Afternoon Market Update

Stocks Giving Back Gains on Rating Action Toward Spain

Stocks are moving lower in afternoon trading on the report that Fitch Ratings lowered its credit rating on Spain, which is helping exacerbate euro-area fears and pressure the euro. The equity markets are extending early losses that came from a flat reading on personal spending, which economists had expected to rise, and a larger-than-forecasted decline in the Chicago Purchasing Managers Index on a drop in employment. However, today’s movements may be exaggerated by lighter volume ahead of the Memorial Day holiday weekend, in which all US markets will close on Monday. Treasuries have added to gains in the initial reaction to the Spain rating cut and the aforementioned economic data, while showing little reaction to an upward revision to a reading of consumer sentiment. In relatively light equity news, Apple Inc’s iPad went on sale internationally, J. Crew Group Inc and Guess? Inc both posted earnings that topped expectations, while Lowe’s Companies Inc increased its quarterly cash dividend. Overseas, Europe slipped in late-day trading to finish mixed, denying a three-day winning streak across the pond.

At 12:57 p.m. ET, the Dow Jones Industrial Average and the S&P 500 Index are 1.0% lower, while the Nasdaq Composite is declining 1.1%. Crude oil is off $0.91 at $73.64 per barrel, wholesale gasoline is down $0.02 at $2.02 per gallon, and the Bloomberg gold spot price is down by $4.10 at $1,208.55 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.4% at 86.62.

Apple Inc. (AAPL $257) is higher in afternoon action as its iPad went on sale in nine countries, including Australia, Canada, Japan, and the UK, as well as other major countries in Europe. The Wall Street Journal is reporting that analysts estimate AAPL will sell about 1.7 million iPads in the April to June quarter and 5.0 million units worldwide for the year.

J. Crew Group Inc. (JCG $46) reported 1Q EPS of $0.68, above the $0.57 consensus estimate of Wall Street analysts, with revenues increasing 20% year-over-year (y/y) to $414 million, besting the $395 million that the Street was looking for. US same-store sales—sales at stores open at least a year—rose 15% y/y and the retailer’s gross margin rose on decreased markdowns and promotional selling. JCG is nicely higher after the results, which also revealed an increased full-year EPS outlook by the company.

Guess? Inc. (GES $38) announced 1Q EPS of $0.54, compared to the $0.49 that analysts were expecting, with revenues increasing 22% y/y to $539 million, above the $507 million that the Street was forecasting. US same-store sales rose 9.7% y/y, and the company said all its business segments delivered double-digit revenue and operating earnings growth. However, the company lowered its full-year EPS outlook, based on the continued strengthening of the US dollar against the euro, which is expected to have a further negative translation and margin impact on EPS. Shares have given up an early gain and are lower.

Lowe’s Companies Inc. (LOW $25) reported that it will increase its quarterly cash dividend by 22% to $0.11 per share, which will be payable August 4, 2010. Shares are lower.

Personal spending disappoints, Chicago business activity drops, and sentiment rises

Personal income was 0.4% higher in April, inline with the Bloomberg estimate, while March’s 0.3% increase was revised to a 0.4% gain. Personal spending was unchanged in April, compared to expectations of a 0.3% rise, and March’s 0.6% increase was left unrevised. The savings rate increased to 3.6% in April, after an upwardly revised 3.1% reading for March.

Also, the PCE Price Index, which is released with the income and spending data, was up 2.0% y/y in April, the same increase as the previous month, and slightly above the consensus forecast of a 1.9% increase. The core PCE Price Index, which excludes food and energy, was 0.1% higher month-over-month (m/m), matching expectations. Year-over-year, core prices moved 1.2% higher, above the consensus of economists surveyed, which called for a 1.1% gain.

Elsewhere, the University of Michigan’s Consumer Sentiment Index (chart) increased by a larger amount than initially reported in the preliminary release, rising from 73.3 to 73.6 in May, compared to the expectation of economists, who forecasted an unchanged reading. The 73.6 level is above the April level of 72.2, but matches the readings that were posted in March and February. The upward revision came as the economic outlook component of the report increased to 68.8 from 68.3 in the preliminary report, and from 66.5 in April.

In other economic news, Chicago PMI fell more than expected, falling from 63.8 in April to 59.7 in May, compared to the decline to 61.0 that was forecasted by economists. The index of business activity in the midwest continued to expand as a reading of 50 is the demarcation point between expansion and contraction, but key components of the report such as production, new orders, and order backlogs all deteriorated in May. Also, the employment component fell out of expansion territory, dropping from 57.2 in April to 49.2 in May.

Treasuries are higher, extending early gains that followed the mixed bag of economic data, after Fitch cut Spain’s credit rating, causing some euro-area fears to resurface and prompt some flight-to-safety buying. Please note all US markets will be closed on Monday in observance of Memorial Day, and the Treasury markets will close early today.

Europe mixed after steep gains yesterday

Treasuries are higher, extending early gains that followed the mixed bag of economic data, after Fitch cut Spain’s credit rating, causing some euro-area fears to resurface and prompt some flight-to-safety buying. Please note all US markets will be closed on Monday in observance of Memorial Day, and the Treasury markets will close early today. BP Plc (BP $44) moving solidly lower as the company continues to try its “top kill” method for stopping the massive oil leak in the Gulf of Mexico, which it said it may be another 24-48 hours before results are known and the cost of cleanup and containment efforts has increased to $930 million, per Bloomberg. Also, a report that showed UK consumer confidence unexpectedly deteriorated in May curbed some of the enthusiasm across the pond. However, following the close, Fitch Ratings lowered Spain’s credit rating to AA+ from AAA.

In other economic news, Sweden’s 1Q GDP expanded by an amount that exceeded forecasts of economists, while a separate report showed Swedish retail sales unexpectedly fell in April. Also, German import prices rose more than anticipated, Switzerland’s trade surplus widened, and Italy’s producer prices increased. In other equity news, Prudential Plc (PUK $16) confirmed reports that it is in discussions with American International Group Inc. (AIG $36) about changing the terms of its more than $35 billion acquisition of AIG’s Asian unit. PUK said discussions have taken place but they may or may not lead to a change in the terms of the deal. AIG has not officially commented on the news, but the Wall Street Journal quoted a spokesperson for the company who said AIG has signed an agreement with PUK and the company “expects them to use their best efforts to live up to it.”

The UK FTSE Index was 0.1% lower, France’s CAC-40 Index finished down 0.3%, Germany’s DAX Index increased 0.2%, Sweden’s OMX Stockholm 30 Index advanced 0.1%, Switzerland’s Swiss Market Index gained 0.3%, and Italy’s FTSE MIB Index was down 0.8%.