Evening Market Update

Sun Comes Out Over Markets

A stronger-than-expected read on US consumer spending, preliminary reports that Hurricane Irene was less damaging than feared and a rally in Europe on the announcement of a merger between two Greek banks helped stocks post sizable gains in today’s session. Treasuries moved lower amid the rise in the equity markets as the optimism overshadowed separate reports that showed pending home sales declined and regional manufacturing activity fell deeper into contraction territory. In equity news, Dow member Pfizer and Bristol-Myers Squibb announced positive results from a study of their blood-thinning treatment, while fellow Dow component Bank of America agreed to sell nearly half of its stake in China Construction Bank Corp for $8.3 billion in cash.

The Dow Jones Industrial Average rallied 254 points (2.3%) to 11,539, the S&P 500 Index gained 33 points (2.8%) to 1,210, and the Nasdaq Composite jumped 82 points (3.3%) to 2,562. In moderate volume, 912 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.90 to $87.27 per barrel, wholesale gasoline lost $0.02 to $2.77 per gallon, and the Bloomberg gold spot price fell $41.27 to $1,785.88 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was flat at 73.70.

Dow member  Pfizer Inc. (PFE $19) and Bristol-Myers Squibb Co. (BMY $29) announced that a study revealed that their blood-thinning treatment, known as apixaban, “significantly reduced the risk” of stroke, major bleeding, and mortality, compared to a standard treatment. BMY said an application for the approval of the treatment, under the trade name Eliquis, will be filed with the US Food and Drug Administration this year, per the Wall Street Journal. Shares of both companies were higher.

Meanwhile, fellow Dow component Bank of America Corp. (BAC $8) was higher after the company announced that it has agreed to sell about 13.1 billion common shares of China Construction Bank Corp. (CICHY $14), “approximately half of our shares,” generating $8.3 billion in cash proceeds and an after-tax gain of $3.3 billion. Following the transaction, BAC will hold about 5% of CICHY. The announcement follows last week’s $5 billion investment in BAC from Warren Buffett’s Berkshire Hathaway Inc. (BRK/B $73), and the company said its actions in August are expected to benefit its Tier-1 capital position by $5.8 billion under Basel I rules.

Personal spending rises strongly, pending home sales drop, Dallas manufacturing fell

Personal income increased 0.3% month-over-month (m/m) in July, inline with expectations of economists surveyed by Bloomberg, and June’s 0.1% increase was revised to a 0.2% gain. However, personal spending advanced 0.8% m/m in July, compared to expectations of a 0.5% advance, and June’s 0.2% decline was revised to a 0.1% drop. The savings rate as a percentage of disposable income fell to 5.0% in July, from an upwardly revised 5.5% in June.

Also, the PCE Price Index, which is released with the income and spending data, was up 2.8% year-over-year (y/y) in July, above expectations of a 2.7% increase, after June’s 2.6% increase was unrevised. The core PCE Price Index, which excludes food and energy, was up 0.2% m/m, matching forecasts, while y/y, core prices moved 1.6% higher, versus the 1.5% gain that was expected.

Elsewhere, pending home sales fell slightly more than expected in July, declining 1.3% m/m, compared to the 1.0% decrease that economists had projected, and June’s 2.4% gain was unadjusted. Moreover, compared to last year, sales were up 10.1% in July, after increasing 17.3% in June, compared to the 13.6% gain that was forecasted. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which unexpected fell in July.

Finally, the Dallas Fed Manufacturing Index declined more than expected, dropping from -2.0 in July to -11.4 for August, compared to the fall to -9.0 that was expected. A reading below zero denotes contraction. New orders, production, and employment all slowed to lead the disappointing data. The report is the latest read on activity in August, with earlier data showing New York activity unexpectedly declined and Philadelphia’s gauge tumbling to the lowest level since March 2009, fostering the recent increase in concerns about a return to a recession.

Most of the normally historically-telling leading indicators continue to point to the United States avoiding a renewed recession. Additionally, despite a shaky market, a high unemployment rate, a contentious political environment, and a very negative news cycle in July, retail sales and personal spending for the month rose at stronger levels than expected. This comes despite the recent release of the University of Michigan’s Consumer Sentiment Index posting its lowest reading since 1980—indicating consumers don't always do what they say. Additionally, according to Ned Davis Research, when consumer confidence was below 66 historically (it’s now at 59.5) the average stock market gain in the year following for the DJIA was 14.4%; far better than the performance seen during times of higher confidence. Also, industrial production for July rose 0.9%, while durable goods orders surprised on the upside by jumping 4.0%, with June's number revised higher.

Moreover, the Index of Leading Economic Indicators (LEI) continues to indicate growth, rising 0.5% in July. There is a caveat to the strength of the LEI: one of the key stronger components has been the yield curve, which has historically inverted (long rates dropping below short rates) before recessions. That’s less likely this time given that short rates are pegged to zero; so the lack of inversion may be sending a "false" positive message about the economy. However, risks are clearly heightened as continued erosion of confidence could push perception into reality.

Treasuries were lower following the data, with the yield on the 2-year note up 1 bp to 0.21%, while the yields on the 10-year note and the 30-year bond were 7 bps higher at 2.27% and 3.61%, respectively.

Greek bank merger lifts sentiment

The announcement that two of Greece’s banks agreed to merge in an attempt to combat the threats of a slowing economy and the eurozone’s sovereign debt crisis aided the mood across the pond. Alpha Bank (ALBKY $1) announced that it will merge with EFG Eurobank Ergasias (EGFEY $2), with Alpha noting that, “This merger is a decisive step in the strengthening of the private sector economy at a crucial juncture in Greece’s history,” per Bloomberg. Banking stocks jumped on the news, to the benefit of most major markets in the region. However, trading was lighter than usual, with the markets in the UK closed for a holiday.

In economic news in Europe, Germany’s consumer prices fell 0.1% m/m in August, matching expectations, after rising 0.4% in July, while prices were 2.3% higher y/y, also inline with forecasts. Meanwhile, a read on consumer confidence in Italy fell more than anticipated in August.

Economic news in the Asia/Pacific region was fairly light, with China’s government announcing further policy tightening measures by ordering banks to hold customer margin deposits in required reserves at the nation’s central bank. Elsewhere, Japan’s Finance Minister Noda was elected head of the Democratic Party, the country’s ruling party, allowing him to succeed Prime Minister Kan, who announced his resignation last week.

FOMC minutes and more housing on deck tomorrow

Tomorrow, the US economic calendar will yield the releases of the S&P/CaseShiller Home Price Index, as well as the Consumer Confidence Index. However, the highlight of the day will likely come in afternoon action, with the release of the minutes from the August Federal Open Market Committee (FOMC) meeting at 2:00 p.m. ET. The Fed downgraded its assessment of the economy at the meeting, and surprisingly gave a timeframe for keeping the fed funds rate at an exceptionally low level, noting that economic conditions will likely warrant low rates at least through mid-2013, causing three members to dissent. Meanwhile, on Friday, Fed Chairman Ben Bernanke failed to signal at the Fed’s annual gathering in Jackson Hole, Wyoming that further stimulus from the Central Bank was on the way, disappointing some. The discussion around the dissents, as well as the merits and costs of the tools at the Fed’s disposal, are likely to garner close scrutiny in tomorrow’s release.

Overseas, Japan will report a plethora of economic data tomorrow, including employment figures, retail sales, personal income, construction orders, housing starts and the nation’s trade balance. The international economic calendar in Europe will include Spain’s CPI, Italy’s retail sales and business confidence, UK mortgage approvals, and eurozone consumer confidence.