Market Happenings for Wednesday, May 25, 2011

Pre-market, futures are down a bit. Winners include BSX, HAL, MEE, CB and FCX. Losers include RL, AIG, COST, AMAT and HRL. Light Crude is down -0.80%.

U.S. Stock News

* June S&Ps this morning are trading down -2.10 points. The US stock market yesterday fluctuated on both sides of unchanged and closed slightly lower as a decline in financial stocks offset an unexpected increase in US new home sales: Dow Jones -0.20%, S&P 500 -0.08%, Nasdaq Composite -0.46%. The Nasdaq fell to a 1-month low. Bearish factors for stocks included (1) weakness in financial companies after Kansas City Fed President Hoenig said that banks’ businesses should be confined to loans and deposits to avert a recurrence of Fed bailouts and the near-collapse of the financial system from 2008, (2) the unexpected decline in the May Richmond Fed manufacturing index which fell to a 2-year low (-16 to -6 versus expectations of unchanged at 10), and (3) the warning from St. Louis Fed President Bullard who said the intensification of Europe’s debt crisis “is the top threat to the US economy today.”

* Bullish factors included (1) the unexpected increase in Apr US new home sales (+7.3% to 323,000 versus expectations of unchanged at 300,000), (2) strength in energy and raw material producers after Goldman Sachs said it’s turning “more bullish” on raw materials, and (3) a rally in for-profit schools after William Clair & Co. said that for-profit school stocks will trade higher within a year because the publication of a rule linking federal student aid to gainful employment will settle a controversy that has discouraged investment.

* Applied Materials (AMAT) fell 3% in European trading after it forecast profit excluding certain costs for the current period will be 31 cents to 37 cents a share, below analysts’ estimates of 38 cents.

The Markets

* June 10-year T-notes this morning are up +2.5 ticks. T-note prices yesterday traded sideways in negative territory due to stronger-than-expected US new home sales but rallied in the early afternoon and closed higher after stocks faltered and strong demand was seen at the Treasury’s $35 billion 2-year T-note auction: TYM11 +2.5, FVM11 +1, EDU11 unchanged. Bullish factors included (1) the unexpected decline in the May Richmond Fed manufacturing index which fell to a 2-year low (-16 to -6 versus expectations of unchanged at 10), (2) strong demand for the Treasury’s $35 billion auction of 2-year T-notes that had a bid-to-cover ration of 3.46, higher than the 12-auction average of 3.35, (4) weak stock prices which prompted safe-haven demand for Treasuries, and (5) comments from St. Louis Fed President Bullard who said the Fed may keep its policy rate, the size of its balance sheet and policy language on hold to “give the FOMC more time to assess economic conditions.” Bearish factors include (1) the unexpected increase in Apr US new home sales (+7.3% to 323,000 versus expectations of unchanged at 300,000), and (2) supply pressures ahead of a $35 billion Treasury auction of 5-year T-notes on Wed.

* The dollar index this morning is higher with the dollar/yen +0.08 yen and the euro/dollar -0.38 cents. The dollar index yesterday closed lower as the euro strengthened on stronger than expected German business confidence and reduced European sovereign-debt concerns: Dollar Index -0.269, USDJPY -0.052, EURUSD +0.00518. Bearish factors included (1) the stronger-than-expected May German IFO business climate index, (2) the action by the Greek government to endorse an asset-sale plan and 6 billion euros ($8.4 billion) of budget cuts to win extra aid, which reduced European debt concerns, and (3) comments from St. Louis Fed President Bullard who said the Fed may keep its policy rate, the size of its balance sheet and policy language on hold to “give the FOMC more time to assess economic conditions.” Bullish factors included (1) the unexpected increase in Apr US new home sales, which suggest economic strength and is dollar supportive, and (2) the larger-than-expected declines in May French business confidence and in Mar Euro-Zone industrial new orders, which is euro negative.

* July crude oil prices this morning are trading down -11 cents a barrel and July gasoline is -1.01 cents per gallon. Crude oil and gasoline prices yesterday settled higher due to the weak dollar and after Goldman Sachs said it was turning “more bullish” on commodities: CLN11 +$1.89, RBN11 +5.21. Bullish factors included (1) a decline in the dollar which encourages investment demand in commodities, (2) fund buying of crude after the statement from Goldman Sachs that it’s turning “more bullish” on commodities and its prediction that “It is only a matter of time until inventories and OPEC spare capacity become effectively exhausted, requiring higher oil prices to restrain demand, keeping it in line with available supplies,” and (3) the outlook for weekly crude supplies to decline when the DOE reports weekly crude oil inventories on Wed. Bearish factors included (1) the unexpected decline in May Richmond Fed manufacturing index to a 2-year low, which indicates weakened energy consumption, and (2) the outlook for gasoline supplies to increase on Wednesday’s weekly DOE inventory report. Expectations for weekly inventories from the DOE are for crude oil supplies to fall -1.7 million bbl, gasoline stockpiles to rise +500,000 bbl, distillate inventories to increase +50,000 bbl and the refinery utilization rate to rise +0.5 to 83.7% of capacity.

Earnings Reports

Earnings reports (confirmed releases, sorted by mkt cap) COST-Costco Wholesale (BEST earnings consensus $0.76), NTAP-NetApp (0.53), RL-Polo Ralph Lauren (0.77), HRL-Hormel Foods (0.40), CSC-Computer Sciences (1.17), GES-Guess? (0.44), TOL-Toll Brothers (-0.04), AEO-American Eagle Outfitters (0.14), ASNA-Ascena Retail Group (0.65), SMTC-Semtech (0.43), FRO-Frontline Ltd. (-0.10), NDN-99 Cents Only Stores (0.27), STP-Suntech Power Holdings Ltd. (0.37), RPXC-RPX Corp. (0.16).

Financial Calendar

0700 ET Weekly MBA mortgage applications, last market index +7.8% with purchase mortgage sub-index -3.2% and refinancing sub-index +13.0%.

0830 ET Apr durable goods orders expected -2.5% and +0.5% ex transportation, Mar +4.1% and +2.3% ex transportation.

1000 ET Mar FHFA house price index purchase only expected -0.5% m/m, Feb -1.6% m/m. Q1 FHFA house price index purchase only expected -1.2% q/q, Q4 0.8% q/q.

1300 ET Treasury auctions $35 billion 5-year T-notes.

1330 ET Minneapolis Fed President Narayana Kocherlakota speaks to the Rochester Area Chamber of Commerce.

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