Evening Market Update

Equities Eke Out a Gain Closing a Week Marred With Selloffs

On Friday, equity markets managed to hold on to gains and snap a two-day losing streak amid relentless uncertainty regarding the Greek debt crisis. The moderate gains came as there were no major economic releases in the US today and Treasuries came off yesterday's record highs. News from the earnings front was fairly positive as Nike and McDonald’s both exceeded the Street’s expectations and Hewlett Packard announced that Meg Whitman will replace embattled CEO Leo Apotheker.

The Dow Jones Industrial Average picked up 38 points (0.4%) to 10,771, the S&P 500 Index gained 7 points (0.6%) to 1,136, and the Nasdaq Composite rose 28 points (1.1%) to 2,483. In lighter volume, 1.2 billion shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.24 to $80.27 per barrel, wholesale gasoline rose $0.05 to $2.56 per gallon, and the Bloomberg gold spot price shed $97.24 to $1,643.15 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was down 0.2% to 78.26. For the week, including dividends, the DJIA was down 6.4%, the S&P 500 Index dropped 6.5%, and the Nasdaq Composite fell 5.3%.

Dow member Hewlett-Packard Co. (HPQ $22) announced that its Board of Directors has appointed former eBay Inc. (EBAY $32) Chief Executive Officer (CEO) Meg Whitman as President and CEO, replacing Leo Apotheker, effective immediately. HPQ said it is at “a critical moment and we need renewed leadership to successfully implement our strategy and take advantage of the market opportunities ahead.” HPQ added that Ray Lane has moved to Executive Chairman of the Board of Directors. HPQ traded solidly lower.

In earnings news,  Nike Inc. (NKE $89) reported fiscal 1Q earnings of $1.36 per share, above the $1.21 consensus estimate of analysts surveyed by Reuters, with revenues rising 18% year-over-year (y/y) to $6.1 billion, exceeding the $5.7 billion that the Street had forecasted. The apparel and footwear maker said its NIKE brand revenues grew in every geography except Western Europe, which was flat due to the negative impact from changes in timing of shipments and comparisons to last year’s World Cup related sales. The company said as of the end of the quarter, worldwide futures orders for NIKE brand athletic footwear and apparel, scheduled for delivery from September 2011 through January 2012, are up 16% y/y to $8.5 billion. NKE closed higher.

Dow component McDonald’s Corp. (MCD $87) raised its quarterly cash dividend by 15% to $0.70 per share. MCD said today’s dividend increase “demonstrates our confidence in the long-term strength of our Brand and our commitment to enhancing shareholder value.” MCD finished higher.

Treasuries finish to the downside closing out a week where safety was in high demand

Treasuries gave up early gains and finished lower with stocks overcoming early losses and as there were no major US economic reports released today. The yield on the 2-year note picked up 2 bps to 0.21%, the yield on the 10-year note was 11 bps higher at 1.83%, and the 30-year bond rate gained 10 bps to 2.90%.

Treasury yields on the mid-to-long end of the curve had been pummeled in the prior two days of trading. The pressure on yields followed the Federal Reserve's monetary policy meeting, in which it noted that there are significant downside risks to the economic outlook, while announcing its latest policy measure of buying longer-term Treasuries and selling the same amount in shorter-term securities aimed at putting downward pressure on longer-term interest rates. Also, disappointing manufacturing data out of China and Europe, along with uncertainty regarding a Greek debt default and a continued lack of confidence that policymakers across the pond have the cohesion to combat the threat of contagion in a timely and effective manner pressured the equity markets and bond yields this week, despite some relatively upbeat US data. Building permits unexpectedly rose in August, existing home sales grew more than anticipated, and the Index of Leading Economic Indicators increased three times more than expectations. On the corporate front, Dow member United Technologies Corp. (UTX $68) agreed to acquire aerospace company Goodrich Corp. (GR $122) for $16.5 billion in cash and Oracle Corp. (ORCL $29) bested analysts’ earnings forecasts, along with FedEx Corp. (FDX $67), but the package delivery company lowered its full-year EPS outlook.

The continued meltdown in the eurozone led investors to exit all forms of risk and head to the safety of cash and US Treasuries. As we've often noted, the risk of another recession is certainly elevated, but it's not yet conclusive. Part of why we think another official recession might be avoided is actually not great news: Many segments of the economy, including small business and housing, never came out of the 2007-2009 recession to begin with, so they may not drop from recent levels sufficiently enough to hurl the economy into another official contraction.

More troubling is the potentially unique relationship we're seeing between stocks and the economy. Normally the stock market is a discounting mechanism, and its weakness could indeed be sending a message about future economic growth. But the stock market has also become a catalyst, and its weakness (and the attendant weakness in confidence) could actually be the trigger for another recession.

Europe still the focal point, while news from the East does little to alleviate recession fears

In Europe, debt uneasiness was exacerbated after Moody's Investors Service downgraded the ratings of eight Greek banks. The European Central Bank (ECB) Governing Council members said that the ECB may act to address the economic and debt crisis as soon as next month if economic data deteriorates further. Meanwhile, the Group of 20 (G-20) finance ministers and central bankers from the world’s major economies offered a pledge to a strong and coordinated international response to address the renewed challenges facing the global economy, while offering no new measures aimed at combating the debt crisis and stimulating the global economy.

In economic news in the region, French consumer confidence unexpectedly declined in September, and French business confidence also deteriorated, while Italy’s retail sales unexpectedly decreased.

In Asian economic news, Taiwan’s August industrial production came in below economists’ forecasts and a report out of Australia showed the country's Leading Index declined for a second-consecutive month in July. In China, business sentiment rebounded, month-over-month in September, aided by improvements in the outlook for new orders and production.

Next week the US economic calendar lightens, Europe focus will remain

The US economic calendar will yield several reads on the housing market, starting with Monday's new home sales report expected to show sales fell 1.0% in August at an annual rate of 295,000 units after declining 0.7% in July to a 298,000 annual rate. The new home sales report is considered a timely indicator of conditions in the housing market as it is based on signings, while existing home sales, which rose a better than expected 7.7% m/m, uses closings. Tuesday brings the S&P/CaseShiller Home Price Index, forecasted to show prices rose 0.1% m/m in July, despite falling by 4.6% y/y. Pricing data lags sales data by a month.

Other releases slated in the US next week include the volatile durable goods orders report, expected to decrease 0.5% in August after rising by a higher than expected 4.0% in July, while ex-transportation, orders are forecasted to be flat m/m after increasing 0.7% in July. Additionally, the final reading of 2Q gross domestic product (GDP) is expected to be revised higher to 1.2% from the second reading of 1.0%, as personal consumption is expected to be unrevised at 0.4%, while trade is expected to lift the final GDP figure. Other releases include Consumer Confidence, the Richmond Fed Manufacturing Index, the MBA Mortgage Applications Index, and weekly initial jobless claims.

International economic releases due out next week include Japan's retail sales, household spending, jobless rate, manufacturing PMI, CPI, industrial production, and housing starts, Australia's new home sales, Korea's trade balance for September and China's industrial profits leading index and manufacturing PMI. Releases from Europe will include euro-zone consumer confidence, CPI and unemployment rate, Germany’s Ifo Business Climate Index, consumer confidence, import prices, CPI, unemployment, and retail sales, and UK home prices and consumer confidence. Back in the Americas, Canada releases industrial product and raw material price indexes, and GDP for July.