Evening Market Update

Tech Strength Fuels Another Late-Day Running of the Bulls

The US equity markets rode another afternoon rally to finish in the green, as eased European banking concerns and some positive US economic data combined to give sentiment a lift. Traders welcomed news of a better-than-expected read on service sector activity, while a jump in ADP private sector jobs raised hope for Friday’s broader jobs report. Treasuries were lower, as the only other report from the economic docket showed a decline in mortgage applications. In equity news, Costco Wholesale missed its EPS target but beat revenue expectations, Yum Brands matched the profit forecast of analysts, and the Bank of New York Mellon Corp was handed two lawsuits regarding currency transactions. Finally, Dow member Microsoft Corp announced an increase to its Xbox Live online-content service, while a separate report from Reuters is suggesting that the company is considering a bid to acquire Yahoo! Inc.

The Dow Jones Industrial Average rose 131 points (1.2%) to 10,940, the S&P 500 Index gained 20 points (1.8%) to 1,144, and the Nasdaq Composite advanced 56 points (2.3%) to 2,461. In heavy volume, 1.2 billion shares were traded on the NYSE and 2.5 billion shares changed hands on the Nasdaq. WTI crude oil rose $4.06 to $79.73 per barrel, wholesale gasoline gained $0.08 to $2.57 per gallon, and the Bloomberg gold spot price increased $15.21 to $1,639.04 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—fell 0.1% to 78.95.

Costco Wholesale Corp. (COST $80) reported fiscal 4Q earnings of $1.08 per share, two cents below the consensus estimate of analysts surveyed by Reuters, but revenues grew 17% year-over-year (y/y) to $28.2 billion, compared to the $27.8 billion that the Street had forecasted. The retailer said its 4Q same-store sales—sales at stores open at least a year—rose 12% y/y, including inflation in gasoline prices and strengthening foreign currencies, while same-store sales for September were also 12% higher. COST also announced that it will increase annual membership fees by $5. Shares were lower.

Meanwhile, Yum Brands Inc. (YUM $48) posted 3Q EPS ex-items of $0.83, inline with the Street’s forecast, as revenues rose 14% y/y to $3.3 billion, above the $3.1 billion that analysts had anticipated. The parent of Taco Bell, Pizza Hut, and KFC said its same-store sales during the quarter grew 19% y/y in China and 3% for the rest of its international segment, while US same-store sales fell 3%. YUM said as a result of strong performance in China and other emerging markets, it reaffirmed its full-year EPS guidance. YUM traded to the downside.

Elsewhere, Bank of New York Mellon Corp. (BK $18) was under pressure after the US Attorney General and the New York Attorney General filed separate civil lawsuits alleging that the company fraudulently charged clients for currency transactions. BK said the lawsuit by the New York Attorney General reflects “a fundamental misunderstanding” of the role of custodian banks and the operation of institutional foreign exchange markets. Also, BK said, “The US Attorney does not appear to have made any serious independent effort to assess the validity of the claims in this lawsuit.” The company said it will “vigorously” fight these claims and it is “confident we will prevail.”

Finally, Dow member Microsoft Corp. (MSFT $26) disclosed plans to increase the content available on Xbox Live, its online content-delivery service through the Xbox gaming system. Nearly 40 television and entertainment providers will begin offering content by the holiday season, including Comcast Corp. (CMCSA $22) and Verizon Communication’s (VZ $36) FiOS TV. Shares of MSFT finished higher, but lost some ground on a separate report from Reuters that suggested the tech-giant is considering a bid for Yahoo! Inc. (YHOO $16). Both YHOO and MSFT declined to comment on the rumors.

Service sector activity ticks lower, ADP jobs exceed forecasts, and mortgage apps fell 

The ISM Non-Manufacturing Index  ticked lower in September to 53.0 from 53.3 in August, but exceeded the forecast of economists surveyed by Bloomberg calling for a decrease to 52.8. A reading of 50 separates expansion from contraction. The report is generally considered a measure of economic strength in the service sector and is the companion to the ISM Manufacturing Index, which on Monday surprisingly accelerated for September. The better-than-expected read on service sector activity came as new orders rose 3.7 points to 56.5, while inventory sentiment gained 3.0 points to 59.0. However, new export orders declined 4.5 points to 52.0 and inventory change decreased 2 points to 51.5. Elsewhere, the non-manufacturing employment component fell 2.9 points to 48.7, while prices paid decreased 2.3 points to 61.9. Finally, the business activity/production component improved from 55.6 to 57.1, but the ISM indicated that survey respondent comments “reflect an uncertainty about future business conditions and the direction of the economy.”

Although the headline figure depicted expansion in the service sector for the 22nd straight month, today’s data was mixed as the ISM employment component fell to a level depicting contraction, snapping a string of 12-straight months of expansion, partially offsetting the improvements in new orders and business activity.

Meanwhile, the ADP Employment Change Report showed private sector payrolls rose by 91,000 jobs in September, versus the forecast of economists, which called for a 75,000 increase, and August’s 91,000 job gain was revised to a rise of 89,000 jobs. The release, which does not include government hiring and firing, comes ahead of Friday’s broader nonfarm payrolls report, where economists expect an increase of 60,000 jobs in September, after posting a disappointingly flat reading in August. Excluding government hiring, September private sector payrolls are expected to increase 90,000, after expanding 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% month-over-month (m/m), after declining 0.1% in August.

Finally, the MBA Mortgage Application Index fell 4.3% last week, after the index that can be quite volatile on a week-to-week basis, rose by 9.3% in the previous week. The decrease came as a 5.2% fall in the Refinance Index was accompanied by a 0.8% decline in the Purchase Index. Meanwhile, the decline in mortgage activity came despite a drop in the average 30-year mortgage rate by 6 basis points (bps) to 4.18%.

Treasuries moved lower, as the yield on the 2-year note was flat at 0.25%, while the yield on the 10-year note rose 7 bps to 1.89%, and the 30-year bond gained 5 bps to 2.86%.

Europe gains ground on banking optimism, retail sales up in the land down under 

The equity markets in Europe finished nicely higher amid eased concerns about the region’s banking sector on the heels of a report from the Financial Times yesterday that EU finance ministers were examining ways of recapitalizing banks. Also, shares of  Dexia SA (DXBGF $2) rebounded from yesterday’s sharp drop that came on concerns about its exposure to Greek debt and “structural problems” at the lender. Dexia received a boost from a report that it would set toxic assets into a bad bank backed by guarantees from the French and Belgian governments. The advance across the pond came despite a downgrade of Italy’s credit rating by Moody’s Investors Service, which said it saw a “material increase” in funding risks for eurozone countries with high levels of debt, per Reuters.

Elsewhere on the economic front, the eurozone PMI Composite Index, which includes data from the manufacturing and service sectors, was revised slightly lower from 49.2 in the preliminary reading to 49.1 for September, as services data from France and Germany were adjusted lower. Also, UK 2Q GDP was revised lower, from a 0.2% quarter-over-quarter (q/q) pace of output to a 0.1% rate of growth, led by larger-than-expected declines in the nation’s private consumption and exports. Finally, eurozone retail sales fell 0.3% m/m in August, inline with expectations, after rising 0.2% in July.

The only major economic report out of the Asia/Pacific region came from Australia, as the nation’s retail sales rose 0.6% m/m in August, compared to the 0.2% rise that economists had expected. Trading remained lighter than usual this week as the Chinese markets were closed for holidays.

The lone report on tomorrow’s US economic calendar will be weekly initial jobless claims. After a sharp drop of 37,000 to 391,000 last week, economists are looking for an increase to 410,000 this week.

The international calendar will be light as well, but traders will be paying close attention to policy meetings of the Bank of England (BoE) and European Central Bank (ECB). Both central banks are expected to leave target interest rates unchanged at 0.5% and 1.5%, respectively. This will be the final meeting and news conference for ECB Chairman Jean-Claude Trichet, who has been at the helm of the central bank since 2003. He will be replaced on November 1st by Mario Draghi, who is currently the head of the Bank of Italy. Other releases on the international front include German factory orders and Canadian building permits. Additionally, the Bank of Japan (BoJ) will be meeting to discuss monetary policy.