Evening Market Update

Stocks Edge Higher Despite Rise in Oil

US stocks are modestly higher in afternoon action as traders grapple with the impact of continued strength in oil prices, which eclipsed the $100 per barrel mark amid exacerbated tensions in the Middle East, on the economy. The equity markets have drifted in and out of the positive territory during today’s trading session as oil supply concerns are garnering the lion’s share of the debate on the Street, overshadowing a larger-than-forecasted increase in private sector payrolls, according to ADP. Treasuries are lower following the jobs data, ahead of the afternoon release of the Fed’s Beige Book. Meanwhile, Federal Reserve Chairman Ben Bernanke concluded his two-day semiannual testimony on Capitol Hill, reiterating that economic growth could accelerate in 2011 compared to last year, while inflation remains low. In other economic news, the MBA Mortgage Application Index declined on declines in refinancing and purchasing activity. In equity news, Costco Wholesale Corp topped analysts’ revenue forecasts, while Staples Inc missed the Street’s earnings and revenue estimates. In corporate dealmaking news, US-based utility company PPL Corp reached an agreement to acquire the Central Networks electric distribution business from UK-based E. ON UK for $5.6 billion in cash, while Yahoo Inc is reportedly discussing the sale of its stake in Yahoo Japan Corp. Overseas, the strength in oil prices and Middle East geopolitical concerns weighed on European markets.

At 12:54 p.m. ET, the Dow Jones Industrial Average and the S&P 500 Index are 0.2% higher, and the Nasdaq Composite is advancing 0.5%. Crude oil is up $1.84 at $101.47 per barrel, wholesale gasoline is rising $0.04 to $3.02 per gallon, and the Bloomberg gold spot price is increasing $4.00 to $1,437.28 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.5% to 76.62.

Costco Wholesale Corp. (COST $72) reported fiscal 2Q EPS of $0.79, inline with the consensus estimate of analysts surveyed by Reuters, with revenues increasing 11% year-over-year (y/y) to $20.9 billion, compared to the $20.5 billion that the Street had forecasted. The wholesale retailer announced that 2Q same-store sales—sales at stores open at least a year—rose 7% y/y including fuel sales and currency changes. COST also said same-store sales in February increased 8% y/y. COST traded lower.

Staples Inc. (SPLS $21) announced 4Q EPS ex-items of $0.39, one penny short of analysts’ expectations, with revenues roughly flat y/y at $6.4 billion, compared to the $6.5 billion that was anticipated on the Street. The office supply company said 4Q was challenging primarily due to the impact of winter storms and sales have recovered in 1Q, while issuing full-year 2011 EPS that exceeded forecasts. Shares were higher.

Shares of Apple Inc. (AAPL $352) gained ground after CEO Steve Jobs made a surprise appearance at a company event in San Francisco, where the tech giant introduced the second-generation tablet known as the iPad 2. The updated device includes front- and rear-facing cameras, a more powerful dual-core processor and the same pricing as the original iPad.

In M&A news, US-based utility company PPL Corp. (PPL $26) reached a definitive agreement to acquire the Central Networks electric distribution business from UK-based E. ON UK for 3.5 billion pounds ($5.6 billion) in cash. PPL said the deal will be “significantly accretive” to earnings and cash flow for 2011 and beyond. PPL finished higher.

Shares of Yahoo Inc. (YHOO $17) moved solidly higher amid reports that the search engine is in discussions to sell its stake in its Yahoo Japan Corp. (YAHOY $131) joint-venture with Softbank Corp. (SFTBY $20). Softbank Corp denied the reports that it is in discussions to acquire Yahoo’s stake in the venture, and YHOO has not commented on the report. Yahoo Japan closed solidly higher and Softbank Corp moved lower in Asian trading.

Private sector payrolls jump, mortgage apps decline, Fed in focus

The ADP Employment Change Report showed private sector payrolls rose by 217,000 jobs in February, above the forecast of economists surveyed by Bloomberg, which called for a 180,000 increase, and January’s 187,000 job gain was revised to 189,000 jobs. The release does not include government hiring and firing and comes ahead of Friday’s broader nonfarm payrolls report, where economists expect an increase of 193,000 jobs in February, after posting a disappointing 36,000 in January (economic calendar). Excluding government hiring, February private sector payrolls are expected to increase 200,000, after expanding by a smaller-than-forecasted 50,000 in January.

In other economic news, the MBA Mortgage Application Index decreased by 6.5% last week, after the index that can be quite volatile on a week-to-week basis, rose 13.2% in the previous week. The decline came as a 6.5% decrease in the Refinance Index joined a 6.1% drop in the Purchase Index. The decline in the overall index came even as the average 30-year mortgage rate fell 16 basis points to 4.84%, above the record low of 4.21% on October 8.

Treasuries finished lower following the employment and housing data, as the yield on the two-year note rose 5 bps to 0.69%, the yield on the 10-year note increased 8 bps to 3.48%, and the 30-year bond yield gained 9 bps to 4.57%.

Moreover, Federal Reserve Fed Chairman Ben Bernanke concluded his two-day semiannual monetary policy testimony on Capitol Hill, speaking to the House Financial Services Committee. Bernanke’s testimony did not evoke many new reactions as he did not change his remarks from what he gave yesterday to the Senate, in which he noted that the combination of rising household and business confidence, accommodative monetary policy, and improving credit conditions seems likely to “lead to a somewhat more rapid pace of economic recovery in 2011 than we saw last year.” However, Bernanke reiterated that job growth “remains relatively weak and the unemployment rate is still high,” and overall inflation remains low. The Fed Chief also acknowledged the recent spike in oil prices and other commodities, exacerbated by the Middle East unrest, but said, “the most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in US consumer price inflation.” Bernanke also reiterated that the Fed will continue to review its asset purchase program—QE2—in light of incoming information, adjusting it as needed.

Meanwhile, the Fed remains in focus after the release of its Beige Book, wherein Fed staffers summarize anecdotal economic data from all twelve Federal Reserve Districts in preparation for the next Federal Open Market Committee (FOMC) meeting scheduled for March 15. The report noted that overall activity continued to expand at a “modest to moderate pace in January and early February,” with all Districts, except St. Louis, experiencing solid growth in manufacturing production. On inflation, the data showed non-wage input costs increased for manufacturers and retailers in most Districts, and manufacturers in a number of Districts reported “having greater ability to pass through higher input costs to customers,” while retailers in some Districts mentioned they had ”implemented price increases or were anticipating such action in the next few months.” However, wage pressures—a key metric followed by the Fed—“remained minimal across all Districts.” On the labor market, the report pointed out modest improvement across the country. Other aspects of the report included: increased retail sales in all Districts, home sales and construction remained low, and mixed changes in loan demand as lending standards remained tight.

Middle East concerns continue to stymie international sentiment

In European economic news, the UK PMI Construction reading unexpectedly improved to 56.5 in February, from 53.7 in January, compared to the decline to 52.8 that economists forecasted, while euro-zone producer prices rose more than expected in January.

In Asia/Pacific, South Korea’s consumer prices came in hotter than anticipated, while Australia’s 4Q GDP expanded at a rate of 0.7% quarter-over-quarter (q/q), matching expectations, after increasing 0.1% in 3Q. However, on a y/y basis, the nation’s output rose at a pace of 2.7%, slightly below the 2.8% that economists had expected.

Back in the Americas, Brazil’s industrial production rose 0.2% in January, compared to economists’ expectations of a 0.3% decline, fueling speculation that the Brazilian Central Bank may raise interest rates more than previously expected.

ISM Non-Manufacturing reading on tap for tomorrow

Tomorrow, the US economic calendar will yield the release of the ISM Non-Manufacturing Index, forecasted to decline slightly from 59.4 in January to 59.3 for February. A reading above 50 denotes expansion and the gauge of service-sector activity is expected to show expansion for the fourteenth-straight month. On Tuesday, the ISM Manufacturing Index exceeded expectations and improved to a near seven-year high.  The bulk of attention on tomorrow’s data will likely lie on the prices paid and employment components of the report, given the growing concerns about inflation and the Fed’s reluctance to change its accommodative policy stance until meaningful job growth is seen.

The only other release on the domestic economic front tomorrow will be initial jobless claims, expected to tick slightly higher to 395,000 from a previous reading of 391,000.

International releases will include euro-zone 4Q GDP and retail sales, German retail sales, service PMI reports from the euro-zone and the UK, Brazilian 4Q GDP, Japanese capital spending, Australian building approvals, and Hong Kong retail sales. Additionally, the European Central Bank and the Central Bank of Brazil will conclude their monetary policy meetings, with the ECB expected to keep target interest rates unchanged, while the Brazilian Central Bank is expected to raise the target rate from 11.25% to 11.75%.