Evening Market Update

International Economic Data Lifts US Equity Markets

Stocks shrugged off yesterday’s weak finish to surge higher today, as a plethora of stronger-than-expected reports were released in Asia, including Chinese exports, Japanese GDP and Australian unemployment rates. The international news overshadowed a smaller-than-expected decline in US weekly initial jobless claims, while the only other report on the US economic front was an increase in the US trade deficit that was smaller than economists anticipated. In light equity news, American Eagle Outfitters raised its quarterly cash dividend by 10%, Del Monte Foods reported 4Q EPS that beat analysts’ estimates, although revenue came up short, and Men’s Wearhouse beat the Street’s top and bottom line expectations. Treasuries finished the day lower and the yield curve steepened.

The Dow Jones Industrial Average increased 273 points (2.8%) to close at 10,173, the S&P 500 Index gained 31 points (3.0%) to finish at 1,087, and the Nasdaq Composite rose 60 points (2.8%) to 2,219. In modest volume, 1.3 billion shares were traded on the NYSE and 2.2 billion shares were traded on the Nasdaq. Crude oil gained $1.35 to $75.73 per barrel, wholesale gasoline rose $0.04 to $2.08 per gallon, and the Bloomberg gold spot price fell $17.45 to $1,216.05 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—fell 1.0% to 86.96.

American Eagle Outfitters Inc. (AEO $13) was higher after the clothing retailer raised its quarterly cash dividend by 10% to $0.11 per share, payable on July 9, 2010. AEO said the announcement reflects the company’s strong cash generation and commitment to enhancing shareholder value.

Del Monte Foods Co. (DLM $16) announced fiscal 4Q EPS of $0.31, above the Reuters estimate of $0.22, but revenues fell 9.8% year-over-year (y/y) to $954 million, below the $1 billion that the Street was expecting. The company said the decline in revenues largely reflects lower volumes due to one extra week in the same period last year, and aside from the extra week, unit volume was lower in its consumer products and pet products. The company announced that it is confident in its future, reflected by today’s announcement of a $350 million share repurchase program and an 80% increase in its dividend. DLM also issued full-year EPS guidance that exceeded analysts’ forecasts. Shares finished solidly higher.

Men’s Wearhouse Inc. (MW $22) reported 1Q EPS of $0.26, above the $0.14 that analysts were expecting, with revenues increasing 2% y/y to $474 million, above the $458 million that the Street was forecasting. MW traded sharply higher.

Jobless claims dip, trade deficit modestly widens

Weekly initial jobless claims declined 3,000 to 456,000, versus last week's figure which was upwardly revised by 6,000 to 459,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to decline to 450,000. The four-week moving average, considered a smoother look at the trend in claims, rose 2,500 to 463,000, but continuing claims tumbled by 255,000 to 4,462,000, compared to the decrease to 4,640,000 that was anticipated.

The trade deficit widened slightly from the modestly revised $40.0 billion in March to $40.3 billion in April, versus the Bloomberg estimate calling for the deficit to increase to $41.0 billion. Treasuries finished lower, with the largest losses on the mid-to-long end of the curve following the jobs and trade reports, and amid the solid gains in the equity markets. The yield on the 2-year note was up 6 bps to 0.77%, the yield on the 10-year note increased 14 bps to 3.32%, and the 30-year bond yield rose 12 bps to 4.23%.

Multiple central bank meetings highlight international scene

Monetary policy decisions were released from major central banks in Europe, beginning with the Bank of England leaving its benchmark interest rate unchanged at a record low of 0.5%, as widely anticipated. The BoE also kept its 200 billion pound asset purchase target unchanged for the fourth month in a row and attention is on the looming budget cuts the nation will make to try to rein in its deficit, as the government will unveil its budget later this month. Also, the European Central Bank left its key interest rate unchanged at 1.0%, as was expected, and the ECB did not offer any new measures, such as further quantitative easing, aimed at making more capital available to struggling entities in the area in order to try to stabilize the euro-zone financial system, as some had hoped for. The euro and the UK pound were both higher following the announcements. Attention shifted to the customary press conference from ECB President Jean-Claude Trichet, which may have garnered more attention than normal in light of the exacerbated euro-area debt crisis and the subsequent tumble in the euro to a four-year low versus the US dollar and an eight-year low compared to the Japanese yen.

In the press conference, Trichet said the current key ECB interest rate remains appropriate and they expect real GDP to grow at a moderate and still uneven pace over time, ranging between 0.7-1.3% in 2010—an upwardly revised figure—and between 0.2-2.2% in 2011—a downwardly revised figure. He also said that inflation expectations remain firmly anchored and the firm anchoring of inflation expectations remains “of the essence.” On the fiscal situation, the head of the ECB said it is essential that all countries stick to their commitments to correct high budget deficits and government debt and reduce fiscal vulnerability. With regard to its asset purchases, Trichet said, “It’s appropriate to continue to do what we’ve decided,” referring to the ECB’s sovereign bond purchase program, and “we have a money market which is not functioning perfectly.” Trichet did not add much commentary on the euro, just saying that it is a credible currency, per CNBC.

In other economic news in Europe, Germany’s consumer prices were left unrevised at a 0.1% month-over-month rate of growth, separate reports of manufacturing and industrial production in France were mixed, Italy’s industrial production rose more than expected in April, while the Italian 1Q GDP figure expanded by 0.4% quarter-over-quarter (q/q), compared to the 0.5% expansion that was anticipated.

The Asia/Pacific region released its fair share of economic data, including a report out of Japan that showed the nation’s 1Q GDP was left unrevised at a growth rate of 1.2% quarter-over-quarter, compared to the expectation that output would be downwardly revised to a rate of expansion of 1.0%. Also, the annualized rate of expansion for the Japanese economy was upwardly revised to a 5.0% rate, from the preliminary reading of 4.9% growth, and compared to the 4.2% advance that economists had forecasted. Moreover, a separate report showed Japan’s consumer confidence rose from 42.1 in April to 42.7 in May. Meanwhile, Australia’s released a report that showed the nation’s employment change increased by 26,900 in May, above the 20,000 forecast of economists, and the nation’s unemployment rate unexpectedly fell from 5.4% in April to 5.2%, versus the anticipation that the rate would remain unchanged, and New Zealand’s central bank raised its benchmark interest rate from 2.5% to 2.75%. In other interest rate moves in Asia, South Korea’s central bank left its main interest rate at 2.0%.

Elsewhere in the region, China’s trade surplus increased from $1.68 billion in April to $19.53 billion in May, and compared to the $8.20 billion that was anticipated. Chinese imports grew 48.3% year-over-year (y/y), above the 44.7% that economists forecasted, while exports increased 48.5%, versus the 32.0% that was expected. The data may have lost is power due to yesterday’s report from Reuters that sources cited a Chinese government official at an investor conference saying that exports would increase by about 50%. The report was not confirmed by China’s government and also suggested stronger-than-expected new yuan loans and inflation data—set to be reported tonight—which may be boosting some concerns that the strong data may induce further government actions to slowdown growth in China. A separate report in China showed the pace of housing prices on a month-over-month basis slowed.

Back in the Americas, the Central Bank of Brazil raised its benchmark interest rate by 75 bps to 10.25%, which was inline with the expectations of most economists. The increase repeats the 75 bps rate hike seen at the previous meeting, as the Brazilian government looks to cool an overheating economy. Along with the unanimous decision, the bank said the increase will help “ensure the convergence of inflation to the target trajectory.” The latest reading of inflation was 5.22% in May, while the target level set by the central bank is 4.5%.

Advance retail sales on tap for tomorrow

Tomorrow the economic calendar will yield one of the more pivotal pieces of US data for the week, in the form of advance retail sales, expected to increase 0.2% in May, after increasing 0.4% in April, while sales ex-autos are forecasted to gain 0.1%. Sales after stripping out the volatile component of autos have not declined since July 2009, which suggests the consumer—a critical component of the economy—continues to show some momentum. However, April’s report was boosted by sales of building materials and supplies, due in large part to the rush as the homebuyer tax credit expired. Economic growth without the assistance of government stimulus is something to watch as it is critical to the sustainability of the economic recovery, but Federal Reserve Chairman Ben Bernanke noted in his testimony in Washington yesterday that, “incoming data suggest that gains in private final demand will sustain the recovery in economic activity.”

The other releases on the US economic calendar include April business inventories, which are expected to increase 0.5%, after rising 0.4% in March, and the University of Michigan consumer sentiment survey, where economists are looking for a preliminary reading of 74.5 in June, after coming in at 73.6 in April.

On the international calendar, France will release its CPI, the UK will report on PPI, industrial and manufacturing production, while China is slated to announce PPI, CPI, retail sales, industrial production, money supply, fixed asset investment and new loans.