Evening Market Update

Ho-Hum Day for the Markets

An unexpected rise in factory orders in the US added to the string up positive manufacturing data as of late, but traders took the report in stride as stocks finished mixed on the day. The release of the minutes from the Federal Reserve’s December monetary policy meeting offered no surprises, as the Committee saw no reason to modify its stance on its repurchase program. Elsewhere, commodities found pressure, most notably gold and crude oil, as investors may have been taking some profits off the table amid a run up in prices aided by yesterday’s upbeat global manufacturing data. In equity news, General Motors, Ford and Chrysler all posted favorable December sales figures, but Toyota continued to suffer from recall concerns. Meanwhile, Motorola officially split into two separate publicly-traded companies. Treasuries ended the day mixed.

The Dow Jones Industrial Average rose 20 points (0.2%) to 11,691, the S&P 500 Index was 2 points (0.1%) lower at 1,270, and the Nasdaq Composite lost 11 points (0.4%) to 2,681. In moderate volume, 1.1 billion shares changed hands on the NYSE and 2.0 billion shares were traded on the Nasdaq. Crude oil fell $2.17 to $89.38 per barrel, wholesale gasoline lost $0.02 to $2.41 per gallon, while the Bloomberg gold spot price tumbled $33.85 to $1,380.95 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—rose 0.4% to 79.45.

General Motors Co.  (GM $37) reported US December auto sales rose 16% year-over-year (y/y) for its core brands—Buick, Cadillac, Chevrolet, and GMC—that will remain in production, marking the best month of sales for 2010. GM’s report kicked off a plethora of releases by the major automakers today, and Ford Motor Co. (F $17) reported US sales increased 6.7% y/y, and the company posted its first back-to-back monthly increase in market share since 1993. Chrysler said sales during December were 16.4% higher than a year ago, with strong sales of its Jeep Grand Cherokee in the final month of the year, and Japanese automaker Nissan Motor Corp (NSANY $20) saw a 28% y/y jump in December auto sales. On the negative side of the ledger, Toyota Motor Corp (TM $80) reported a 5.5% y/y decline in December sales, as the carmaker continues to be mired in safety recall issues. GM, F, NSANY and TM all finished higher.

Meanwhile, Motorola completed its split into two separate publicly traded companies today, with Motorola Mobility Holdings Inc. (MMI $33), which encompasses its smartphone and set-top box businesses, and Motorola Solutions Inc. (MSI $40), consisting of its two-way radio and scanners businesses. Both are trading on the New York Stock Exchange. Shares of both firms were higher.

Factory orders surprise, FOMC minutes don’t

The minutes from the December Federal Open Market Committee (FOMC) meeting were released midday, showing that participants had increased confidence in the economic recovery, but that “the change in the outlook was not sufficient to warrant any adjustments to the asset-purchase program,” and that more time was needed “before considering any adjustment.” The Fed noted that economic improvement was disappointingly slow, that that the recovery remained subject to downside risks such as the housing sector and the European debt crisis. Members emphasized that the pace and size of the purchase program would be contingent on economic and financial developments, although some participants indicated they had a “fairly high threshold for making changes to the program.”

Treasury yields declined in anticipation of the Fed’s November announcement of the purchase program, also known as quantitative easing, or QE2. The stated purpose of QE2 is to lower rates to ease financial conditions - therefore the rise in Treasury yields since the program started has attracted negative attention. However, the Fed noted that the rise in yields has been due to an “apparent downward reassessment by investors of the likely ultimate size” of QE2, as well as economic data suggesting an “improved economic outlook, and the announcement of a package of fiscal measures that was expected to bolster economic growth and increase the deficit.”

In other economic news, factory orders unexpectedly rose, increasing 0.7% month-over-month (m/m) in November, compared to the decline of 0.1% that economists surveyed by Bloomberg had expected, and October’s 0.9% drop was favorably revised to a 0.7% decrease. November durable goods orders—reported on December 23—were favorably revised from a 1.3% drop to a 0.3% decline. Nondefense capital goods ex-aircraft, considered a good proxy for business spending, remained at the 2.6% gain seen in the preliminary report two weeks ago, following an upwardly revised 3.2% drop in October.

Treasuries finished mixed, with the yield on the two-year note down 4 bps to 0.61%, the yield on the 10-year note flat at 3.33%, while the 30-year bond yield gained 2 bps to 4.42%.

European economic data diverge

Economic news across the pond showed mixed results, as a report out of the UK showed manufacturing activity unexpectedly accelerated in December at the fastest pace in sixteen years, per Bloomberg, adding to the recent string of upbeat global manufacturing data, while mortgage approvals in the nation also rose more than expected. However, Germany’s unemployment change unexpectedly rose, French consumer confidence deteriorated and the euro-zone Consumer Price Index estimate reached 2.2% y/y in December, compared to 1.9% in November and the 2.0% that economists had anticipated. Further east, Australia’s manufacturing activity contracted for a fourth month in a row.

In other news in the Asia/Pacific region, China’s economic planning agency disclosed new rules against price collusion and monopolistic pricing practices which will take effect February 1 in its continued efforts to cool inflation pressures. The move follows the country’s pledge in 2008 to bring competition and pricing procedures more inline with international standards of anti-monopolistic laws.

Service sector data on tap tomorrow

One of the highlights of tomorrow’s US economic calendar will be the release of the ISM Non-Manufacturing Index, forecasted to improve from 55.0 in November to 55.7 in December, posting the twelfth-straight month of expansion in the service sector, which accounts for the lion’s share of economic activity. Yesterday, the ISM Manufacturing Index depicted the manufacturing sector grew for the seventeenth-consecutive month, which helped foster a strong global rally in the equity markets. Underlying components of the report such as new orders, production, and inventories are likely to garner attention, but the biggest focus among traders will probably lie on the components pertaining to the Federal Reserve’s dual mandate of inflation and employment. Prices paid will likely remain high and could foster some inflationary concerns as seen in Monday’s manufacturing read by the ISM, as this could foreshadow diminished purchasing power for consumers, who are the heart of the economy, and illustrate that corporate profits could get squeezed as the current economic environment threatens pricing power among businesses. Also, the employment component could garner attention ahead of Friday’s US Labor Report and as the jobs market remains a key headwind noted by the Federal Reserve that is keeping the economy from firing on all cylinders.

Other items on tomorrow’s US economic calendar are the ADP Employment Change report and the MBA Mortgage Application Index.

A number of services PMI reports will dominate the international economic landscape tomorrow, including releases from Italy, France, Germany and the euro-zone. As well, the UK will provide data on construction orders and the euro-zone will release PPI.