Evening Market Update

Bernanke Speech Puts Bulls to Sleep, President on Deck

Stocks hovered near the flatline for most of the morning, but moved lower following an afternoon speech by Fed Chairman Ben Bernanke. The Fed Chief reiterated the comments he made in Jackson Hole last month, while offering no additional insight as to specific actions that may be on the horizon. Focus now turns to tonight’s speech by President Obama before a joint session of Congress, where he is expected to lay out a jobs package worth more than $300 billion. In domestic economic news, US jobless claims unexpectedly increased, the US trade balance narrowed, and consumer credit saw its largest jump in more than three years in July. Meanwhile, attention overseas was on the European Central Bank, which left rates unchanged and signaled a halt to the rate increase cycle. On the US equity front, Smithfield Foods Inc posted better-than-expected earnings but its revenues fell short, while Pall Corp missed analysts’ profit forecasts. Treasuries moved higher.

The Dow Jones Industrial Average fell 119 points (1.0%) to 11,296, the S&P 500 Index declined 13 points (1.1%) to 1,186, and the Nasdaq Composite decreased 20 points (0.8%) to 2,529. In moderate volume, 941 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.51 to $88.83 per barrel, wholesale gasoline dropped $0.03 to $2.87 per gallon, and the Bloomberg gold spot price was $49.36 higher at $1,867.07 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 1.0% higher at 76.26.

Smithfield Foods Inc. (SFD $20) reported fiscal 1Q EPS ex-items of $0.69, two cents above the consensus estimate of analysts surveyed by Reuters, with revenues gaining 7% year-over-year (y/y) to $3.1 billion, compared to the $3.2 billion that the Street had forecasted. The company said it posted record profits in its packaged meats business, “in spite of higher raw material costs.” Meanwhile, the meat producer said balanced supply and demand fundamentals coupled with strong exports yielded solid fresh pork margins, while its international group capitalized on “robust demand for pork.” Shares were solidly lower. 

Pall Corp. (PLL $44) announced fiscal 4Q earnings ex-items of $0.76 per share, below the $0.88 that the Street had projected, while revenues gained 15% y/y to $780 million, exceeding the $759 million that analysts had estimated. The filtration and purification technology company said sales in both its businesses met its expectations against a “backdrop of global macroeconomic challenges,” while its profitability in its industrial segment fell short of estimates, resulting in a “disappointing finish to an otherwise good year.” Shares traded sharply lower.

Jobless claims rise, trade deficit narrows, consumer credit soars, Bernanke speaks

Weekly initial jobless claims rose by 2,000 to 414,000, versus last week's figure which was upwardly revised by 3,000 to 412,000, and compared to the 405,000 level that economists surveyed by Bloomberg had expected. Also, the four-week moving average, considered a smoother look at the trend in claims, increased by 3,750 to 414,750, while continuing claims dropped by 30,000 to 3,717,000, above the forecast of economists, which called for continuing claims to come in at 3,706,000.

Meanwhile, the  trade deficit narrowed more than expected, falling to $44.8 billion in July from a favorably revised $51.6 billion in June, versus the estimate of economists, which called for the deficit to narrow to $51.0 billion. Exports increased 3.6% m/m in July to $178.0 billion, led by industrial supplies, capital goods, and autos, while imports decreased 0.3% to $222.8 billion on a decline in industrial supplies and materials. Meanwhile, the import price of crude oil fell by $1.73 m/m to $104.27 and the quantity of barrels dropped 5.3% to 281.1 million barrels. Finally, the US trade deficit with China widened to $26.96 billion.

Consumer credit was released in the final hour of trading, showing that consumer borrowing rose by $12.0 billion during July, double the $6.0 billion expected by economists surveyed by Bloomberg, and the tenth-consecutive month of increases. June’s figure was revised downward to an $11.3 billion increase from an initially-reported $15.0 billion gain. The jump was driven by a $15.4 billion increase in non-revolving debt, which includes student loans and loans for cars and mobile homes. Meanwhile, revolving debt, which includes credit cards, fell by $3.4 billion,

Treasuries moved higher on the economic data, as the yield on the 2-year note fell 1 bp to 0.19%, while the yields on the 10-year note and the 30-year bond declined 6 bps to 1.98% and 3.31%, respectively.

Traders paid close attention to an afternoon speech by Federal Reserve Chairman Ben Bernanke to the Economics Club of Minnesota on the topic of “The US Economic Outlook.” The Fed Chief reiterated that the Central Bank still has tools at its disposal to foster economic growth, but offered no new details or specific actions that might be taken. Focus now turns to President Obama’s Congressional speech tonight on the economy and job creation, scheduled for 7:00 p.m. ET.  The unprecedented dissent at the last Fed meeting, with three members of the Federal Open Market Committee (FOMC) opposing the change in the language, indicates that further action is further off than some are expecting.

And there may be little the Fed can do to overcome the perceived dysfunction on Capitol Hill and in the White House. The debt crisis debate shook confidence of businesses and consumers alike, and the current environment lends itself to little in the way of needed reforms getting done prior to the 2012 elections. This will drag on confidence and the ability of businesses to plan for the future.

BoE and ECB leave rates unchanged, Trichet signals hold on rate increase cycle

In European economic news, the Bank of England (BoE) and the European Central Bank (ECB) both kept their benchmark interest rates unchanged as expected at 0.50% and 1.50%, respectively. However, the customary press conference by ECB President Jean-Claude Trichet that followed its interest rate decision was closely scrutinized regarding the appropriateness of the central bank’s current policy and the description of the inflationary environment, as price stability is the central bank’s lone policy mandate. The ECB has kept rates on hold since raising rates for the second time this year in July, and investors were looking for signs from Trichet whether the ECB will move to a more accommodative stance amid the festering eurozone debt crisis, which has ravaged the region’s financial sector and is threatening economic growth. During the press conference, Trichet noted that “monetary liquidity remains ample,” inflation rates should fall below its target of 2% next year, and inflation risks are “broadly balanced.” However, the head of the ECB added that a “very thorough analysis” of incoming data and developments over the period ahead “is warranted,” and it remains essential for monetary policy to focus on its mandate of maintaining price stability over the medium term. Also, Trichet said he expects euro-area growth to be moderate, but subject to “particularly high uncertainty and intensified downside risks.” 

Elsewhere, the economic calendar across the pond was mostly on the disappointing side, with French 2Q nonfarm payrolls rising by a smaller rate than expected, while a read of the nation’s business sentiment remained unchanged, with economists forecasting a slight decline. Moreover, Germany exports unexpectedly fell in July, resulting in a larger-than-estimated narrowing of the trade surplus in Europe’s largest economy.

In the Asia/Pacific region, Japanese machine orders fell nearly twice the expectation of economists, while a separate report showed an unexpected narrowing of the nation’s trade surplus. Elsewhere, Australia reported an unexpected increase in its unemployment rate, Taiwan’s trade balance narrowed more than expected, and the Bank of Korea kept its benchmark interest rate unchanged as expected at 3.25%.

Back in the Americas, a report showed that Canadian building permits rose 6.3% in July, well above the 1.5% decline expected by economists. Also, Mexico’s consumer prices increased more than expectations on a y/y basis.

The lone report on tomorrow’s US economic calendar will be wholesale inventories, expected to increase 0.7% in July, after rising 0.6% in June.

The international docket will be busy to close out the week, with reports including the German CPI, French industrial and manufacturing production, UK PPI, Canadian housing starts and the unemployment rate, and Japan’s consumer confidence and the final revision to 2Q GDP. Additionally, China will report on consumer and producer prices, which are forecasted to decelerate in August to 6.2% and 7.2% y/y, respectively. In July, China’s consumer and producer prices were 6.5% and 7.5% higher, respectively.