Evening Market Update

Rally Rolls On as Calming Eurozone Fears Overshadow US Data

US stocks finished nicely higher and near the best levels of the day, marking the fourth-straight session in the green. The rally was fueled by an announcement that major global central banks will work together to provide further US dollar funding to the world’s financial system, taking pressure off funding issues across European banks. The news overshadowed some mostly negative domestic economic news, which included an increase in jobless claims, a hotter-than-expected read on inflation, a decline in capacity utilization and continued contraction in regional manufacturing activity. Not all the data was unfavorable though, as industrial production unexpectedly rose, while the current account deficit came in below expectations. In equity news, shares of Netflix plunged after the company lowered its US subscriber guidance, John Mack said he will step down as Chairman of Morgan Stanley, and UBS announced that it may post a quarterly loss due to unauthorized trades that resulted in $2 billion in losses. Treasuries moved lower on the strength in equities, while the US dollar also moved to the downside.

The Dow Jones Industrial Average rose 186 points (1.7%) to 11,433, the S&P 500 Index gained 20 points (1.7%) to 1,209, and the Nasdaq Composite added 35 points (1.3%) to 2,607. In moderate volume, 964 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.32 to $89.23 per barrel, wholesale gasoline was $0.05 higher at $2.78 per gallon, and the Bloomberg gold spot price lost $30.05 to $1,789.75 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.8% to 76.28.

Netflix Inc . (NFLX $169) traded sharply lower after the internet movie and TV show subscription service provider lowered its 3Q domestic subscriber guidance. The company said the revised estimate was due to more visibility after it took the strategic step two months ago by separating its streaming and DVD-by-mail units into two distinct services. NFLX added that its financial guidance and its international subscriber outlooks were unchanged.

Elsewhere, Morgan Stanley (MS $17) announced that John Mack will step down as Chairman and leave the Board as expected at the end of 2011, and will retire from a full-time role at the company. MS said Mack will become a senior advisor to the firm at that time and President and CEO James Gorman will become Chairman, effective January 1, 2012. Shares finished nicely higher.

Finally, shares of UBS AG (UBS $11) moved sharply lower after the Swiss bank warned that it may post a loss for 3Q as a trader at the firm lost $2 billion in unauthorized trades. The trader, who works on UBS’s ETF desk in London, was arrested by British police on suspicion of fraud. UBS declined to comment on the matter, but did say it is in close contact with Swiss and British regulators.

Inflation rises, while employment and manufacturing activity remains lackluster

The Consumer Price Index showed prices at the consumer level were up 0.4% month-over-month (m/m) in August, more than the forecasts of economists surveyed by Bloomberg, which called for a 0.2% increase, with July’s 0.5% rise unrevised. Meanwhile, the core rate, which strips out food and energy, was 0.2% higher m/m in August, matching estimates, with July’s 0.2% increase unadjusted. On a y/y basis, consumer prices were up 3.8% in August, above economists’ forecasts of a 3.6% increase, and the core CPI was 2.0% higher, versus the 1.9% that was expected. The July y/y figures were gains of 3.6% and 1.8% for the headline and core rates, respectively. The rise in consumer prices was driven by continued increases in the costs for gasoline, food, shelter, and apparel. 

Meanwhile, weekly initial jobless claims  rose by 11,000 to 428,000, versus last week's figure which was upwardly revised by 3,000 to 417,000, and compared to the 411,000 level that economists had expected. Also, the four-week moving average, considered a smoother look at the trend in claims, rose by 4,000 to 419,500, while continuing claims fell by 12,000 to 3,726,000, above the forecast of economists, which called for continuing claims to come in at 3,710,000.

Also, the Empire Manufacturing Index, a measure of manufacturing in the New York region, deteriorated further in September, falling to -8.82 from August’s level of -7.72, compared to the estimates of economists, which called for an improvement to -4.00. A reading of zero is the demarcation point between contraction and expansion in activity and the surprising decline came as new orders, shipments and inventories all fell, along with the employment component. Elsewhere, the Philly Fed Manufacturing Index improved slightly less than forecasted, rising from -30.7 in August—the lowest since March 2009—to -17.5 in September, remaining at a level showing contraction. Economists had expected the index to improve to -15.0. The index rebounded as new orders and inventories improved noticeably, while shipments dropped further to -22.8 from -13.9. Also, employment posted an 11 point increase to 5.8. These reports are the first major pieces of data looking at manufacturing conditions in September.

Moreover, industrial production unexpectedly rose in August, rising 0.2% m/m, while the forecast was for a flat reading, after growing by 0.9% in July. However, capacity utilization came in below expectations, improving from a downwardly revised 77.3% in July to 77.4%, while the expectation was for 77.5%. Utilization is now 1.9% above the rate from a year earlier, but remains 3.0% below its average rate from 1972 to 2010.

Finally, the 2Q current account deficit came in smaller than expected at $118.0 billion, from a slightly unfavorably revised $119.6 billion in 1Q, and compared to the increase to $122.4 billion that was anticipated by economists.

Today’s plethora of data illustrates why there is growing divergence among Federal Reserve policymakers as they grapple with fulfilling both ends of the Central Bank’s dual mandate of controlling inflation and fostering maximum employment. Core consumer inflation moved to the informal target of near 2.0% on a y/y basis, reaching the highest level since November 2008, manufacturing activity remained lackluster, and the employment data today suggested little easing of the discouragingly high unemployment rate. The Fed’s meeting next week, which was extended to a two-day discussion, is likely going to garner heavy attention amid growing concerns about a return to a recession for the US economy.

Treasuries moved mostly lower amid the strength in equities, as the yield on the 2-year note was unchanged at 0.19%, while the yield on the 10-year note was 10 bps higher at 2.08%, and the 30-year bond rate increased 9 bps to 3.36%. 

Greece concerns ease, coordinated action boosts global sentiment  

Global markets got a lift from eased concerns regarding the future of Greece as part of the eurozone. Germany and France offered reassuring comments following a late-day conference call yesterday that Greece will remain in the eurozone, and that the troubled nation is committed to meeting its deficit-reduction targets to continue to receive financial aid from the region’s bailout mechanisms. Also, the European Central Bank (ECB) decided, in coordination with the US Federal Reserve, the Bank of England (BoE), the Bank of Japan and the Swiss National Bank, to conduct three US dollar liquidity-providing operations aimed at adding liquidity for the rest of the year to the world’s financial system. The new operations will take the form of repurchase operations against eligible collateral, with a fixed rate and will have maturity of about three months. The action is in addition to ongoing weekly seven-day operations announced in mid-2010. Elsewhere on the European economic front, UK retail sales came in better than expected in August, while the BoE’s twelve-month inflation forecast accelerated. Moreover, eurozone consumer prices rose at a rate that matched economists’ projections in August, while 2Q euro-area employment grew compared to 1Q.

The lone economic report from the Asia/Pacific region came out of New Zealand’s central bank, which kept its benchmark interest rate unchanged at 2.50%, as expected, amid the growing global growth worries. Meanwhile, back in the Americas, Canada reported a sharp increase in manufacturing sales for July, after three straight months of declines.

After today’s plethora of economic releases, the US economic calendar will slow down tomorrow, with the only release being the preliminary University of Michigan Consumer Sentiment Index reading for September. Economists are looking for a reading of 56.9, up from a final August figure of 55.7.

The international front will be quiet as well, as the eurozone trade balance will be the only report on the docket.