Evening Market Update

Bulls Shake-Rattle-and-Roll On

Despite soft economic data coming out of the US and reports of a 5.9-magnitude earthquake in Virginia that was felt up the eastern coast, stocks posted sizable gains in today’s session. The bulls got some relief from the recent flare up in recession worries, courtesy of some better-than-anticipated manufacturing data from Europe and China, which overshadowed a slightly larger-than-anticipated dip in US new home sales and the Richmond Fed Manufacturing Index moving deeper into contractionary territory. Treasuries finished lower following the US data, while gold fell sharply, crude oil moved higher and the US dollar was lower compared to most of its foreign counterparts. On the equity front, Dow member Microsoft announced a formalized cloud-computing agreement with China Standard Software and H.J. Heinz bested analysts’ forecasts, while Medtronic reported inline fiscal 1Q results and Temple-Inland filed a report stating that it is being sued for allegedly being the source of the failure of Guaranty Financial Group.

The Dow Jones Industrial Average jumped 322 points (3.0%) to 11,177, the S&P 500 Index gained 39 points (3.4%) to 1,162, and the Nasdaq Composite soared 101 points (4.3%) to 2,446. In relatively heavy volume, 1.2 billion shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil gained $1.02 to $85.44 per barrel, wholesale gasoline added $0.04 to $2.88 per gallon, while the Bloomberg gold spot price tumbled $71.61 to $1,825.85 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.4% to 73.84.

Dow member Microsoft Corp. (MSFT $25) was higher after the company announced that it has formalized its agreement to jointly develop, market and sell solutions for the cloud-computing market in China with China Standard Software Co. Ltd. The collaboration will be built on MSFT’s Hyper-V Open Cloud architecture and will include China Standard’s Neokylin Linux Server products.

H.J. Heinz Co. (HNZ $51) reported fiscal 1Q EPS ex-items of $0.78, two cents above the consensus estimate of analysts surveyed by Reuters, with revenues growing 14.9% year-over-year (y/y) to $2.8 billion, roughly inline with what the Street had forecasted. The condiment company said its 1Q organic sales—sales excluding divestitures, acquisitions, and currency fluctuations—grew by 3.1% y/y, “despite the difficult economic environment in developed markets,” on higher pricing, primarily in the US, UK, and Latin America, in response to “sharply rising commodity costs.” HNZ reaffirmed its full-year EPS outlook, but shares were lower.

Medtronic Inc. (MDT $33) announced fiscal 1Q earnings ex-items of $0.79 per share, inline with the Street’s projection, as revenues rose 7% y/y to $4.0 billion, mostly matching what analysts had anticipated. The medical device maker said it saw growth across many of its businesses, led by revenue growth of 30% in emerging markets, but its ICDs and spinal products “continued to face challenges.” Shares were nicely higher. 

Shares of Temple-Inland Inc. (TIN $20) were sharply lower after the company reported in a regulatory filing that it is being sued for allegedly causing the failure of Guaranty Financial Group. TIN said it believes the claims made in the lawsuit are “without merit” and the company “intends to defend them vigorously.” According to the Wall Street Journal, a court-appointed trustee is seeking more than $1 billion in damages, contending that TIN, the former parent of Guaranty Financial Group, arranged for the bank to make risky loans and took nearly $600 million in dividends from the financial firm.

New home sales decline, regional manufacturing activity deteriorates

New home sales declined slightly more than forecasted, falling 0.7% month-over-month (m/m) in July to an annual rate of 298,000 units—the lowest level since February—and below the 310,000 rate forecasted by economists surveyed by Bloomberg. Also, June’s figure was downwardly revised by 12,000 to a 300,000 annual unit rate. However, the median home price rose 4.7% y/y but was 6.3% lower m/m to $222,000. Inventory of new homes for sale posted a new record low of 165,000 units, remaining at 6.6 months of supply at the current sales rate. New home sales are considered a more timely indicator of conditions in the housing market than existing home sales, which unexpectedly fell in July, as they are based on signings instead of closings. Existing home sales represent more than 90% of the housing market, where distressed properties have dominated both sales and prices.

The housing market continues to be plagued by reluctance by consumers to make large purchases while still facing high unemployment and reduced ability to trade up, as a sizeable portion of homeowners have negative equity in their homes, and loan underwriting standards remain restricted. Also, the growing debt concerns in the US and Europe, which have weighed heavily on the equity markets recently likely applied further pressure on homebuyer sentiment, draining the confidence to buy homes.

Meanwhile, the Richmond Fed Manufacturing Index showed manufacturing activity in the Mid-Atlantic region fell deeper into a level depicting contraction than anticipated, dropping from -1 in July to -10 in August—the lowest level since June 2009—compared to the decrease to -5 that was expected by economists. A reading below zero depicts contraction. The deterioration in the index came as new orders volume and shipments both fell further below zero, while the number of employees component dropped to 1 from 4.

After paring early losses following the data, Treasuries moved again lower late in the day with the yield on the 2-year note up 2 bps to 0.23%, the yield on the 10-year note 2 bp higher at 2.15%, and the 30-year bond rising 6 bps to 3.48%.

Upbeat manufacturing data offsets tumble in German sentiment

Some favorable manufacturing data helped stocks across the pond post a second-straight winning session, overshadowing a separate report on German investor confidence, which fell to a level not seen since December 2008. The preliminary eurozone PMI Manufacturing Index slowed from 50.4 in July to 49.7 in August, below the 50 mark that is the demarcation point between expansion and contraction, but above the 49.5 level that economists had expected. The eurozone manufacturing report was led by a better-than-expected read on activity in Germany—Europe’s largest economy—as the nation’s Manufacturing PMI report posted a preliminary reading of 52.0 for August, matching the level seen in July, and compared to the 50.6 mark that was estimated. However, the German ZEW Survey of Economic Sentiment tumbled from -15.1 in July to -37.6 for August, versus the -26.0 reading that was projected. The read on sentiment may not have been much of a surprise as the equity markets have sold off sharply recently as eurozone contagion fears have ravaged confidence and last week, the eurozone 2Q GDP report showed lackluster expansion, with German output nearly flat.

In other economic news, France’s PMI Manufacturing Index slowed more than expected and UK loans for home purchases unexpectedly increased.

Further east, manufacturing activity in China likely improved in August, helping soothe concerns about a hard landing of the nation’s economy amid the backdrop of growing concerns about a return to recession in the US and Europe. China’s HSBC Flash Manufacturing PMI—a preliminary read on August activity—rose from 49.3 in July to 49.8, just below the 50 level that separates contraction from expansion. The final PMI report for August is expected to be released on August 31.

Durable goods report on tap tomorrow

Tomorrow brings the volatile durable goods orders report, expected to gain 2.0% m/m in July after falling a surprising 2.1% m/m in June, while ex-transportation, orders are forecasted to have declined 0.5% m/m after increasing 0.1% in June. The MBA Mortgage Applications Index will round out the day’s economic data.

Overseas, the international economic calendar will include the IFO Business Climate Index from German, industrial new orders from the eurozone, Australia’s leading index and Mexico’s trade balance.