Market Happenings for October 19, 2011

Pre-market, futures are mixed as investors tried to make sense of a mixed bag of company earnings and awaited the latest inflation data. Gainers this morning include ABT, ISRG, APOL, INTC and YHOO. Losers include LLTC, AAPL, RRC, STI and NUE. Light crude is up +0.23% at 88.54 and gold is up +0.16% at 1,655.40.

U.S. Stock News

December S&Ps this morning are trading up +1.80 points. The US stock market yesterday shook off early losses and settled sharply higher after U.S. homebuilder sentiment increased more than forecast and bank stocks rallied after the Guardian newspaper reported that France and Germany agreed to boost the European rescue fund: Dow Jones +1.58%, S&P 500 +2.04%, Nasdaq Composite +1.63%. The Dow posted a 1-week low but erased its losses and closed higher. Bullish factors included (1) strength in homebuilders after the Oct NAHB housing market index rise more than expected to its best level in 17 months (+4 to 18 versus expectations of +1 to 15), (2) a rally in bank stocks led by gains in Bank of America after the bank reported an improvement in credit quality and said the provision for loan losses dropped to $3.4 billion from $5.4 billion a year earlier, (3) indications that Fed policy may remain extremely accommodative after Chicago Fed President Evans said he favors keeping the Fed funds rate near zero until either the unemployment rate falls below 7% or the medium-term inflation outlook rises above 3%, and (4) a late-day surge in prices after German Chancellor Merkel’s chief spokesman said France and Germany are engaged in “intensive talks” on bolstering the European Financial Stability Facility.

Bearish factors included (1) carry-over weakness from a fall in European stocks on concern the debt crisis may worsen after Moody’s Investors Service warned that France may loses it top Aaa credit rating, (2) concern the global economy is slowing after Q3 China GDP expanded at +9,1% y/y, slower than expected and its weakest pace of growth in 2 years, and (3) price pressures after the Sep PPI rise more than expected (+0.8% m/m and +6.9% y/y versus expectations of +0.2% m/m and +6.4% y/y).

The Markets

December 10-year T-notes this morning are down -12 ticks. T-note prices yesterday fluctuated between gains and losses and finally finished slightly higher as European debt concerns and indications of slower global growth offset the larger-than-expected increase in U.S. producer prices: TYZ11 -10, FVZ11 +0.7, EDH12 +1.5. Bullish factors included (1) increased safe-haven demand for Treasuries after Moody’s Investors Service warned that France may loses it top Aaa credit rating, (2) concern the global economy is slowing after Q3 China GDP expanded at its weakest pace in 2 years, and (3) dovish comments from Chicago Fed President Evans who said the U.S. faces “massive shortfalls” in output and job creation and reiterated his proposal to keep the Fed funds rate near zero until either the unemployment rate falls below 7% or the medium-term inflation outlook rises above 3%. Bearish factors included (1) price pressures after the Sep PPI rise more than expected (+0.8% m/m and +6.9% y/y versus expectations of +0.2% m/m and +6.4% y/y), (2) the larger-than-expected increase in the Oct NAHB housing market index to its best level in 17 months (+4 to 18 versus expectations of +1 to 15), and (3) reduced safe-haven demand for Treasuries after stocks erased early losses and headed higher.

The dollar index this morning is lower with the dollar/yen -0.03 yen and the euro/dollar +0.90 cents. The dollar index yesterday finished little changed as stock market strength offset the drop in German economic sentiment to a nearly 3-year low and Moody’s warning that France may lose its top credit rating: Dollar Index +0.523, USDJPY -0.379, EURUSD -0.01433. Bullish factors included (1) the warning from Moody’s Investors Service that France may lose its Aaa credit rating from a deterioration in debt metrics and the potential for additional liabilities from Europe’s debt crisis, (2) the larger-than-expected decline in the Oct German ZEW economic sentiment survey to a nearly 3-year low of -48.3, (3) the action by Standard & Poor’s to cut its Banking Industry Country Risk Assessment for Italy to Group 3 from Group 2 along with its downgrade of 24 Italian banks, saying fallout from the sovereign debt crisis will boost their borrowing costs, and (4) the unexpected increase in the Aug net long-term TIC flows which posted their biggest increase in 8 months and indicates strong foreign demand for U.S. dollar assets. Bearish factors included (1) the reversal in stock prices which erased early losses and headed higher, which reduced the safe-haven demand for the dollar and (2) comments from Chicago Fed President Evans who said the Fed should keep the funds rate near zero as the U.S. faces “massive shortfalls” in output and job creation.

Nov crude oil prices this morning are up +17 cents a barrel and Nov gasoline is -1.47 cents per gallon. Crude oil and gasoline prices yesterday settled higher as a rebound in stock prices offset concern that global growth was slowing after Q3 China GDP expanded less than expected: CLX11 +$1.96, RBX11 +0.40. Nov gasoline rallied to a 1-1/4 month high. Bullish factors included (1) a reversal in stock prices after stocks erased early losses and headed higher, which boosts optimism in the economic outlook and energy demand and (2) the larger-than-expected increase in the Oct NAHB housing market index, which fuels optimism that the U.S. housing market and fuel demand will improve. Bearish factors included (1) the smaller-than-expected growth in Q3 China GDP, which hints at an economic slowdown in the world’s second-largest consumer of crude oil, (2) the warning by Moody’s Investors Service that France’s credit rating is under pressure, which signals a deterioration of the European debt crisis that may curtail economic growth and energy demand, and (3) the stronger dollar. Expectations for Wednesday’s weekly DOE inventory report are for crude oil supplies to increase by +1.95 million bbl, gasoline stockpiles to fall -1.25 million bbl, distillate inventories to decline -1.5 million bbl and the refinery utilization rate to slip -0.5 to 83.7%.

Earnings Reports

Earnings reports (confirmed releases, sorted by mkt cap): ABT-Abbott Labs (BEST earnings consensus $1.17), UTX-United Technologies (1.45), AXP-American Express (0.96), USB-US Bancorp (0.62), EBAY-Ebay (0.48), FCX-Freeport-McMoRan Copper & Gold (1.02), MS-Morgan Stanley (0.30), BLK-BlackRock (2.68), PNC-PNC Financial Services Group (1.49), KMP-Kinder Morgan Energy Partners (0.46), KMI-Kinder Morgan (0.26), BK-Bank of New York Mellon (0.52), TRV-Travelers Cos. (0.85), SYK-Stryker (0.89), AEP-American Electric Power (1.13), WYNN-Wynn Resorts Ltd. (1.19), STJ-St. Jude Medical (0.76).

Financial Calendar

0700 ET Weekly MBA mortgage applications, previous +1.3% with purchase mortgage sub-index +1.1% and refinancing sub-index +1.3%.

0830 ET Sep CPI expected +0.3% m/m and +3.9% y/y, Aug +0.4% m/m and +3.8% y/y. Sep CPI ex food & energy expected +0.2% m/m and +2.1% y/y, Aug +0.2% m/m and +2.0% y/y.

0830 ET Sep housing starts expected +3.3% to 590,000, Aug -5.0% to 571,000. Sep building permits expected -2.4% to 610,000, Aug +4.0% to 625,000.

0830 ET Boston Fed President Eric Rosengren speaks at the Boston Federal Reserve Conference.

1400 ET Fed’s Beige Book.

1630 ET Atlanta Fed President Dennis Lockhart speaks on ‘Leadership and Career’ at the Georgia Tech College of Management IMPACT Series.

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