence and dwelling starts, euro-zone industrial production, the German Zew survey of economic conditions, French CPI, and the UK CPI and retail price index.