Evening Market Update

Earnings Reports Take Center Stage

Stocks ended Friday before a long weekend in the green, overcoming early pressure from another tightening move in China, focusing instead on the strength indicated from earnings reports from leading companies in the technology and financial services sectors. Even disappointing reads on retail sales and consumer sentiment failed to contain sentiment. In earnings news, Dow members Intel Corp and JPMorgan Chase & Co beat estimates, while Coinstar lowered guidance. Elsewhere, BP PLC is set to announce a possible arrangement with Russian state-owned OAO Rosneft. Treasuries were mixed in a choppy session on the economic news, which also included higher industrial production than expected, contained consumer prices and a smaller build in business inventories. Markets will be closed on Monday in observation of Martin Luther King Jr. Day.

The Dow Jones Industrial Average advanced 55 points (0.5%) to 11,787, the S&P 500 Index rose 9 points (0.7%) to 1,293, and the Nasdaq Composite gained 20 points (0.7%) to 2,755. In moderate volume, 1.1 billion shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. Crude oil rose $0.14 to $91.54 per barrel, wholesale gasoline gained $0.04 to $2.49 per gallon, while the Bloomberg gold spot price declined $13.47 to $1,360.30 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-fell 0.1% to 79.10. For the week, including dividends, the DJIA was 1.0% higher, the S&P 500 Index gained 1.7%, and the Nasdaq Composite advanced 1.9%. 

Dow member Intel Corp. (INTC $21) reported 4Q EPS of $0.59, six cents above the Reuters consensus, with revenues increasing 3% quarter-over-quarter (q/q) to $11.5 billion, above the $11.4 billion Street forecast. Compared to 3Q, the chipmaker said its data center group revenue was 15% higher, while its PC client group, Atom microprocessor, and architecture units all posted flat revenues. INTC said it expects 1Q revenues to be between $11.1-11.9 billion, compared to the $10.7 billion that analysts were anticipating. INTC shares fell, but semiconductor equipment manufacturers rose after Intel said it would boost capital spending by 73% in 2011 to $9 billion, plus or minus $300 million, to ramp production for its new 22-nanometer processor.

Fellow Dow member JPMorgan Chase & Co. (JPM $45) posted 4Q EPS of $1.12, above the $1.00 Street estimate, with revenues increasing 6% year-over-year (y/y) to $26.7 billion, above the $24.2 billion expectation. The company said its noninterest revenues jumped 34% y/y to $14.5 billion, due to higher trading results and mortgage fees, while its interest income fell 15% y/y, driven by lower loan and securities balances. Meanwhile, JPM said its EPS surged by 51% y/y, driven by a "significantly lower" provision for credit losses and higher revenues. JPM's CEO Jamie Dimon said although the company continues to face challenges, there are signs of stability and growth returning to both the global capital markets and the US economy, and that the consumer is "getting stronger." While reserves for litigation of $1.5 billion were more than expected, and Dimon said the mortgage-related legal situation could be a "long, ugly mess," he noted that it wasn't "that material of an issue" for the bank. JPM rose.

Shares of BP PLC (BP $49) rose after the company issued a statement confirming speculation that it is in discussions with Rosneft relating to a possible arrangement, and would make an announcement after the close of trading today. Before BP's statement, Dow Jones Newswires reported that sources familiar with the matter said the company would unveil a share swap agreement with the Russian government-owned oil company OAO Rosneft, while BP currently has a joint venture in the country known as TNK-BP.

Elsewhere, Coinstar Inc. (CSTR $42) fell over 25% after the operator of coin-counting machines and Redbox DVD-rental kiosks lowered its 4Q guidance and it issued full-year 2011 guidance that missed expectations.

Retail sales and consumer prices headline disappointing economic docket

Advance retail sales for December rose 0.6% month-over-month (m/m), below the forecast of economists surveyed by Bloomberg of an increase of 0.8%, and while November’s 0.8% gain was unrevised, October was adjusted down by 0.3% to a gain of 1.6%. December sales ex-autos increased 0.5%, below expectations of a 0.7% increase, and November was revised 0.2% lower to a gain of 1.0%. Sales ex-autos and gas gained 0.4% in December, versus the 0.3% increase that was anticipated, and 9.1% in 4Q, the best quarter since first quarter of 2006.

Meanwhile, the Consumer Price Index showed prices at the consumer level were up 0.5% m/m in December, above the forecast of a gain of 0.4%, and the 0.1% increase experienced in November. Energy costs rose 4.6% and food prices gained 0.1%, while excluding these, the core rate was 0.1% higher m/m in December, matching estimates, after rising 0.1% in November. On a year-over-year basis, consumer prices were 1.5% higher in December, and the core CPI was up 0.8% y/y, matching November for the smallest increase since records began in 1958.

Elsewhere, the November reading of  industrial production of a gain of 0.8% m/m was higher than the 0.5% rise expected, while the net effect of revisions from July to November left the level of industrial production in November higher than initially reported. Notable strength was seen in consumer goods, which rose for the first time since July, and business equipment remained strong, rising at an annual rate of 10.0%, the third consecutive quarterly double-digit gain. Also, capacity utilization exceeded forecasts, increasing to 76.0% versus the forecast of 75.6%. However, utilization remains 4.6% below its average rate from 1972 to 2009.

While Friday's consumer spending disappointed, the demise of the consumer has generally been over estimated. Total retail spending gained 6.6% in 2010, and even automotive and parts sales gained 10.3% during the year, and better-than-expected spending has played a large role in upward revisions to gross domestic product (GDP) over the past year. Despite the better spending, pricing power by businesses remains subdued, and increases in commodity prices thus far have not flowed through to consumers due to competitive pressures and the need for promotional prices to catalyze spending. Speeches by policymakers over the past week demonstrate the lack of inflation concern, with Federal Reserve Board Vice Chair Janet Yellen stating that absent the Fed's asset purchase program, the economy would now be close to deflation, and Dallas Fed President Richard Fisher saying that he didn't see inflation presently or in the immediately foreseeable future. While the economy remains far from a more normalized level, there are reasons for optimism, and the market tends to look at the trend, not the absolute level.

Moreover, the preliminary University of Michigan's Consumer Sentiment Index unexpectedly deteriorated, falling from 74.5 in December to 72.7 for January, compared to the increase to 75.5-the highest level since June 2010-that economists had expected. The drop in the index came as the current economic conditions component fell, more than offsetting an improvement in the economic outlook. On inflation, consumers upgraded their outlook for the one-year time frame from 3.0% to 3.3%, while the five-year time frame remained at 2.8%.

In other economic news, business inventories rose 0.2% m/m in November, below the 0.7% increase that was expected, but October's 0.7% gain was revised to a 0.8% advance. Sales rose 1.2% m/m, and the inventory-to-sales ratio-the amount of time it would take to deplete inventories at the current sales pace-declined to 1.25 from 1.27.

Treasuries were mixed in a choppy session as traders grappled with the plethora of generally disappointing economic data, with the yield on the two-year note flat at 0.58%, the yield on the 10-year note 3 bps higher at 3.33%, and the 30-year bond yield gaining 3 bps to 4.53%. Markets will be closed on Monday in observation of Martin Luther King Jr. Day.

Inflation concerns the name of the game internationally 

Concerns about further policy tightening in China gained ground after a report from the Conference Board showed China's Leading Index increased for the seventh-straight month in November. Meanwhile, after the close of trading in Asia, the Chinese government announced that it raised the bank reserve ratio-the amount of deposits that banks must keep in reserve-by 50 basis points, marking the seventh increase since the beginning of 2010. Elsewhere, concerns India may need to further hike interest rates were boosted following a report that showed wholesale prices came in hotter than expected in December, while central banks in both Korea and Thailand increased rates earlier this week in response to inflation pressure.

Elsewhere, inflation was also in focus in Europe, as European Central Bank council member Axel Weber said inflation risks could increase and President Jean-Claude Trichet yesterday said that there were signs of short-term upward pressure on overall inflation and they are monitoring price developments very close. In Friday's economic reports, German consumer prices rose 1.0% m/m in December, matching expectations, producer prices in the UK rose more than economists expected, and euro-zone consumer prices rose 0.6% m/m, as expected. Other inflation reports included: inline consumer prices in both Italy and Spain. In other economic news, the euro-zone trade balance unexpectedly swung to a deficit in November and Italy’s trade deficit widened in November.

Stocks get support as debt concerns ease overseas

The US markets managed to trudge higher for the week, continuing the momentum that appears to be growing in the equity markets. Financials led the way, finding support from better-than-expected results from Dow member JPMorgan Chase & Co, which helped kick off 4Q earnings season on a positive note, along with a plethora of positive outlooks for the group. However, the biggest boost to the sector came from overseas, as uneasiness toward the euro-area debt crisis cooled somewhat, on the heels of successful debt auctions from troubled nations Portugal and Spain and reports that the European Union is mulling changes to the size and scope of its euro-zone bailout fund.

Meanwhile, energy issues also paced the advance in the wake of the eased euro-area debt concerns and supply concerns as the Trans Alaska Pipeline was temporarily shut down and the Department of Energy reported a bullish crude oil inventory report. The bulls also received support from the Federal Reserve's Beige Book, as the tool used by monetary policymakers noted the economic recovery continued to expand moderately, the US trade deficit unexpectedly narrowed, and major M&A announcements continued to pour in. Stocks managed to show some resilience in the face of downward revisions to regional manufacturing reports out of Chicago and Philadelphia, a steep rise in jobless claims, and inflation data that suggested higher food and energy costs could begin to threaten consumer discretionary income and pressure corporate margins.

Housing market health gets a check-up next week

Next week brings several readings on the health of the housing market, starting with Tuesday's NAHB Housing Market Index, where homebuilder sentiment is expected to modestly improve to 17 from 16, while a reading below 50 indicates respondents feel conditions are poor. Meanwhile, housing starts remain subdued, expected to fall 0.9% m/m in December to an annual rate of 550,000 units, while building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, are forecasted to gain 2.0% m/m to 555,000 units.

Additionally, Thursday brings the December reading on existing home sales, which reflect closings from contracts entered one to two months earlier and are forecasted to rise 4.5% m/m to an annual rate of 4.89 million units after gaining a lower than expected 5.6% in November.

The housing market has lagged the overall economic recovery, weighed down by foreclosures and high unemployment. Offsetting these negative factors, home affordability remains at an all time high, as the 30-year fixed mortgage rate remains near a record low.

Other releases on the US economic calendar include the Empire Manufacturing Index, MBA Mortgage Applications, initial jobless claims, the Philadelphia Fed’s Business Activity Index, and the Conference Board's Index of Leading Indicators. Other reports in the Americas include Canada's leading indicator, as well as manufacturing, wholesale and retail sales, and readings on jobs in Brazil and Mexico. Central bank meetings are scheduled in Canada, Brazil and Mexico.

Other international releases include Japanese consumer confidence, industrial production, department store sales, machine tool orders, and leading index, Australian consumer confidence, Taiwan export orders, and a slew of data comes out of China, including 4Q GDP, housing prices, PPI, CPI, retail sales, industrial production and fixed asset investment, which includes housing and infrastructure spending. Economic releases in Europe will include euro-zone consumer confidence, German PPI, the Zew survey of economic conditions and IFO survey of business confidence, UK house prices, CPI, retail price index, and retail sales.