Evening Market Update

Stocks Erase Early Weakness

US equities were able to claw back into positive territory after a dismal read on consumer confidence sent stocks lower in early trading. Treasuries also accelerated to the upside after the minutes to the FOMC’s most recent monetary policy meeting showed debate over a third round of asset purchases to stimulate the economy. However, the minutes also revealed a clear divide among officials as to what steps to take, if needed. On the equity front, Dollar General bested analysts’ forecasts and raised its revenue outlook, while Dow member Boeing announced a redesign of its 737 aircraft. In other economic news, US home prices declined during June, while crude oil rose and gold surged back above $1800 per ounce.

The Dow Jones Industrial Average added 21 points (0.2%) to 11,560, the S&P 500 Index gained 3 points (0.2%) to 1,213, and the Nasdaq Composite rose by 14 points (0.6%) to 2,576. In moderate volume, 1.0 billion shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil rose by $1.63 to $88.90 per barrel, wholesale gasoline gained $0.07 to $2.84 per gallon, and the Bloomberg gold spot price jumped $49.60 to $1,838.00 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.3% higher at 73.92. 

Dollar General Corp. (DG $36) reported 2Q EPS ex-items of $0.52, above the $0.48 consensus estimate of analysts surveyed by Reuters, with revenues increasing 11.2% year-over-year (y/y) to $3.6 billion, compared to the $3.5 billion that the Street had forecasted. 2Q same-store sales—sales at stores open at least a year—grew 5.9% y/y at the discount retailer. The company said it benefitted from increased customer traffic and average transaction amount, while consumables sales continued to outpace non-consumables, with the most significant growth related to changes in and further expansion of its candy and snacks, packaged foods, and perishable offerings businesses. DG raised its full-year revenue outlook and shares were solidly higher.

Elsewhere, Dow member Boeing Co. (BA $66) announced a re-engined 737 airline, based on order commitments for 496 airplanes from five airlines and “a strong business case.” BA said the new 737 will have the lowest operating costs in the single-aisle segment and deliveries are scheduled to begin in 2017. Shares were higher.

Consumer confidence tumbles and home prices decline 

The Consumer Confidence Index came in well below expectations, falling from a downwardly revised 59.2 in July to 44.5 for August—the lowest since April 2009—and compared to the 52.0 that economists surveyed by Bloomberg anticipated. The sharp slide in sentiment came as a decline in consumers’ assessment of the current situation was met with a steep drop in expectations of business conditions. Moreover, their appraisal of jobs being “hard to get” increased, while the read on jobs being “plentiful” decreased. On inflation, the report showed consumers expect inflation to reach 5.8% twelve months from now, matching the projection in July.

Meanwhile, the 20-city composite S&P/Case-Shiller Home Price Index showed a decline in home prices of 4.52% y/y in June, compared to the 4.60% drop that economists had expected. Month-over-month (m/m), seasonally adjusted home prices were 0.06% lower, compared to forecasts, which called for a flat reading. The Chairman of the Index Committee at Standard & Poor’s (S&P) David Blitzer noted that “this month’s report showed mixed signals for recovery in home prices,” as no cities made new lows in June and the majority of cities are “seeing improved annual rates.” Moreover, the report showed that on a non-seasonally adjusted basis, the 20-city index of home prices were up 1.1% m/m, and have increased three-consecutive months, “a sign of the seasonal strength in the housing market.”

FOMC minutes shows divide among members

The release of the minutes from the August Federal Open Market Committee (FOMC) meeting showed the degree of divergence among policymakers and that it held an emergency meeting on August 1, to discuss contingencies regarding the debt ceiling debate. The report showed a few participants emphasized that guidance focusing solely on the state of the economy would be preferable to naming specific spans of time or calendar dates, while some noted that additional asset purchases could be used to lower longer-term interest rates. Meanwhile, others suggested that increasing the average maturity of the Fed’s portfolio could have a similar effect on rates, and a few participants noted that a reduction in the interest rate paid on excess reserve balances could also be helpful in easing financial conditions. Finally, the report noted that some judged that “none of the tools available to the Committee would likely do much to promote a faster economic recovery, either because the headwinds that the economy faced would unwind only gradually and that process could not be accelerated with monetary policy or because recent events had significantly lowered the path of potential output.” These participants thought that additional stimulus at this time would risk boosting inflation without providing a significant gain in output or employment.

Following the discussion, the FOMC decided to expand its September meeting to a two-day discussion beginning on September 20. The FOMC’s statement noted that “economic conditions are likely to warrant exceptionally low levels for the fed funds rate at least through mid-2013,” with those arguing for further accommodative policy agreeing that a strengthening of its forward guidance would be a measured response to the deterioration in the economic outlook. Moreover, a few felt that recent economic developments justified a more substantial move at this meeting, but they were willing to accept the stronger forward guidance as a step in the direction of additional accommodation. On the three dissenters, Fisher, Kocherlakota, and Plosser noted that they would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the fed funds rate for an “extended period.” Fisher discussed the fragility of the US economy but felt that it was chiefly nonmonetary factors, such as uncertainty about fiscal and regulatory factors. Meanwhile, Kocherlakota’s perspective on the policy decision was shaped by his view that in November 2010—when QE2 was announced—the chosen level of accommodation was well calibrated for the condition of the economy. Finally, Plosser felt that the reference to 2013 might well be misinterpreted as suggesting that monetary policy was no longer contingent on how the economic outlook evolved.

Treasuries moved higher following the release of the Fed minutes. The yield on the 2-year note was down 1 bp to 0.20%, the yield on the 10-year note declined 8 bp to 2.18%, and the 30-year bond rate was 7 bps lower at 3.52%.

Confidence in Europe falters, Italy’s bond auction yields lower rates

Economic news across the pond yielded mixed results, with the most prominent of the reports showing a decline in confidence in the eurozone. The eurozone Economic Confidence Index fell from 103.0 in July to 98.3 for August, compared to the drop to 100.2 that economists expected, the most since December 2008, per Bloomberg, as the ongoing concerns about the region’s debt crisis and signs of slowing economic growth hampered sentiment. The disappointing data overshadowed a bond auction in Italy, which showed the yield on 10-year notes declined to 5.22%, compared to 5.77% that the nation had to pay in a similar auction in July. The eased pressure on yields came in the wake of the bond purchasing initiative that the European Central Bank began in early August.

In Asia, Japan provided the lion’s share of the economic data out of the region, with reports showing that household spending came in better than expected and retail sales rose more than projected, while the nation’s jobless rate unexpectedly increased and small business confidence declined. Meanwhile, India’s 2Q GDP showed a smaller-than-anticipated deceleration to a growth rate of 7.7%, after posting a 7.8% expansion in 1Q, and compared to the 7.6% pace of output that was forecasted. Rounding out today’s data overseas, Australia’s building approvals rose by a smaller rate than expected, while China’s Leading Index increased.

Tomorrow’s US economic calendar will offer the ADP Employment Change report, where 100,000 private sector payrolls are expected to have been added in August, factory orders, forecasted to improve by 2.0% m/m in July after falling 0.8% in June, and the MBA Mortgage Application Index.

Overseas, we will get retail sales from Germany, the eurozone’s flash CPI, both CPI and PPI from Italy, and construction orders, industrial production and housing starts from Japan.