Morning Update

Output Falls but Consumption Stands Tall

Stocks held on to an early advance even after a report that showed 1Q GDP fell more-than-expected, as a solid gain in personal consumption suggested consumers are spending their tax refunds, helping soothe some concerns. Treasuries are higher but showed only a modest reaction to the output data, as traders await the Federal Reserve's conclusion of its monetary policy meeting. In equity news, Time Warner, Aetna, and Qwest all topped earnings expectations. Overseas, markets are rebounding from their recent slide.

As of 8:51 a.m. ET, the June S&P 500 Index Globex futures contract is 8 points above fair value, the Nasdaq 100 Index is 11 points above fair value, and the DJIA is 58 points above fair value. Crude oil is up $0.58 at $50.50 per barrel, and gold is up $8.10 at $901.70 per ounce.
Time Warner (TWX $22) reported 1Q EPS ex-items of $0.45, six cents above the Reuters estimate, and revenues fell 7% to $6.9 billion. The multi-media firm said revenues were negatively impacted by decreases in sales at its AOL, publishing and filmed entertainment segments, which were partially offset by an increase at its networks segment. TWX reaffirmed its full-year business outlook.

Aetna (AET $24) reported 1Q operating EPS of $0.96, three cents above the Street's forecast, as revenues rose 11% to $7.6 billion. The healthcare firm said its medical membership grew by 1.4 million members during the quarter to a total of 19.1 million, which led the growth in revenues along with premium rate increases for renewing membership. AET reiterated its full-year EPS outlook.

Qwest (Q $4) posted 1Q EPS ex-items of $0.13, topping the Street's forecast of $0.08, as revenues declined 7% to $3.2 billion. The company said disciplined execution and focus on cost controls have produced a strong start to the year given the current economic climate. Q reaffirmed its full-year earnings guidance.

Nation's output falls to start the year, but consumption gains

Advance Gross Domestic Product , the broadest measure of economic output, fell at an annualized rate of 6.1% in 1Q, more than the Bloomberg forecast of a 4.7% decline, and just below the 6.3% decline in 4Q. Personal consumption rose 2.2%, following a 4.3% decline in 4Q, led by a jump in durable goods purchases. GDP was negatively impacted by a drop in exports and business investment spending, which fell 30% and 37.9%, respectively. Real final sales, which exclude changes in inventory, fell 3.4%.

Pricing pressures gained steam, with the GDP Price Index rising 2.9%, compared to a gain of 0.5% in 4Q and the forecast of 1.8%. The core PCE Index, which excludes food and energy, rose 1.5%, just above the estimate of 1.3%, and the rate sits between the Fed's implied target of 1-2%.Treasuries showed little reaction to the data, gaining only modest ground following the report.

The increase in personal consumption is welcome news, but the larger-than-expected decline in GDP is in line, but improvements remain tenuous.

In other economic news, the US MBA Mortgage Application Index fell 18.1% to 960.6 for the week ended April 24. The Refinance Index dropped 21.9% to 5108.2, while the Purchase Index declined, falling 0.6% to 251.6. The Mortgage Bankers Association (MBA) said the average 30-year fixed loan fell 11 basis points to 4.62%, just above the 4.61% all-time low. The MBA noted that refinancing demand fell sharply, despite a near record low mortgage rate, which led to the lowest level in mortgage applications since mid-March.

The Federal Open Market Committee (FOMC) will conclude its two-day meeting today and will a release of the statement of the Committee's actions at about 2:15 p.m. ET. No action is expected on the interest rate front, but the Fed will likely update the market with regard to the unconventional measures it is taking to stabilize the economy and credit markets. Investors will be monitoring progress on the Fed's purchases of mortgage-backed securities and Treasuries. Of particular interest will be any details regarding the status of the Term Asset-backed Securities Loan Facility (TALF), which has gotten off to a slow start. The Street will also be looking for any comments regarding any "green shoots" in the economy and whether that will have any impact on the Fed's asset purchasing appetite and keeping the fed funds rate targeted near zero.

Europe gaining ground on economics and earnings

Stocks in Europe are higher in afternoon action as traders digest a couple upbeat earnings reports and some favorable data from the economic front. Euro-zone consumer confidence increased for the first time in 11 months, rising from 64.7 in March to 67.2 in April, and above the 65.6 consensus of economists surveyed by Bloomberg. Also, Euro-zone retail sales improved from 44.1 in March to 48.4 in April, posting the smallest decline in 11 months as a reading below 50 signals a contraction. Adding to the upbeat economic sentiment, Germany's Economy Ministry said the German economy-Europe's largest-will return to growth next year, growing 0.5% in 2010 as export growth increases and stimulus efforts in the region take hold.

The earnings front is also providing some support to the advance as shares of Europe's largest engineering firm, Siemens (SI $62) are solidly higher after posting an operating profit that jumped 43% to 1.84 billion euros ($2.42 billion) in 2Q, topping analysts' expectations of 1.7 billion euros. The company benefitted from aggressive cost-cutting measures and it also said it expects full-year earnings to top last year's record 6.6 billion euros. Additionally, Sanofi-Aventis (SNY $27) is higher after the drugmaker said 1Q profits increased 16% on growth in demand for its medicine for diabetes patients. However, all was not rosy on the earnings front as SAP (SAP $40)-the world's largest maker of business management software-reported 1Q earnings that missed analysts' estimates as software sales slumped and warning that it does not expect an upturn in demand before next year.

Asia advances without contribution from Japan

Stocks in Asia were mostly higher as commodity-related issues helped support the advance after a key earnings report and a reading in South Korea that showed its current-account surplus widened. Shares of China Petroleum & Chemical Corp. (SNP $74) were higher after Asia's largest refiner said first half profits could rise at least 50% as a slump in demand for fuel is being met with lower crude oil prices and China's fuel-pricing reforms. The company also reported 1Q earnings jumped 85%, but posted a 12% decline in fuel sales. The report helped Hong Kong's Hang Seng Index advance 2.8%, teaming up with the Shanghai Composite Index's 2.8% gain to help Asian shares finish in the green. Elsewhere, South Korea's Kospi Index rose 2.9% to lead the major markets in the region, supported by the central bank's report that the region's current-account surplus widened to $6.65 billion for March, aided by a drop in imports and a slowdown in the rate of decline in exports. Markets in Japan-Asia's largest economy-did not participate in today's action as they were closed for a holiday.