Morning Market Update

Bulls Set Free Even After Downward Revision to GDP

Stocks remain nicely higher in afternoon action as easing concerns about the euro from China’s denial that it is reconsidering its euro foreign exchange reserves are helping the bulls rid the bad taste in their mouths from yesterday’s late-day slide in the US equity markets. Treasuries are posting meaningful declines amid dissipating risk aversion on the rebound in sentiment toward Europe, which is overshadowing an unexpected downward revision to 1Q GDP, as well as a smaller-than-expected decline in weekly initial jobless claims. US equity news is adding to the favorable backdrop, with Costco Wholesale Corp, HJ Heinz Co, Tiffany & Co, and NetApp Inc all posting earnings that exceeded analysts’ expectations. Overseas, Europe posted steep gains on the aforementioned easing of euro fears, which were also soothed by news that Spain’s Parliament narrowly approved its 15 billion euro austerity package.

At 12:45 p.m. ET, the Dow Jones Industrial Average is up 2.0%, the S&P 500 Index is 2.2% higher, while the Nasdaq Composite is advancing 2.7%. Crude oil is up $2.78 at $74.29 per barrel, wholesale gasoline is $0.07 higher at $2.04 per gallon, and the Bloomberg gold spot price is up by $0.83 at $1,212.63 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.9% at 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 is trading solidly higher.

HJ Heinz Co. (HNZ $44) 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. HNZ has given up an early advance and is lower, as the company’s CEO sounded a cautious tone, saying future results will likely be affected by “significant currency fluctuations.”

Upscale retailer Tiffany & Co. (TIF $46) 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 are posting sizeable gains.

NetApp Inc.(NTAP $37) is 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.

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 pared some losses following the output and employment reports, but remain solidly in the red in afternoon action as the global equity markets are posting sizeable gains.

Europe nicely higher as euro rebounds on China’s euro denial

Stocks in Europe finished solidly higher, led by financials, as the euro is rebounding off the 4-year low it reached recently versus the dollar after 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.

Mining issues also led the way as metals prices were higher and on optimism that Australia may change its large tax on the industry. Also, oil and gas issues helped pace the advance on the recovering sentiment and as BP Plc (BP $45) was solidly higher as it tries to deploy a “top kill” measure of plugging the massive oil leak in the Gulf of Mexico with drilling mud. In other equity news, shares of Prudential Plc (PUK $16) moved solidly higher after a media report that shareholders of about 15% of the UK insurer’s shares are opposing the $35.5 billion takeover of American International Group Inc’s (AIG $36) Asian unit. A spokesperson for PUK reiterated that the deal is best for its shareholders. Additionally, Man Group Plc (MNGPY $3) posted a sizeable gain after it reported year end results that topped expectations and the pace of client asset outflows at the hedge fund firm stabilized.

On the 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.

Britain’s UK FTSE 100 Index was 3.1% higher, France’s CAC-40 Index finished up 3.4%, Germany’s DAX Index advanced 3.1%, Spain’s IBEX 35 Index increased 3.2%, Switzerland’s Swiss Market Index gained 2.2%, and Italy’s FTSE MIB Index rose 4.5%. However, Greece’s Athex Composite Index was down 0.5%.