Evening Market Update

Positive Sentiment Heading Into Long Weekend

Stocks looked toward the upcoming three-day weekend with a bullish view, shrugging off another policy tightening move in China and continued unrest in the Middle East to post new two-year highs. Treasuries were mixed as there were no major US economic reports today and an overseas speech by Fed Chair Ben Bernanke offered little in the way of market moving news. In earnings news, Nordstrom Inc, Intuit, Brocade Communications Systems and Aruba Networks Inc beat the Street, while Campbell Soup Co lowered its full-year guidance.

The Dow Jones Industrial Average rose 73 points (0.6%) to 12,391, the S&P 500 Index gained 3 points (0.2%) to 1,343, and the Nasdaq Composite was 2 points (0.1%) higher at 2,834. In moderate volume, 1.2 billion shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. Crude oil rose $0.87 to $89.71 per barrel, wholesale gasoline gained $0.02 at $2.55 per gallon, and the Bloomberg gold spot price increased $3.33 to $1,387.43 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.5% lower at 77.64. For the week, including dividends, the DJIA and the S&P 500 Index gained 1.0%, and the Nasdaq Composite advanced 0.9%.

Nordstrom Inc. (JWN $47) reported 4Q EPS of $1.04, above the $1.00 consensus estimate of analysts surveyed by Reuters, with revenues increasing 10.9% year-over-year (y/y) to $2.8 billion, inline with the Street’s expectation. The department store retailer said 4Q same-store sales—sales at stores open at least a year-grew 6.7% y/y, led by sales of jewelry, dresses and shoes. Shares ended higher, overcoming early weakness that came as the retailer also announced that it will acquire fashion website HauteLook for $180 million in stock.

Intuit Inc. (INTU $54) posted fiscal 2Q EPS ex-items of $0.32, two pennies above analysts' estimates, as revenues rose 5% y/y to $878 million, below the $884 million that was expected. The business and financial management software firm and maker of Turbotax said revenue at its customer tax unit declined quarter-over-quarter (q/q), driven by a shift in revenue from 2Q to 3Q, due primarily to taxpayers waiting longer to file their returns. The company raised its full-year EPS guidance, while it reiterated its revenue outlook. INTU rose solidly.

Brocade Communications Systems Inc. (BRCD $6) was nicely higher after the networking equipment supplier achieved fiscal 1Q EPS ex-items of $0.12, topping analysts' forecast by two cents, on revenues that grew 1.2% y/y to $546 million, compared to the $544 million that was anticipated. Also, the company issued 2Q revenue guidance that exceeded expectations. BRCD added that its Ethernet fabric solutions are being well received by customers in the industry.

Shares of Aruba Networks Inc. (ARUN $31) rose over 15% after reporting 2Q EPS ex-items of $0.14, one cent better than the Street consensus, as revenues rose 50% y/y and 13% quarter-over-quarter. The maker of WiFi equipment for businesses and carriers said that enterprises are facing intensified proliferation of tablet and smartphone devices, requiring IT departments to rapidly and affordably deliver secure mobile access.

Campbell Soup Co. (CPB $33) was lower after the food maker lowered its full-year guidance after posting fiscal 2Q revenues that fell 1% y/y to $2.1 billion, below the $2.2 billion that the Street expected. The company also reported 2Q EPS of $0.71, matching forecasts, and said the overall competitive environment remains challenging throughout the food industry, particularly in the US. Moreover, CPB noted that it expects “improved price realization” will lead to better profitability in anticipation of higher cost inflation going forward.

Fed Chief speaks to end the week

Ahead of the three-day weekend-all US markets will be closed on Monday in observance of President’s Day-Treasuries were mixed and there were no major economic reports today. The yield on the two-year note was down 1 bp to 0.75%, the yield on the 10-year note gained 1 bp to 3.58%, and the 30-year bond yield increased 2 bps to 4.69%.

However, Federal Reserve Chairman Ben Bernanke spoke in conjunction with the G-20 meeting of finance chiefs on the subject of global imbalances and financial stability, offering little market moving comments as he gave an analysis of the financial crisis. Bernanke noted that to achieve a more balanced international system over time, countries with excessive and unsustainable trade surpluses will need to allow their exchange rates to better reflect market fundamentals and increase their efforts to substitute domestic demand for exports. Moreover, he added that at the same time, countries with large, persistent trade deficits must find ways to increase national saving, including putting fiscal policies on a more sustainable trajectory. In addition, to bolster our individual and collective ability to manage and productively invest capital inflows, Bernanke stressed that we must continue to increase the efficiency, transparency, and resiliency of our national financial systems and to strengthen financial regulation and oversight.

New tightening moves in China

Economic news was light in the Asia/Pacific region, with Japan reporting another decline in department store sales, and China's Conference Board’s Leading Index deteriorating. However, the biggest piece of news came after the close of trading in Asia, as the Chinese government increased its banking industry's reserve requirement-the amount of capital a lender must keep in reserve instead of using it for loans-for the second time this year, raising the rate by 50 basis-points to an average of nearly 20%. The action follows the People's Bank of China’s interest rate hike less than two weeks ago, as it battles rising inflation and the formation of asset bubbles.

Meanwhile, other international economic data painted a mixed picture, with German producer prices coming in much hotter than expected and France reporting its business confidence unexpectedly declined, while UK retail sales surged eight times the expectation of economists and Italian industrial orders jumped more than twice what was anticipated. Canada's consumer price index was subdued, increasing 0.3% m/m at the headline level, and flat at the level that excludes food and energy prices.

Markets defy inflation concerns and Middle East uneasiness

The US equity markets were able to continue their momentum as optimism regarding the economy carried the major indices to near multi-year highs. The bulls had many headwinds to defy including: growing inflation concerns, disappointing retail sales, discouraging housing starts, tightening monetary policy in China, festering geopolitical concerns in the Middle East, rising jobless claims, and declining industrial production. A flurry of major M&A announcements, solid earnings from the corporate front, and much better-than-forecasted manufacturing activity reports out of New York and Philadelphia proved to be the nutrients in the bulls' trough, fueling the resiliency in the global equity markets. Finally, traders received a glimpse into the first monetary policy meeting of a new slate of Fed members, and the minutes from its January meeting revealed an increase in their economic outlook, but labor remains a key source of disappointment and a few members felt unsure about the impact of the Fed’s $600 billion asset purchase program (QE2) on the economy.

Shortened trading week, but full of economic data

The week starts off with more data on the housing market, with Tuesday’s S&P/CaseShiller Home Price Index, which lags the sales data by a month, anticipated to show a 2.3% decline year-over-year (y/y) in December, and a fall of 0.5% month-over-month (m/m). Meanwhile, Wednesday’s January existing home sales report, which reflects closings from contracts entered one to two months earlier, is forecasted to fall 1.5% m/m to an annual rate of 5.2 million units. The decline comes after sales surged 12.3% in the month prior, with single-family sales increasing 11.8%. Lastly, Thursday's release of new home sales, which calculates sales of single-family homes based on signings instead of closings, and is considered a more timely indicator of conditions in the housing market, is expected to fall 1.5% in January to an annual rate of 300,000 after spiking by 17.5% m/m in December.

Friday brings the second reading of 4Q gross domestic product (GDP), forecasted to be revised up to 3.3% from a 3.2% quarter-over-quarter (q/q) annualized rate, an acceleration from the 2.6% rate experienced in 3Q. The anticipated upward revision to GDP comes despite an expected downward revision to personal consumption to 4.2% from the initially reported 4.4%. Inflation readings are expected to unchanged, with the GDP Price Index coming in at a mere 0.3% gain, and the core PCE Index, which excludes food and energy, forecasted at an increase of 0.4%. Other releases on the US economic calendar include the volatile durable goods orders report, expected to increase 3.0% in January after falling 2.5% m/m in December, while ex-transportation, orders are forecasted to have grown 0.5% m/m, the same rate as in December. The week also includes the Conference Board’s measure of consumer confidence, the Richmond Fed Manufacturing Index, the MBA Mortgage Applications Index, weekly initial jobless claims, and the final University of Michigan Consumer Sentiment Index reading for February.

International releases include euro-zone manufacturing and services PMI reports, industrial new orders, and consumer confidence, Germany’s GDP, CPI and IFO survey of business confidence, French jobseekers and CPI, UK home prices and detailed GDP breakdown, Japanese CPI, Australia's leading index, Brazil’s unemployment rate, Canada's and Mexico's retail sales, and Mexico's unemployment and GDP. Additionally, the Bank of Japan and Bank of England release the minutes from their recent meetings.