Evening Market Update

Late-Day Surge Leads to Modest Gains For US Equities

Stocks staged a small rally late in the day to finish in the green, as traders were hit with a plethora of economic data and a full slate of earnings and sales figures from the equity front, while a watchful eye continues to remain on the unrest and increasing violence in Egypt. The highlight of the domestic economic reports was a solid expansion in the US service sector, while sentiment was also lifted by a larger-than-expected drop in jobless claims, an improvement in 4Q productivity, and an unexpected increase in factory orders. The Street listened closely to a speech by Fed Chairman Ben Bernanke, as he noted that growth in 2011 may accelerate compared to last year. Equity news was dominated by mostly favorable same-store sales from the nation’s retailers, although Target and some of the large department stores failed to meet sales expectations in January. On the earnings front, Visa, MasterCard and YUM! Brands all posted better-than-expected profits, while Dow member Merck & Co issued a disappointing outlook for 2011. Treasuries finished the day lower.

The Dow Jones Industrial Average was 20 points (0.2%) higher at 12,062, the S&P 500 Index rose 3 points (0.2%) to 1,307, and the Nasdaq Composite gained 4 points (0.2%) to 2,754. In moderate volume, 1.0 billion shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. Crude oil fell $0.20 to $90.66 per barrel, wholesale gasoline rose $0.01 to $2.51 per gallon, and the Bloomberg gold spot price advanced $18.95 to $1,354.28 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.8% higher at 77.76.

Dow member Merck & Co. Inc. (MRK $33) posted 4Q EPS ex-items of $0.88, topping the $0.83 consensus estimate of analysts surveyed by Reuters, with revenues decreasing 1% year-over-year (y/y) to $12.1 billion, exceeding the $11.5 billion that was anticipated. The company withdrew its long-term EPS outlook, while issuing full-year 2011 EPS guidance that came in below analysts’ forecasts. MRK traded lower.

Visa Inc. (V $72) reported fiscal 1Q EPS of $1.23, two cents north of the consensus estimate, with revenues growing 14% y/y to $2.2 billion, roughly inline with expectations. The company reaffirmed its full-year 2011 outlook. Meanwhile, fellow credit card transaction firm MasterCard Inc. (MA $245) achieved 4Q EPS of $3.16, above the $3.04 that the Street had anticipated, with revenues increasing 10.7% y/y to $1.4 billion, matching the consensus estimate. Shares of V were lower, while MA was higher.

Yum! Brands Inc.  (YUM $49) announced 4Q EPS ex-items of $0.63, above the $0.60 that was expected, as revenues increased 6% to $3.6 billion, exceeding the $3.5 billion forecast on the Street. The operator of KFC, Pizza Hut, and Taco Bell said same-store sales—sales at stores open at least a year—grew 5% y/y in the US, while international sales ticked 1% higher, led by growth of 8% in China. YUM traded nicely higher.

Meanwhile, the nation’s retailers are reporting January same-store sales results, headlined by Target Corp. (TGT $54), which announced a 1.7% y/y increase, compared to the 1.9% gain that analysts surveyed by Reuters had anticipated. TGT said January sales were below expectations, particularly in portions of the South and the Northeast, while its REDcard rewards 5% savings program continues to perform as expected. Shares were higher.

Moreover, shares of Costco Wholesale Corp. (COST $74) rose after the company reported its January same-store sales grew 9.0% y/y, including gasoline sales and foreign exchange, well above the 6.1% that the Street had forecasted, and excluding fuel and currency, sales rose 6.0%. Meanwhile, fellow wholesaler BJ’s Wholesale Club Inc. (BJ $48) announced that its January same-store sales rose 2.7% y/y, and shares surged on news that the company will explore strategic alternatives, including the possible sale of the company.

Department store chain, Macy’s Inc. (M $22), achieved 2.6% y/y growth in same-store sales for January, above the 2.1% gain that analysts had anticipated. However, other department stores such Kohl’s Corp. (KSS $51) and J.C. Penney Co. Inc. (JCP $31) reported disappointing sales results for the month, noting adverse weather conditions, but JCP did increase its 4Q earnings outlook. Shares of JCP were lower, while KSS and M finished higher.

Elsewhere, Gap Inc. (GPS $20) reported an unexpected increase in sales and Limited Brands Inc’s (LTD $31) sales surged past analysts’ forecasts, while American Eagle Outfitters Inc. (AEO $15) recorded a smaller-than-forecasted decline in sales. All three retailers traded solidly higher.

Service sector activity jumps, jobless claims fall, while productivity and factory orders rise

The ISM Non-Manufacturing Index unexpectedly rose in January to 59.4 from 57.1, where economists surveyed by Bloomberg forecasted the reading to remain. A reading of 50 separates expansion from contraction. The measure of economic strength in the service sector jumped to the highest level since August 2005, complimenting the companion to the ISM Manufacturing Index, which posted the highest rate of expansion since May 2004 on Tuesday. The index suggested that activity in the service sector expanded for the fourteenth-straight month as new orders rose to 64.9 from 61.4—the highest since January 2004—and business activity/production increased from 62.9 to 64.6, the highest since 2005. Also, the employment rose from 52.6 to 54.5, the largest level of expansion since May 2006. However, the prices paid component moved above the 70 mark for the first time since September 2008, rising to 72.1, which may be fueling inflationary concerns that threaten corporate profits and the purchasing power of consumers—the heartbeat of the economy.

Meanwhile, weekly initial jobless claims fell by 42,000 to 415,000, versus last week's figure which was upwardly revised by 3,000 to 457,000, and below the 420,000 level that economists had expected. The four-week moving average, considered a smoother look at the trend in claims, increased by 1,000 to 430,500, while continuing claims dropped by 84,000 to 3,925,000, below the forecast of economists, which called for continuing claims to come in at 3,950,000.

Elsewhere, the preliminary reading on 4Q nonfarm productivity showed a 2.6% increase on an annual basis, compared to the 2.0% gain that economists expected. Unit labor costswere 0.6% lower, versus a gain of 0.2% that was estimated. Moreover, factory orders unexpectedly rose, increasing 0.2% month-over-month (m/m) in December, compared to the decline of 0.5% that economists surveyed by Bloomberg had expected, and November’s 0.7% increase was favorably revised to a 1.3% gain. December durable goods orders—reported last week—were favorably revised from a 2.5% drop to a 2.3% decline.

Treasuries finished lower, as the yields on the two-year note increased 5 bps to 0.70&, the yield on the 10-year note rose 7 bps higher to 3.55%, and the 30-year bond advanced 5 bps to 4.62%.

Finally, Federal Reserve Chairman Ben Bernanke delivered a speech to the National Press Club on the topic of “The Economic Outlook and Macroeconomic Policies.” Bernanke noted that the economic recovery appears to have strengthened in recent months, although he reiterated that growth has not been fast enough to bring about a “significant improvement” in the job market. Moreover, he added that there is increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold, likely helping—along with accommodative monetary policy and more supportive financial conditions—lead to a more rapid pace of economic recovery in 2011 than we saw last year. The Fed Chief did recognize higher commodity costs, but he pointed out that “overall inflation remains quite low,” while reiterating that the Fed will review the asset purchase program—known as quantitative easing or QE2—regularly in light of incoming information and will adjust it as needed to promote maximum employment and stable prices.

ECB reports on its policy, Trichet’s comments scrutinized

Focus across the pond was on the European Central Bank’s monetary policy announcement, in which it expectedly kept its benchmark interest rate unchanged at 1.0% and offered no new additions to its asset purchase program. However, traders closely scrutinized the customary press conference by ECB President Jean-Claude Trichet that followed the monetary policy announcement, as the central bank faces the difficult task of maintaining price stability as inflationary pressures mount in key parts of the euro-area, while trying to foster the continued economic recovery. Trichet softened his tone regarding inflation, noting that “very close monitoring” of price developments is “warranted,” but also saying inflation expectations remain “firmly anchored.” The ECB head also pointed out that the balance sheets of euro-area banks are contracting again and it was “important” that banks meet expanding credit demand, per Dow Jones Newswires. The euro fell solidly versus the US dollar following Trichet’s remarks, as expectations had ramped up that the ECB may be nearing some tightening of monetary policy sooner than some had expected, and some noted that they expected Trichet to project a slightly more hawkish tone at the press conference.

In other European economic news, euro-zone retail sales unexpectedly fell in December, offsetting stronger-than-expected PMI Services reports from France, the UK, euro-zone, and Germany—Europe’s largest economy.

Activity in the Asia/Pacific region was light due to the Lunar New Year, which had several markets including China, South Korea, and Taiwan closed. Australia did announce that building permits jumped well above economists’ expectations, while the cyclone that hit the nation’s northeast coast today produced less damage than some had expected, per Reuters. Finally, India issued a report that showed the nation’s service sector activity expanded further in January.

Tomorrow’s labor report caps the week

All eyes will be on tomorrow’s release of nonfarm payrolls, expected to grow 145,000 in January after posting two months of disappointing figures, including a 103,000 gain in December, and the unemployment rate is estimated to increase slightly to 9.5% after dropping in December to 9.4% from 9.8%. Job reports this week in the form of private payrolls from ADP and initial jobless claims, as well as the employment component of the ISM reports were all better than expected.

The other release on the US economic calendar is consumer credit, expected to increase to $2.0 billion in December, from $1.3 billion in November.

International releases scheduled for tomorrow include UK house prices, Canada’s employment and Ivey Purchasing Managers Index.