Weekend Market Update

End of Mubarak Era Leads to Market Advance

Stocks closed out the week in the green, as investors welcomed a potential end to the crisis in Egypt, after President Hosni Mubarak resigned and handed over control to the country's military. Global markets seemed pleased to see an end to three weeks of protest and unrest, but uncertainty remains as to the future leadership in Egypt. Back on the domestic front, US consumer sentiment saw improvement in February, while the US trade deficit widened more than expected in December. In equity news, Dow member Kraft Foods matched the Street's earnings expectations but warned of significant input cost inflation, and fellow Dow component Microsoft announced a strategic partnership with Nokia. Additionally, shares of Expedia plunged after the company missed bottom-line profit projections. Treasuries finished higher, while crude oil prices moved solidly below the flatline on the news out of the Middle East.

On Friday, the Dow Jones Industrial Average gained 44 points (0.4%) to 12,273, the S&P 500 Index gained 7 points (0.6%) to 1,329, and the Nasdaq Composite added 19 points (0.7%) to 2,809. In moderate volume, 1.0 billion shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. Crude oil fell $1.27 to $85.46 per barrel, while wholesale gasoline gained $0.02 to $2.49 per gallon, and the Bloomberg gold spot price fell $7.35 to $1,356.45 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-rose 0.3% to 78.41. For the week, including dividends, the DJIA rose 1.5%, the S&P 500 Index gained 1.4%, and the Nasdaq Composite advanced 1.5%.

Dow member Kraft Foods Inc. (KFT $31) reported 4Q EPS ex-items of $0.46, inline with the consensus estimate of analysts surveyed by Reuters, with revenues growing 30% year-over-year (y/y) to $13.8 billion, exceeding the $13.5 billion that the Street was forecasting. The food products firm said its results were driven by strong volume and product mix gains in each geographical region it operates. However, looking ahead, the company said it expects the operating environment to remain challenging, with significant input cost inflation and persistent consumer weakness in many markets. KFT issued full-year 2011 EPS guidance that missed expectations, and shares of the company traded lower.

Meanwhile, fellow Dow component Microsoft Corp. (MSFT $27), and Nokia Corp. (NOK $9) announced plans to form a broad strategic partnership aimed at creating a new global mobile ecosystem. Under the partnership, NOK would adopt MSFT's Windows Phone as its smartphone operating platform and the two companies would work together on joint marketing initiatives regarding the future of mobile products. Additionally, NOK will use MSFT's Bing search functionality for its devices, while NOK's content and application store would be integrated with Microsoft Marketplace. NOK said the company is at a critical juncture, where significant change is necessary and inevitable in our journey forward, while MSFT said the partnership provides incredible scale, vast experience in hardware and software innovation and a proven ability to execute. MSFT finished lower, while NOK traded sharply to the downside, due to disappointment regarding NOK's guidance, in which it called 2011 and 2012 transition years.

In other earnings news, shares of Expedia Inc. (EXPE $21) were down sharply after the online travel booking site posted adjusted 4Q earnings of $0.32 per share, below the $0.36 that the Street had forecasted, due to higher interest expense. Revenues grew 16% y/y to $808 million, topping the $801 million forecast on the Street, on strong unit growth in both hotel and air and continued strong performance in its advertising and media business.

Trade deficit widens, while consumer sentiment improves slightly more than expected

The trade deficit widened more than anticipated, increasing from an unrevised $38.3 billion in November to $40.6 billion in December, versus the estimate of economists surveyed by Bloomberg, which called for the deficit to widen to $40.5 billion.

Meanwhile, the preliminary University of Michigan's Consumer Sentiment Index improved slightly more than forecasted, increasing from 74.2 in January to 75.1—the highest level since June 2010—for February, compared to the increase to 75.0 that economists had expected. The improvement in the index came as the current economic conditions component rose, more than offsetting a deterioration in the economic outlook. On inflation, consumers left their outlooks unchanged for the one-year and five-year time frames at 3.4% and 2.9%, respectively.

Treasuries finished mostly higher despite the resiliency in the stock markets, and after showing little reaction to the trade and consumer sentiment data. The yield on the two-year note was flat at 0.83%, the yield on the 10-year note fell 7 bps to 3.63%, and the 30-year bond lost 6 bps to 4.70%.

Mubarak resigns, prices rise across Europe, Bank of Korea leaves rates untouched

Focus across the globe was on the announcement that Egyptian President Hosni Mubarak has stepped down and handed control of the country over to the military. The resignation was announced by Vice President Omar Suleiman and followed 18 days of massive protests against Mubarak's 30-year reign over the country. While Egypt's higher military council said it would announce measures for a transitional phase, uncertainty remains regarding what the future leadership will look like and what implications it could have for the rest of the region.

Economic data out of Europe painted a mixed picture, as a report showed German consumer prices rose at the fastest y/y rate in more than two years, according to Bloomberg, as prices rose 2.0% in January, compared to a pace of 1.9% that economists forecasted. Additionally, producer prices in the UK came in hotter than expected, while Spain’s 4Q GDP rose 0.2% quarter-over-quarter (q/q), matching expectations, but compared to last year, output came in slightly below forecasts. In other economic news, France's nonfarm payrolls rose at a rate that was inline with estimates, while French wages increased at a rate that was just below forecasts.

In Asia/Pacific news, the Bank of Korea unexpectedly left its benchmark interest rate unchanged at 2.75%, Taiwan issued a favorable report on the nation’s trade balance, while India reported the slowest pace of industrial production in 20 months, per Bloomberg, possibly easing concerns about further monetary tightening by the nation's central bank.

Stocks ride M&A and drop in claims into positive territory for the week

The equity markets shrugged off some notable headwinds during the week, posting respectable gains as optimism regarding the health of the US economy continued to gain steam. The bulls showed some resiliency in the face of another round of rate hikes out of China, festering global inflation fears, and disappointing margin performance and guidance from Dow member Cisco Systems Inc. (CSCO $19). A plethora of major global M&A announcements and a slew of reports by companies returning value to shareholders in the form of dividend increases and share buybacks buoyed sentiment, along with an improvement in small business optimism to the highest level since December 2007. Moreover, a steep drop in US weekly initial jobless claims to the lowest level since July 2008, and below the 400,000 mark, fostered some enthusiasm regarding an improvement in the employment market, helping limit the impact of Federal Reserve Chairman Ben Bernanke testimony in front of the House, in which he reiterated that although the economic recovery strengthened, the unemployment rate remains high.

Plenty of economic data to digest next week

Readings on a wide swath of the economy will be reported next week, as well as Wednesday's midday release of the minutes from the January Federal Open Market Committee (FOMC) meeting, where investors will be monitoring any changes to the economic forecast. The discussion that transpired at the meeting could be outweighed by several speeches given by Fed Chairman Ben Bernanke since the meeting, where he reiterated a strengthened recovery, but still slow progress on the jobs front, and low overall inflation.

Advance retail sales will be announced Tuesday, forecasted to post a 0.5% month-over-month (m/m) gain in January, while sales ex-autos are also estimated to grow 0.5%, the same pace as in December. Same-store sales results - sales at stores open at least a year - reported by retailers were better than expected, despite poor weather. Meanwhile, housing starts will be reported Wednesday, expected to increase 2.1% m/m in January to an annual rate of 540,000 units, after falling 4.3% in December, while building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, are forecasted to fall 9.9% m/m to 565,000 units, following a 16.7% gain the prior month.

Wednesday also brings the January reading on industrial production, expected to rise 0.5% m/m in December, and capacity utilization is forecasted to increase to 76.4%. The Producer Price Index (PPI) is also scheduled for Wednesday, expected to show prices at the wholesale level rose 0.8% m/m in January, while the core rate, which excludes food and energy, is expected to increase 0.2%. The release precedes Thursday's Consumer Price Index (CPI) report, forecasted to show a 0.3% m/m increase, while ex-food and energy, it is expected to again rise 0.1%. On a y/y basis, the CPI is expected to increase 1.6% at the headline level and 0.9% at the core level.

Other releases on the US economic calendar include the Empire Manufacturing Index, business inventories, the NAHB Housing Market 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, CPI, as well as manufacturing and wholesale sales, and Brazil's retail sales.

International releases next week out of the Asian/Pacific region include Japan's 4Q GDP, industrial production, department store sales, machine tool orders, and leading index, Australia’s leading index, 4Q GDP readings from Singapore and Taiwan, and China's new yuan loans, money supply, housing prices and CPI. Economic releases in Europe will include euro-zone industrial production, 4Q GDP, German PPI and Zew survey of economic conditions, UK house prices, CPI, retail price index, consumer confidence and retail sales. In central bank action, the banks of Japan and Sweden meet and the Bank of England issues its quarterly inflation report.