Evening Market Update

Recession Fears Grow as Equity Markets Plunge

US stocks suffered a broad-based selloff today, extending yesterday’s losses and leaving the major indexes near their lowest levels in a year. European and Asian markets were also in the red, as disappointing manufacturing reports out of both regions fueled doubts about the health of the global economy. Domestic economic news was decent, but could do nothing to support the markets, as a read on US leading economic indicators was better than expected, while weekly initial jobless claims remained above the key 400,000 level. In equity news, FedEx Corp beat the Street’s earnings forecast, but lowered its full-year EPS outlook amid a challenging economic environment. Elsewhere, Bed Bath & Beyond Inc reported stronger-than-forecasted results, while Dow member United Technologies Corp announced that it will acquire aerospace company Goodrich Corp for about $18.4 billion. Finally, after the close, the board of Dow member Hewlett-Packard appointed Meg Whitman as the company’s new President and CEO. Treasuries were mostly higher, particularly on the long end of the curve, while crude oil and gold prices moved sharply lower.

The Dow Jones Industrial Average fell 391 points (3.5%) to 10,734, the S&P 500 Index declined 37 points (3.2%) to 1,130, and the Nasdaq Composite lost 83 points (3.3%) to 2,456. In heavy volume, 1.7 billion shares were traded on the NYSE and 2.9 billion shares changed hands on the Nasdaq. WTI crude oil fell $5.74 to $80.18 per barrel, wholesale gasoline was $0.11 lower at $2.56 per gallon, and the Bloomberg gold spot price declined $45.88 to $1,736.42 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.9% higher at 78.38.

FedEx Corp. (FDX $67) reported fiscal 1Q earnings of $1.46 per share, one penny above the consensus estimate of analysts surveyed by Reuters, with revenues growing 11% year-over-year (y/y) to $10.5 billion, exceeding the $10.3 billion that the Street had forecasted. The company said revenue and earnings “increased significantly,” due to strong FedEx Ground performance, improved Freight results and the continued success of the company’s yield management actions. FDX added that while the economic environment is “challenging,” it remains confident it will improve earnings, margins and cash flows this fiscal year.

However, the company noted that the “US and global economy grew at a slower rate than we anticipated during the quarter,” and a “more rapid decline in demand for FedEx Express services, particularly from Asia, outpaced our ability to reduce operating costs.” FDX lowered its full-year EPS guidance, to reflect current business conditions, and it is “aggressively working to adjust our cost structure to match demand levels.” Shares were solidly lower.

After the close, Dow member Hewlett-Packard Co. (HPQ $23) announced that its board of directors has appointed Meg Whitman as president and chief executive officer, replacing outgoing CEO Leo Apotheker, who resigned from the company. Whitman, the former CEO of eBay Inc. (EBAY $32), said “I am honored and excited to lead HP. I believe it matters to Silicon Valley, California, the country and the world.” Shares of HPQ were lower on the day.

Elsewhere, Bed Bath & Beyond Inc. (BBBY $58) posted 2Q EPS of $0.93, above the $0.84 that the Street had forecasted, with revenues increasing 8.3% y/y to $2.3 billion, roughly inline with expectations. The retailer said its 2Q same-store sales—sales at stores open at least a year—rose 5.6% y/y. BBBY raised its full-year profit outlook. Shares finished modestly higher.

In M&A news, Dow member United Technologies Corp. (UTX $68) confirmed recent reports as it announced an agreement to acquire aerospace company Goodrich Corp. (GR $121) for $127.50 per share in cash, or about $18.4 billion, including the assumption of $1.9 billion in debt. UTX reaffirmed its expectations for full-year revenues and EPS. UTX was down solidly, while GR traded sharply higher.

Jobless claims remain above 400k, while leading indicators top expectations

Although  weekly initial jobless claims declined by 9,000 to 423,000, the drop came from a 4,000 upward revision to last week's figure to 432,000, and compared to the 420,000 level that economists surveyed by Bloomberg had expected. Also, the four-week moving average, considered a smoother look at the trend in claims, increased by 500 to 421,000, while continuing claims fell by 28,000 to 3,727,000, but came in above the forecast of economists, which called for a 3,722,000 reading.

One bright spot in today’s economic calendar came in the form of the Conference Board’s  Index of Leading Economic Indicators (LEI), which rose 0.3% month-over-month (m/m) in August, compared to the 0.1% increase that economists expected, and following July’s upwardly 0.6% increase. The index was led by positive contributions from the components pertaining to money supply, the yield curve, and building permits, which offset declines in the jobless claims, stock prices, consumer goods orders, and consumer expectations components of the data.

Treasuries were sharply higher on the long end of the curve, as the yield on the 2-year note was flat at 0.20%, while the yield on the 10-year note fell 14 bps to 1.72%, and the 30-year bond rate declined 20 bps to 2.79%.

Yields on the mid-to-long end of the curve are extending losses, after finding pressure from yesterday’s monetary policy statement from the Federal Reserve, which revealed that the Central Bank will purchase $400 billion in longer-term Treasuries, while selling that same amount in shorter-term debt. The action is aimed at putting downward pressure on longer-term interest rates and “help make broader financial conditions more accommodative.” Also, the Fed noted that “there are significant downside risks to the economic outlook.”

Global economic concerns join lingering debt uneasiness to pound Europe

The European markets were under heavy pressure today, led by weakness in basic materials issues amid several reports showing decelerating manufacturing activity, and as the US Federal Reserve launched its plan to lower long-term interest rates and said there are “significant downside risks” to the US economy. On the heels of a third-consecutive monthly indication of contraction in Chinese manufacturing output, similar readings in Europe showed activity in the sector slowed more than expected. The eurozone Manufacturing PMI Index declined from 49.0 in August to 48.4 in September, just below the 48.5 reading that economists had forecasted. A reading below 50 suggests a contraction in manufacturing activity. Also, the eurozone Services PMI Index fell below the key 50 mark in September. The disappointing data was led by larger-than-expected decelerations in services and manufacturing output in Germany—Europe’s largest economy—and France.

Meanwhile, continued eurozone debt concerns, particularly the possibility of a Greek debt default and a subsequent contagion in the region, added to the uneasiness across the pond, even though Greece announced accelerated austerity measures, including pension cuts and government layoffs. Greece will meet with EU officials next week to review its deficit reduction plans and progress in order to determine if it will receive its next installment of bailout funds. A report by CNBC that the European Central Bank stepped up its purchases of Italian and Spanish bonds had little impact on helping alleviate the exacerbated contagion fears.

Asia/Pacific economic news was highlighted by a disappointing read on Chinese manufacturing activity for September that showed the third-straight month of contraction. HSBC’s Flash China Manufacturing Index decelerated from 49.9 in August to 49.4, with a reading below 50 depicting contraction in output.

Back in the Americas, Canada reported a 0.6% decline in retail sales for July, doubling the 0.3% fall expected by economists and in sharp contrast to June’s 0.8% increase. Meanwhile, Brazil’s unemployment rate remained unchanged at 6.0% in August.

After a busy week for economic data, there are no major releases on the US economic calendar tomorrow. The international front will be light as well, with reports including French consumer confidence, Italian retail sales, Taiwan’s industrial production, and Australia’s leading indicator.