Evening Market Update

Upbeat Retail Data Dilutes Disappointing Best Buy Report

US equity markets remain higher heading into the afternoon trading session as a disappointing 3Q earnings report from Best Buy Co Inc is being more than offset by a much better-than-expected report on November retail sales. Treasuries are lower following the retail sales data, while the economic calendar also showed US producer prices came in hotter than economists had anticipated, business inventories grew less than forecasted, and the NFIB Small Business Optimism Index improved to the highest level since December 2007. However, the conclusion of the US Federal Reserve’s monetary policy meeting looms on the afternoon horizon, which may be keeping conviction hamstrung. In other equity news, Amgen Inc announced that a key study revealed favorable results for its bone treatment, while real estate investment trust HCP Inc announced an agreement to acquire most of the real estate assets of privately-held nursing-home company HCR ManorCare Inc for $6.1 billion. Overseas, Europe was modestly higher amid mixed economic reports and ahead of the Fed’s announcement.

At 12:57 p.m. ET, the Dow Jones Industrial Average is up 0.6%, while the S&P 500 Index and the Nasdaq Composite are gaining 0.4%. Crude oil is up $0.11 at $88.72 per barrel, wholesale gasoline is flat at $2.32 per gallon, and the Bloomberg gold spot price is up by $9.60 at $1,403.78 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.2% at 79.18.

Best Buy Co. Inc. (BBY $35) reported 3Q EPS of $0.54, shy of the $0.61 consensus estimate of analysts surveyed by Reuters, with revenues falling 1.1% year-over-year (y/y) to $11.9 billion, short of the $12.5 billion that the Street was expecting. The electronics retailer said its same-store sales—sales at stores open at least fourteen months—were down 3.3% y/y, as domestic sales fell on “lower industry demand in key categories and changes in market share.” The company said it estimates that its domestic market share fell by 110 basis points y/y due to declines in TVs, mobile computing and gaming software. BBY lowered its full-year 2011 EPS outlook and said it does not have “complete visibility,” to how customers will behave over the next several weeks. Shares are sharply lower.

Amgen Inc. (AMGN $56) announced that a key study of its bone drug, Xgeva, helped delay the onset of cancer to bone by 4.2 months in patients with prostate cancer. AMGN’s drug is already on the market as a treatment for osteoporosis, and the study could lead to the expansion of the drug’s role. The company said it is looking forward to presenting these “landmark data” at an upcoming medical conference. AMGN is solidly higher.

In M&A news, real estate investment trust HCP Inc. (HCP $34) announced that it has reached an agreement to acquire substantially all of the real estate assets of privately-held nursing-home company HCR ManorCare Inc for $6.1 billion. The deal will consist of about $3.5 billion in cash, roughly $850 million in stock, and approximately $1.7 billion reinvested from the payoff of HCP’s existing debt investments in HCR ManorCare Inc. HCP is trading higher.

Retail sales and producer prices rise, Fed meeting concludes in the afternoon

Advance retail sales for November rose 0.8% month-over-month (m/m), compared to the 0.6% increase forecasted by economists surveyed by Bloomberg, and October’s 1.2% gain was revised upward to a 1.7% advance. November sales ex-autos gained 1.2%, above expectations of a 0.6% increase, and October’s 0.4% rise was revised to a 0.8% advance. Sales ex-autos and gas rose 0.8% in November, versus the 0.6% increase that was anticipated, and its October figure was upwardly revised from a 0.4% increase to a 0.8% gain.

Despite the negative report from Best Buy today, consumer spending has been stronger than expected, with today’s retail sales report driven by gains in eight of thirteen categories. Retailers have noted the phenomena of “self-gifting,” where consumers are buying discretionary items for themselves, while last year’s spending was focused on necessities and items with steep discounts. Over the past three months, retail sales ex-autos are up 2.5% from the prior three months, showing the momentum in spending.

Meanwhile, the Producer Price Index  showed prices at the wholesale level increased 0.8% m/m in November, after increasing 0.4% in October, and above the forecast of economists, which called for a 0.6% rise. Meanwhile, the core rate, which excludes food and energy, rose 0.3% m/m, compared to the 0.2% increase that economists had expected. On a year-over-year basis, headline producer prices were 3.5% higher, and the core rate was up 1.2%.

Elsewhere, business inventories rose 0.7% m/m in October, below the 1.0% increase that was expected, but September’s 0.9% gain was revised to a 1.3% advance. Sales rose 1.4% m/m, and the inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—remained at 1.27.

In other economic news, the NFIB Small Business Optimism Index improved to the highest level since December 2007, rising from 91.7 in October to 93.2 in November, above the expectation of economists calling for the index to improve to 92.3. The increase came as the number of firms reporting expectations of a better economy improved, while those expecting higher sales and selling prices also rose. Moreover, firms planning to hire over the next three months increased and the outlook for increased capital spending gained ground.

Treasuries are lower following the data, but the day’s headlining event on the economic calendar will likely come in the form of 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.

Europe modestly higher amid data and ahead of US Fed

The equity markets in Europe finished mostly higher, with materials coming under pressure following some mixed data in the region and possibly some profit-taking from yesterday’s solid gains seen in the group. Meanwhile, traders treaded with some caution ahead of the conclusion of the US Federal Reserve’s monetary policy meeting, while digesting the better-than-expected retail sales data out of the US. Elsewhere, euro-area debt focus continues, with European Central Bank President Jean-Claude Trichet saying late-yesterday that European governments should consider extending and broadening the euro-area’s bailout fund, per Bloomberg.

The economic calendar across the pond painted a mixed picture with reports showing euro-zone industrial production increased at a rate that was below economists’ forecasts, while a separate release showed the ZEW Survey of Economic Sentiment in Germany—Europe’s largest economy—as well as the euro-zone both improved more than anticipated. Elsewhere, French consumer prices rose inline with expectations, and UK consumer prices increased by a larger amount than forecasted.

The UK FTSE 100 Index was 0.5% higher and France’s CAC-40 Index finished up 0.3%, while Germany’s DAX Index closed nearly unchanged.