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Friday, September 30, 2011

Evening Market Update



 
Bad Day, Worse Quarter

Global equity markets finished solidly lower today, closing out a disappointing third quarter that saw the largest quarterly decline in the Dow since Q1 2009. The familiar culprits behind the day's selloff were uncertainty over the eurozone debt crisis and global recession fears, which were agitated by the third-straight monthly decline in Chinese manufacturing. The US economic calendar offered a glimmer of hope with improvements in personal spending, regional manufacturing, and consumer sentiment. However, the first decline in personal income in nearly two years tarnished an otherwise solid day. In equity news, Micron posted disappointing results, Ingersoll-Rand cut their forecast and Eastman Kodak retained legal counsel for restructuring advice. Benefiting from the day's gloomy news, Treasuries and the US dollar finished higher.

The Dow Jones Industrial Average dropped 241 points (2.2%) to 10,913, the S&P 500 Index fell 29 points (2.5%) to 1,131, and the Nasdaq Composite declined 65 points (2.6%) to 2,415. In moderate volume, 1.3 billion shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil fell $3.34 to $78.80 per barrel, wholesale gasoline gained $0.06 to $2.62 per gallon, and the Bloomberg gold spot price added $8.71 to $1,623.40 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was up 1.0% to 78.69. For the week, including dividends, the DJIA was up 1.3%, the S&P 500 Index fell 0.4%, and the Nasdaq Composite dropped 2.7%.

Micron Technology Inc.
(MU $5) reported a fiscal 4Q net loss of $0.14 per share, versus the $0.01 per share profit that analysts surveyed by Reuters had anticipated, as revenues fell 14.2% year-over-year (y/y) to $2.1 billion, roughly inline with the Street’s forecast. The chipmaker said its gross margin decreased during the quarter due primarily to "significant declines" in the average selling price of DRAM chips-processors used in PCs and video game consoles-partially offset by an increase in sales volume. However, sales volume for its NAND Flash chips-used in digital cameras and smartphones-rose 40%, partially offset by a decrease in average selling prices.

In a conference call with analysts, MU noted that consumer demand is weak, while the corporate market is "in better shape," per Dow Jones Newswires. The company also said it is bullish on NAND Flash memory heading into the holiday season as demand remains "relatively strong" for smartphones, tablets and solid-state drives. Shares finished down sharply. 


Eastman Kodak Co.
(EK $1) shares tumbled after the company retained the services of law firm Jones Day for restructuring advice. A spokesman for the company said Eastman Kodak "has no intention of filing bankruptcy," but on the heels of a pair of ratings downgrades, investors seemed to take little or no solace in the spokesman's words and shares were down over 50%.

Elsewhere,
Ingersoll-Rand Plc. (IR $28) shares were under heavy pressure after the industrial conglomerate lowered its full-year and 3Q revenue and earnings guidance due to lower-than-expected demand levels in its key North American residential and commercial security markets. IR added that the strengthening of the US dollar against the euro is also expected to have a negative impact on revenues.

Personal income and spending mixed, but sentiment and manufacturing data improve

Personal income
declined 0.1% month-over-month (m/m) in August, compared to the 0.1% increase that economists surveyed by Bloomberg had projected, and July"s 0.3% gain was revised to a rise of 0.1%. However, personal spending rose 0.2% m/m in August, inline with expectations, while July’s 0.8% increase was revised to a 0.7% gain. The savings rate as a percentage of disposable income fell to 4.5% in August, from a downwardly revised 4.7% in July.

Also, the
PCE Price Index, which is released with the income and spending data, was up 2.9% y/y in August, matching expectations, after July’s 2.8% rise was unrevised. But the core PCE Price Index, which is released with the income and spending data, was up 2.9% y/y in August, matching expectations, after July’s 2.8% rise was unrevised. But the core PCE Price Index, which excludes food and energy, was up 0.1% m/m, below forecasts of a 0.2% increase, and y/y, core prices were 1.6% higher, versus the 1.7% gain that was expected.

Meanwhile, the
final University of Michigan Consumer Sentiment Index was unexpectedly revised higher to 59.4 for September, from the preliminary reading of 57.8, and up compared to the 55.7 level posted in August, which was the lowest reading since November 2008. Economists expected the index to remain at 57.8. The upward revision reflected better-than-initially reported views on both the economic outlook and current conditions components. Additionally, consumers' outlook on short-term inflation was revised lower to 3.3% from 3.7%, while the long-term inflation expectation was adjusted a tick lower to 2.9% from 3.0%.

Elsewhere, the
Chicago Purchasing Managers Index unexpectedly improved, rising to 60.4 in September from 56.5 in August-the lowest level since November 2009-led by accelerations in production, new orders, inventories and employment, offsetting decelerations in supplier deliveries and order backlogs. A reading above 50 depicts expansion in manufacturing activity.

Treasuries finished higher amid weakness in the equity markets. The yield on the 2-year note fell 1 bp to 0.25%, while the yield on the 10-year note decreased 9 bps to 1.91%, and the 30-year bond rate was 15 bps lower at 2.90%.


News from overseas stokes global recession fears

Already fragile European sentiment was pressured by the largest decline in German retail sales in more than four years and a hotter-than-anticipated reading on eurozone consumer prices. German retail sales fell 2.9% m/m in August, after being flat in July and compared to the 0.5% decline that economists had expected. On inflation, eurozone consumer prices were 3.0% higher y/y in September, the highest reading since October 2008, above the 2.5% rise that was forecasted and the rate that was posted in August. However, not all news from across the pond was negative as other reports showed UK consumer confidence unexpectedly improved and French consumer spending rose more than expected m/m.


Economic news from Asia added to global recession fears after a report confirmed Chinese manufacturing activity contacted for the third straight month in September. The three-month string of data is the longest contraction since 2009, fueled primarily by declines in new orders and export demand.


In Japan, industrial production rose at a smaller rate than forecasted, consumer prices came in hotter than anticipated and household spending dropped more than projected in August. Elsewhere in Asia, South Korea reported their Leading Index rose 2.0% and industrial production in August declined more severely than was expected.


Some support for stocks from US data and eurozone debt progress


Economic data for the week was generally good as
new and pending home sales, along with the S&P/Case-Shiller Home Price Index, showed sales came in better than expected for August, while home prices continued to show some seasonal strength. Moreover, both reads on consumer sentiment showed improvements in September, jobless claims fell below the key 400,000 mark, 2Q GDP was revised higher than expected on strength in consumer spending, and August durable goods orders exceeded forecasts. Meanwhile, Germany's Parliament approved the expansion in scope of the eurozon's bailout mechanism known as the European Financial Stability Facility (EFSF), Greece approved a property tax to further combat its deficit problems, and reports surfaced that euro-area leaders are in discussion about possibly leveraging the EFSF.

However, stocks were pressured by global recession concerns after China posted the third-straight month of contraction in its manufacturing sector, while eurozone economic reports showed signs of lackluster economic activity and rising inflationary pressures. Materials were the worst performers, while the Nasdaq Composite Index was bogged down by weakness in the technology sector, primarily in the chip sector, on the heels of disappointing reports from
Advanced Micro Devices Inc. (AMD $5) and Micron Technology Inc.

US labor market, ECB meeting, and global manufacturing reads due up

Key readings on the economy in September are due up next week, starting with Monday's
ISM Manufacturing Index, with the Bloomberg survey of economists expecting the reading to tick down slightly to 50.5 from 50.6 in August, with 50 the level that separates contraction from expansion in the manufacturing sector. The companion ISM Non-Manufacturing Index will be reported on Wednesday, and is expected to fall to 52.8 from 53.3.

Particular attention will be paid to the US jobs market, as the US consumer is still the biggest component of the largest economy globally. Measures of the jobs market will include the leading indicator of
weekly jobless claims, the ADP Employment Change and the employment component of the ISM reports. Additionally, Friday brings nonfarm payrolls, which are expected to grow by 50,000 jobs in September, after August payrolls were unchanged, as no net new jobs were reported. Meanwhile, private-sector payrolls are projected to increase 90,000, after advancing by 17,000 in August. The unemployment rate is forecasted to remain at 9.1% and average hourly earnings are anticipated to rise 0.2% m/m, after falling 0.1% in August.

Other reports on the US economic calendar for next week include
factory orders, MBA mortgage applications, wholesale inventories and consumer credit, as well as retail same-store sales results for September. Other releases elsewhere in the Americas include Canada’s building permits, Ivey Purchasing Manager Index and employment, Brazil’s industrial production, manufacturing PMI, vehicle sales and production, as well as Mexico's consumer prices.

International releases will include eurozone and UK manufacturing and service PMIs, eurozone retail sales, UK home prices, 2Q GDP, and PPI, Japan’s quarterly Tankan Survey of business conditions, and leading index, Australia’s building approvals, trade balance and retail sales, manufacturing PMIs and September export data from South Korea and Taiwan, as well as additional PMI readings on manufacturing and services for China. In addition to the aforementioned ECB meeting, other central bank meetings include the Reserve Bank of Australia, the Bank of England, and the Bank of Japan. 

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