Evening Market Update

Equities Move Higher, but Investors Remain Wary

Despite continued anxiety over the euro-area debt crisis and the sixth-straight monthly decline in small business confidence, US equities finished in the green in an up-and-down session. Cautious comments from German Chancellor Angela Merkel appeared to be a bit of a salve for the worries over the heightened possibility of a Greek default, while talks between Germany, France and Greece are slated for tomorrow. However, continued pessimism over the mettle of European leaders to combat the crisis lingered. In equity news, Best Buy Co fell short of analysts’ expectations and Steel Dynamics disappointed the Street by issuing lackluster 3Q guidance, while Cummins provided an upbeat outlook and Cisco Systems lowered its prediction for annual sales growth. Treasuries were mostly lower, despite the business optimism data and a smaller-than-expected drop in import prices, while crude oil and gold prices were higher, and the US dollar lost ground. 

At 12:53 p.m. ET, the Dow Jones Industrial Average is flat, while the S&P 500 Index is advancing 0.4%, and the Nasdaq Composite is gaining 0.8%. WTI crude oil is rising $1.14 at $89.33 per barrel, and wholesale gasoline is unchanged at $2.74 per gallon, while the Bloomberg gold spot price is increasing $13.81 to $1,829.06 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.2% at 76.95. 

Best Buy Co. Inc. (BBY $23) reported 2Q earnings of $0.47 per share, below the $0.53 consensus estimate of analysts surveyed by Reuters, with revenues flat year-over-year (y/y) at $11.3 billion, also missing the $11.5 billion that the Street had expected. The electronics retailer said its 2Q same-store sales—sales at stores open at least a year—fell 2.8% y/y. BBY said its 2Q results reflect “continued macro challenges to overall consumer spending and lower consumer electronics industry sales,” but it believes it is well positioned for the holiday season. The company reiterated its full-year revenue outlook but said adjusting for share repurchases, its annual EPS guidance is lower than its previous outlook. Shares were lower.

Steel Dynamics Inc. (STLD $12) announced that 3Q EPS are expected to be in range of $0.18-0.22, down from 2Q’s earnings of $0.43 per share, and below the $0.29 that analysts had expected. The steel producer said the earnings outlook is due to the “substantial drop” in projected profits at its flat rolled unit as demand during July and August did not materially improve, pricing remained a challenge, and the cost of raw materials did not decline with steel prices. However, the company said if more economic clarity develops throughout the remainder of the year, demand could be expected to increase, along with steel pricing and margins, which have already started to move, with the potential to positively impact 4Q results. Shares overcame early weakness and were higher.

Cummins Inc. (CMI $92) was nicely higher after the company set a target for achieving $30 billion in sales by 2015, as the diesel and natural gas engine maker expects to grow at an approximate annual growth rate of 14%. The company’s CEO Tim Solso noted that, “Despite the current uncertainty surrounding the strength of economic growth in some regions of the world, 2011 will be a record year for Cummins.” CMI cited tightening diesel engine emission standards and regulations around commercial vehicle fuel economy as benefiting the company, along with the rising price of energy. Analysts expect the company to post 2011 revenues of $18.1 billion.

Cisco Systems Inc. (CSCO $16) said that its sees annual sales growth of 5-7% over the next three years, well below the 12-17% range that it had been predicting before the announcement. The router and switches maker also forecasted EPS growth of between 7-9% and operating margins in the “mid-20s” percent range, adding that it also plans to be “very active” in making smaller acquisitions. Shares finished higher.

Import prices fall less than expected, while small business sentiment declines again

The Import Price Index declined 0.4% month-over-month (m/m) for August, compared to the expectation of economists surveyed by Bloomberg, which projected a 0.8% decline for the index. The drop was led by a 1.8% decline in fuel prices, which offset the second-straight monthly increase in nonfuel prices, and follows the 0.3% increase seen in July, which was unrevised. Year-over-year, import prices are higher by 13.0%, versus the 12.5% forecast of economists, and the downwardly revised 13.8% gain that was posted in July, compared to the 14.0% increase that was originally reported.

Elsewhere, the NFIB Small Business Optimism Index dropped for a sixth-straight month in August, falling from 89.9 in July to 88.1, but was slightly above the expectation of economists, which called for a decline to 88.0. The decrease came as the number of firms reporting expectations of higher sales and a better economy fell, offsetting an increase in plans to hire and a gain in capital spending.

Treasuries finished mixed, with the yield on the 2-year note down 1 bp to 0.21%, while the yield on the 10-year note was up 4 bps to 1.99%, and the 30-year bond rate gained 8 bps to 3.33%.

Sentiment in Europe tempered by continued debt uneasiness

Sentiment across the pond was held in check by lingering concerns about a potential default in Greece, growing worries about the threat of debt contagion in the eurozone, and waning confidence regarding the region’s policymakers’ ability to combat the debt crisis. Germany, France, and Greece are set to talk tomorrow, and German Chancellor Angela Merkel offered cautious comments about letting the Greek nation default. The head of Europe’s largest economy said, “The top priority is to avoid an uncontrolled insolvency, because that wouldn’t just hit Greece and the danger that it hits everyone, or at least a number of countries, is very big,” per Bloomberg. She added that, “I have made my position very clear: that everything must be done to keep the euro area together politically, because we would very quickly face a domino effect.”

On the economic front, French consumer prices came in hotter than expected, while core consumer prices, excluding food and energy, in the UK exceeded economists’ forecasts. In other economic news, the UK trade deficit came in larger than expected, and a separate read on UK home prices declined inline with forecasts.

In Asia, sentiment was mixed in lighter-than-usual volume, with markets in Hong Kong and South Korea closed for holidays, on the heels of the swift reversal to the upside in late-day trading in the US yesterday on a report that China was meeting with Italy to discuss purchases of the euro-area nation’s debt. Economic news in the region was light, with only Australia reporting a negative read on the nation’s business confidence.

Retail sales and inflation reading on tap in the US

Economic releases on tomorrow’s US calendar include advance retail sales, forecasted to rise 0.2% month-over-month (m/m) in August, after gaining 0.5% in July, while sales ex-autos are expected to increase 0.2% and sales ex-autos and gas are estimated to grow 0.3%. Additionally, the week’s second inflation reading will be released, in the form of the Producer Price Index (PPI), which is expected to show prices at the wholesale level were flat m/m in August after gaining 0.2% in July, while the core rate, which excludes food and energy, is anticipated to slow to a 0.2% rate. The release precedes Thursday’s Consumer Price Index (CPI) report, forecasted to show a 0.2% m/m increase after rising 0.5% in July, while ex-food and energy it is expected to remain at a 0.2% rate.

Also on tomorrow’s docket are business inventories, forecasted to rise 0.5% m/m during July, as well as MBA Mortgage Applications.

Scheduled international economic releases include Japan and eurozone industrial production, Japan’s machine tool orders, and Australian consumer confidence and dwelling starts.