Evening Market Update

Greek Optimism Helps Stocks Extend Rally

The US equity markets overcame a sluggish start to finish solidly higher, as developments in Europe continued to be the driving force behind movement in the domestic markets. After an early stall on reports that Austria had rejected the broadened scope of the eurozone bailout, stocks took off after the reports turned out to be false and after a reassuring conference call between the leaders of Germany, France and Greece. Back on the homefront, US retail sales came in below forecasts, while core producer prices were cooler than expected. Treasuries were mixed on the economic data, which also included an increase in mortgage applications and business inventories. In equity news, Dow member General Electric said it will buy back $3.3 billion in preferred shares held by Berkshire Hathaway, while the board of Dell authorized an additional $5 billion in share repurchases. In M&A news, Avis Budget Group Inc announced that it has decided not to pursue its proposed acquisition of Dollar Thrifty Automotive Group Inc.

The Dow Jones Industrial Average rose 141 points (1.3%) to 11,247, the S&P 500 Index gained 16 points (1.3%) to 1,189, and the Nasdaq Composite added 40 points (1.6%) to 2,573. In moderate volume, 1.1 billion shares were traded on the NYSE and 2.3 billion shares changed hands on the Nasdaq. WTI crude oil fell by $1.52 to $88.69 per barrel, wholesale gasoline was $0.02 lower at $2.72 per gallon, and the Bloomberg gold spot price lost $14.62 to $1,819.05 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.4% to 76.76. 

Dow member General Electric Co. (GE $16) announced that it will buyback $3.3 billion in preferred shares that were held by Berkshire Hathaway Inc. (BRK/B $69). The shares were acquired by BRK/B in 2008 in order to help GE’s financial segment boost capital during the financial crisis. Shares of both companies were higher.

Meanwhile, the board of Dell Inc. (DELL $15) approved a plan to buy back up to $5 billion in stock, in addition to the $2.16 billion remaining of an initial $10 billion authorized four years ago. Shares of the computer maker were solidly higher.

In M&A news, Avis Budget Group Inc. (CAR $12) announced that it has decided not to pursue its proposed acquisition of Dollar Thrifty Automotive Group Inc. (DTG $65) in light of current market conditions. Shares of CAR were higher, while DTG overcame early losses to finish in the green. Meanwhile, Hertz Global Holdings Inc. (HTZ $11) was sharply higher as it remains the lone bidder to acquire DTG.

Retail sales and core producer prices come up short of expectations 

Advance retail sales for August came in unchanged month-over-month (m/m), compared to the 0.2% growth that was forecasted by economists surveyed by Bloomberg, and July’s 0.5% gain was revised to a rise of 0.3%. August sales ex-autos were higher by 0.1% m/m, below the 0.2% increase that was anticipated, and July’s 0.5% gain was revised to a 0.3% rise. Sales ex-autos and gas increased 0.1% m/m in August, versus the 0.3% growth that was anticipated, and its July figure was revised from a 0.3% increase to a rise of 0.2%.

Purchases excluding autos, gasoline and building materials, the figure used to calculate gross domestic product, were also unchanged, the weakest performance this year, after a 0.3% increase in July. Despite the flat performance, eight of the thirteen categories increased, led by grocery and sporting goods, offset by declines in clothing, autos and parts, and miscellaneous store retailers.

Meanwhile, the  Producer Price Index showed prices at the wholesale level were flat m/m in August, after rising by an unrevised 0.2% in July, matching economists’ forecasts. Also, the core rate, which excludes food and energy, rose 0.1% m/m, below forecasts of a 0.2% gain, after rising an unadjusted 0.4% in July. On a year-over-year basis, headline producer prices were 6.5% higher, inline with projections, and the core rate was up 2.5%, compared to expectations of a 2.6% rise. July’s y/y figures were 7.2% and 2.5% higher on the headline and core levels, respectively.

In other economic news, business inventories rose 0.4% m/m in July, compared to the 0.5% gain that was expected, and June’s 0.3% growth was revised to a 0.4% advance. Also, sales rose 0.7% m/m, and the inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—declined to 1.27 months, from 1.28 in June.

Finally, the MBA Mortgage Application Index rose 6.3% last week, after the index that can be quite volatile on a week-to-week basis, fell by 4.9% in the previous week. The advance came as a 6.0% gain in the Refinance Index was accompanied by a 7.0% increase in the Purchase Index. The increase in the index came amid a 6 basis point (bp) drop in the average 30-year mortgage rate to a new record low of 4.17%.

Treasuries were mixed amid the data and volatility in stocks, as the yield on the 2-year note fell 2 bps to 0.19%, the yield on the 10-year note gained 1 bp to 2.00%, while the 30-year bond rate declined 4 bps to 3.28%.

European leaders show support for Greece, China appears on board as well 

The focus of the European markets remained on Greece, and whether the troubled nation will receive the next installment of financial aid, amid the increasing uneasiness surrounding a potential default on its debt obligations. After the close of European trading, a conference call between the leaders of Germany, France, and Greece gave some assurance that Greece would remain in the eurozone, while stressing the importance of the country implementing reforms and meeting fiscal goals set under the July 21st bailout plan. Sentiment also got a boost from some comments from China in support of Europe’s efforts to control the crisis and as European Commission President Jose Barroso said, “The Commission will soon present options for the introduction of euro bonds,” fostering some optimism of possible coordination in eurozone. A flare-up in uncertainty regarding the eurozone’s ratification of the region’s European Financial Stability Facility (EFSF) occurred on reports that the Austrian Parliament rejected increasing the scope of the EFSF. However, Austria denied the reports, saying the Parliamentary committee only rejected some procedural matter and plans to address the EFSF expansion at a later time. Meanwhile, Moody’s Investors Service downgraded the credit ratings of two key French banks, Credit Agricole(CRARY $4) and Societe Generale (SCGLY $5), due to their exposure to Greek debt. Also, Moody’s left BNP Paribas(BNPQY $18) on review for a possible downgrade, along with CRARY, while maintaining a negative outlook for SCGLY.

On the European economic front, UK jobless claims rose by a smaller amount than economists forecasted in August, while eurozone industrial production reaccelerated m/m in July, but came in below expectations.

In Asia/Pacific news, China’s Premier Wen noted that the country remains ready to help Europe through its current debt crisis, but he urged Europe to recognize China as a full market economy before the World Trade Organization (WTO) does so in 2016, according to CNBC. Wen added that developed nations “must take responsible fiscal and monetary policies,” and what is most important is to prevent the spread of the European sovereign debt crisis, per Bloomberg. The comments came amid reports that China had held talks regarding a possible purchase of Italian bonds. Wen also said that China can best contribute to the global economic recovery by ensuring steady growth at home, maintaining that the nation “will keep overall price levels basically stable and prevent big swings in economic growth.” Elsewhere in the region, Japan’s July read on industrial production was revised downward, Australia’s consumer confidence rebounded in September, and India’s wholesale prices came in hotter than expected, suggesting India’s government will continue to tighten monetary policy to try to combat inflation.

CP I and industrial production to headline a busy day on the US docket

On the heels of today’s cooler-than-expected read on producer prices, inflation data will remain in focus tomorrow with the release of the Consumer Price Index, expected to rise 0.2% m/m in August, after gaining 0.5% in July, while the core rate is also forecasted to increase 0.2%, matching the increase seen in July. Also, the economic docket will yield a plethora of data on manufacturing activity, with the releases of industrial production and capacity utilization, theEmpire Manufacturing Index, and the Philly Fed Manufacturing Index. Industrial production and capacity utilization are anticipated to come in flat for August, while the reads on manufacturing in the New York and mid-Atlantic regions are expected to improve in September—but remain at levels depicting contraction—after coming in shockingly disappointing in August. Rounding out the day, weekly initially jobless claims will be released and are projected to decline modestly, but remain above the key 400,000 mark.

Tomorrow’s data will offer insight into both sides of the Federal Reserve’s dual monetary policy mandate of controlling inflation and fostering maximum employment, ahead of next week’s Fed meeting. The Fed has moved further away from a consensus on the direction of its policy. Three members dissented in regard to the Central Bank’s historic move in August to put a time frame on keeping interest rates exceptionally low “at least through mid-2013,” and its meeting next week was extended to a two-day discussion. Some Fed members argued for further policy accommodation to help jumpstart the economy and ease financial conditions by keeping rates low, while others thought additional stimulus at this time would risk boosting inflation without providing a significant gain in output or employment.

The international calendar will be much less active, with reports including Italy’s CPI, UK retail sales, eurozone CPI, and Canadian manufacturing sales.