Evening Market Update

Bulls Run Wild as China Commits to European Investments

The equity markets shrugged of yesterday’s late-day slide to surge higher today, led by a reassurance from China that it doesn’t plan to sell the European foreign exchange reserves it holds. Negativity from an unexpected downward revision to 1Q GDP and a smaller-than-expected decline in weekly initial jobless claims couldn’t stop the upward equity momentum, and Treasuries fell sharply. In equity news, Costco Wholesale Corp, HJ Heinz Co, Tiffany & Co, and NetApp all reported earnings that beat the Street’s expectations, while the US Treasury announced that it sold 1.5 billion shares of Citigroup Corp stock, with plans to sell another 1.5 billion by the end of June.

The Dow Jones Industrial Average gained 285 points (2.9%) to close at 10,259, the S&P 500 Index rose 35 points (3.3%) to finish at 1,103, and the Nasdaq Composite increased 82 points (3.7%) to 2,278. In heavy volume, 1.4 billion shares were traded on the NYSE and 2.3 billion shares were traded on the Nasdaq. Crude oil gained $3.14 to $74.65 per barrel, wholesale gasoline rose $0.07 to $2.04 per gallon, and the Bloomberg gold spot price gained $0.55 to $1,212.35 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.9% to 86.32.

Costco Wholesale Corp. (COST $59) reported fiscal 3Q EPS of $0.68, two cents above the consensus estimate of Wall Street analysts, with revenues increasing 12% year-over-year (y/y) to $17.8 billion including membership fees, compared to $17.6 billion that the Street was looking for. Same-store sales—sales at stores open at least a year—increased 10% y/y including the impact of gas inflation and foreign exchange. Excluding gasoline inflation and strengthening foreign currencies, same-store sales rose 4% y/y. COST traded solidly higher.

HJ Heinz Co. (HNZ $45) reported fiscal 4Q EPS of $0.60, one penny above the Street’s forecast, with revenues gaining 8.3% y/y to $2.7 billion, inline with analysts’ expectations. The condiment company said organic sales—sales excluding the impact of foreign exchange and acquisitions—of its top 15 brands grew by 4% y/y, while emerging markets organic sales were up 21.1%. The company issued full-year 2011 guidance that matched expectations, and it increased its annual dividend by 7.1% to $1.80 per share. However, the company’s CEO sounded a cautious tone, saying future results will likely be affected by “significant currency fluctuations.” Shares of HNZ finished higher.

Upscale retailer Tiffany & Co. (TIF $47) announced 1Q EPS ex-items of $0.48, well above the $0.37 that analysts were anticipating, with revenues increasing 22% y/y to $634 million, compared to the $613 million that the Street was expecting. The company said sales growth was achieved in most countries and product categories. TIF raised its full-year guidance and the company’s Chief Financial Officer attributed some of the upwardly revised outlook on greater confidence there will be “no deterioration in the macro environment or in consumer confidence.” Shares of TIF posted sizeable gains.

NetApp Inc. (NTAP $38) was sharply higher after the storage and data management firm reported fiscal 4Q earnings ex-items of $0.50 per share, compared to the $0.44 that analysts had forecasted, with revenues rising 33% y/y to $1.2 billion, above the $1.1 billion that the Street was looking for. NTAP said that server virtualization and cloud computing trends are driving significant business for the company. NTAP issued fiscal 1Q 2011 guidance that exceeded analysts’ forecasts.

The U.S. Treasury Department said it has sold 1.5 billion shares of Citigroup Inc. (C $4) stock, for gross proceeds of about $6.2 billion. The Treasury took a 27% stake in Citigroup through the Troubled Asset Relief Program (TARP) and after the sale the ownership percentage will fall to 22%. The Treasury said it will continue to sell shares “in an orderly fashion”, and announced plans to sell an additional 1.5 billion shares in the second phase of the program, which should be completed by June 30th. Shares of C were higher.

Second glance at output comes in lower than expected, jobless claims decline

The second look at 1Q Gross Domestic Product, the broadest measure of economic output, was released this morning and showed a 3.0% quarter-over-quarter annualized rate of growth, compared to the 3.2% gain in the advance report, and the Bloomberg forecast of economists that expected the figure to be revised to an increase of 3.4%, while 4Q GDP was 5.6%. Personal consumption gained 3.5%, below the 3.8% that was forecasted, and the 3.6% that was originally reported, although still an acceleration from the 4Q pace of 1.6%. Real final sales, which exclude changes in inventory, were 1.4% higher, versus the 1.6% that was reported in the advance report, and 1.7% in 4Q.

The GDP Price Index rose 1.0%, above the consensus of economists, which called for it to remain at a 0.9% increase. The core PCE Index, which excludes food and energy, increased 0.6%, matching expectations.

Revisions to the initially reported figure were due to a downward revision to consumer spending, and an upward adjustment to imports (a subtraction from GDP), offset by an upward modification to exports.

Breaking down the report, contributions to growth were more evenly distributed during the first quarter relative to the fourth quarter, as inventory building added 1.65% to 1Q GDP, while last quarter’s 3.8% contribution was a disproportional percentage of growth, consumer spending added 2.4% this quarter and capital spending on equipment and software contributed 0.8%. Meanwhile, net exports subtracted 0.7%, as imports outpaced exports, and while federal government spending contributed 0.1%, state and local government deducted 0.5%. Residential construction subtracted 0.3% and commercial real estate investment deducted 0.5%.

Weekly initial jobless claims declined 14,000 to 460,000, versus last week's figure which was upwardly revised by 3,000 to 474,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to decline to 455,000. The four-week moving average, considered a smoother look at the trend in claims, rose 2,250 to 456,500, and continuing claims fell by 49,000 to 4,607,000, compared to the decline to 4,613,000 that was anticipated.

Treasuries finished the day solidly in the red amid dissipating risk aversion on the rebound in sentiment toward Europe. The yield on the 2-year note was up 6 bps to 0.87%, while the yield on the 10-year note gained 15 bps to 3.34%, and the 30-year bond yield increased 15 bps to 4.24%.

China denies claims that it’s reconsidering Euro holdings

In international news, China denied reports that it may be reconsidering its foreign exchange holdings of the euro amid the euro-area debt fears. The Chinese State Administration of Foreign Exchange said the reports that it was reconsidering its euro reserves were “groundless” as Europe has been, and will be one of the “major markets for investing China’s exchange reserve,” per Bloomberg News. Some of the euro-worries were also soothed by Spain’s Parliament barely passing the 15 billion euro austerity package by one vote today.

Meanwhile, Japan’s trade surplus came in at a larger amount than expected for April, while March’s surplus was revised higher. In other economic news, Australia’s leading indicators rose in March, but its capital expenditures unexpectedly fell in 1Q. A report out of Taiwan showed its leading indicators rose in April, while South Korea reported a current account surplus in April.

On the European economic front, France’s consumer confidence deteriorated in May, Spain’s retail sales fell in April, while its housing permits rose in March, Switzerland’s employment ticked slightly higher in 1Q, and Italy’s business confidence improved more than expected in May. Elsewhere, Germany’s CPI rose 0.1% month-over-month (m/m) in May, which matched the consensus estimate of economists.

Multiple economic releases on tap for tomorrow

Tomorrow’s US economic calendar will include April’s personal income and spending, which are expected to be 0.4% and 0.3% respectively and the May reading of the Chicago Purchasing Manager Index, which economists are expecting to drop to 61.0 from a previous reading of 63.8. A final reading on the University of Michigan Consumer Sentiment Index for May will round out the US reports, with expectations of a 73.3 reading, which is flat from last month.

The international economic calendar will include the German import price index, Italian PPI, as well as Japan’s monthly jobless rate and CPI.