Evening Market Update

Stocks Move Higher, Happily Leave August in the Rearview

US stocks are continuing their recent upward momentum in afternoon action, paring steep losses that were posted earlier in the month, aided by economic reports showing Midwest manufacturing activity slowed less than anticipated, while factory orders came in stronger than projected. However, stocks are off of the best levels of the day after the US Department of Justice filed to block Dow member AT&T Inc’s proposed takeover of T-Mobile USA Inc. The advance comes even as the ADP private sector payroll report showed a smaller-than-expected rise in jobs, ahead of Friday’s key nonfarm payroll release. Treasuries are mostly lower in afternoon action, erasing early gains following the data, which also included a decline in US mortgage applications. Meanwhile, crude oil is modestly higher and the US dollar remains nearly unchanged, while gold prices are slightly lower. In other equity news, PVH Corp and Joy Global Inc posted better-than-forecasted earnings and raised their full-year guidance, while Clorox Co rejected activist investor Carl Icahn’s latest $78.00 per share takeover offer. Overseas, European equities moved solidly higher to finish out a terrible month.

The Dow Jones Industrial Average added 54 points (0.5%) to 11,614, the S&P 500 Index gained 6 points (0.5%) to 1,219, and the Nasdaq Composite rose by 3 points (0.1%) to 2,579. In relatively heavy volume, 1.3 billion shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil rose by $0.04 to $88.94 per barrel, wholesale gasoline gained $0.04 to $3.03 per gallon, and the Bloomberg gold spot price fell $10.12 to $1,825.40 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.2% lower at 74.14.

Dow member AT&T Inc. (T $28) was solidly lower after the US Department of Justice (DoJ) filed to block the company’s takeover of T-Mobile USA Inc, a unit of Deutsche Telekom AG (DTEGY $13). Shares of DTEGY were also under pressure, while competitor Sprint Nextel Corp. (S $4) traded nicely higher. The DoJ said the proposed $39 billion transaction would “substantially lessen competition for mobile wireless telecommunications services across the US, resulting in higher prices.” The announcement came after AT&T said earlier in the day that it plans to return 5,000 call-center jobs back to the US when the deal closes. AT&T said it is “surprised and disappointed by today’s action, particularly since we have met repeatedly with the Department of Justice and there was no indication from the DoJ that this action was being contemplated.” The company added that it plans to ask for an expedited hearing on the matter. DTEGY issued a statement echoing the disappointment in the DOJ’s action, and said it will join AT&T in defending the merger in court. AT&T faces a $3 billion break-up fee to be paid to DTEGY if the transaction does not get completed.

PVH Corp. (PVH $67) reported 2Q EPS ex-items of $1.07, above the $0.95 consensus estimate of analysts surveyed by Reuters, with revenues growing 21% year-over-year (y/y) to $1.33 billion, compared to the $1.28 billion that the Street had forecasted. The apparel maker said its revenue growth reflected increases in its Tommy Hilfiger unit and Calvin Klein businesses, which posted sales gains of 30% and 19% y/y, respectively. PVH also raised its full-year revenue and earnings guidance. Shares were higher.

Joy Global Inc. (JOYG $83) finished higher after the mining equipment manufacturer raised its full-year earnings and revenue guidance and announced that it has reached an agreement to sell the drilling products business of its recently acquired subsidiary, LeTourneau Technologies Inc. Also, the company posted fiscal 3Q EPS ex-items of $1.54, above the $1.53 analyst forecast, as orders for underground mining equipment rose and orders for its surface mining equipment almost doubled. JOYG reported a 34% y/y gain in revenues to $1.1 billion, compared to the $1.2 billion that the Street had projected.

ADP private sector payrolls rise less than expected, but manufacturing data pleases

The ADP Employment Change Report showed private sector payrolls rose by 91,000 jobs in August, versus the forecast of economists surveyed by Bloomberg, which called for a 100,000 increase, and July’s 114,000 job gain was revised to a rise of 109,000 jobs. The release, which does not include government hiring and firing, comes ahead of Friday’s broader nonfarm payrolls report, where economists expect an increase of 70,000 jobs in August, after posting a better-than-expected 117,000 increase in July. Excluding government hiring, August private sector payrolls are expected to increase 100,000, after expanding by 154,000 in July. The unemployment rate is forecasted to remain at 9.1% and average hourly earnings are anticipated to rise 0.2% month-over-month (m/m), after gaining 0.4% in July.

Meanwhile, the Chicago Purchasing Managers Index fell by a smaller amount than expected, declining from 58.8 in July to 56.5 in August, the lowest level since November 2009, compared to the deceleration to 53.3 that economists forecasted. The slowing expansion in the Midwest was led by deteriorations in production and new orders, but employment ticked slightly higher and supplier deliveries accelerated. A reading above 50 depicts expansion in manufacturing activity.

Elsewhere, factory orders rose more than expected, increasing 2.4% m/m in July, compared to the 2.0% gain that economists had expected, and June’s initial 0.8% decrease was favorably revised to a 0.4% decline. July durable goods orders—reported last week—were revised to a 4.1% gain from the initially reported 4.0% increase.

Finally, the MBA Mortgage Application Index fell 9.6% last week, after the index that can be quite volatile on a week-to-week basis, declined by 2.4% in the previous week. The decrease came as a 12.2% fall in the Refinance Index more than offset a 0.9% increase in the Purchase Index. Meanwhile, the decline in refinancing activity came despite a drop in the average 30-year mortgage rate by 7 basis points (bp) to 4.32%.

Treasuries moved mostly lower, as the yield on the 2-year note was unchanged at 0.20%, while the yield on the 10-year note gained 5 bps to 2.23% and the 30-year bond rate was 8 bps higher at 3.61%.

Europe rallies to close out August, Japanese economic data mixed

The European markets gained some momentum on the heels of a relatively upbeat read on German retail sales and the favorable US manufacturing data. Also, traders digested yesterday’s release of the US Federal Reserve’s minutes that showed policymakers continue to grapple with the direction of monetary policy amid elevated unemployment and the threat of inflation. Reports out of Germany dominated the economic calendar across the pond, showing retail sales in Europe’s largest economy came in flat for July, after jumping 6.3% in June, and compared to the 1.5% drop that economists projected. Also, German unemployment declined by 8,000 in August, versus the 10,000 drop that was anticipated. In other economic news, the eurozone estimate of consumer prices for August held steady at a rise of 2.5% y/y, matching expectations.

Asia/Pacific economic news was highlighted by a number of reports out of Japan, including a smaller-than-expected rise in industrial production, a decline in vehicle production and construction orders, while housing starts surged. Also, South Korea’s industrial production unexpectedly fell. Meanwhile, Chinese markets may have been hampered somewhat by comments from Chinese Premier Wen Jiabao suggesting that stabilizing inflation remains the nation’s top priority, dampening hopes that China was near the end of its monetary policy tightening campaign. Volume was lighter than usual in the region, as markets in Malaysia, Indonesia, and India were closed for holidays.

Back in the Americas, Brazil’s industrial production rose less than analysts expected in July, while the country’s central bank is expected to hold its benchmark interest rate unchanged at 12.5% at its policy meeting today. Meanwhile, Canada’s GDP unexpectedly shrank in the second quarter, the country’s first contraction in growth in two years. The growth rate declined 0.1% q/q, for an annualized contraction of 0.4%, while economists were looking for a flat annualized reading. Within the report, exports fell 2.1% during the quarter, while energy shipments declined 6.7%.

ISM Manufacturing on deck for tomorrow

Tomorrow, the US economic calendar will yield a read of August national manufacturing activity in the form of the ISM Manufacturing Index, which is forecasted to decline from 50.9 in July to 48.5. The estimated deterioration would be the first time the index has fallen to a level depicting contraction—denoted by a reading below 50—in the manufacturing sector for the first time since July 2009. We have had several regional reports show activity contracted in August leading up to the report, highlighted by the Philly Fed Manufacturing Index, which fell to the lowest level since March 2009, boosting elevated recession chatter. Key components of tomorrow’s report that will likely garner the most attention are the new orders and inventories components, and their corresponding relationship, for signs of current demand and the outlook for future activity. Also, ahead of Friday’s labor report, the employment component could potentially find some increased scrutiny as the jobs sector is one that has appeared to have baffled the US Federal Reserve at its meetings for some time.

Other reports on the domestic front tomorrow include construction spending, expected to increase 0.2% in July, and weekly initial jobless claims, which economists are forecasting to drop to 410,000 from 417,000 last week. Additionally, the major automakers will be releasing August sales figures.

International releases will include PMI manufacturing data from the eurozone, UK, Brazil and China, the final revision to Germany’s 2Q GDP, UK housing prices, Japanese vehicle sales, Australian retail sales, and Brazil’s trade balance.