Evening Market Update

Stocks End Down Week in the Green

Equities gradually gained ground in trading on Friday, as traders reflected on the magnitude 8.9 earthquake and subsequent tsunami in Japan, while breathing a sigh of relief from the lack of a much anticipated "day of rage" in Saudi Arabia and resulting decline in the price of crude oil. Meanwhile, a strong US retail sales report was offset by a weak read on consumer sentiment, which included an increase in inflation expectations, while business inventories rose, and Treasuries were mixed. In equity news, National Semiconductor reported a mixed earnings report and Aeropostale Inc issued disappointing guidance.

The Dow Jones Industrial Average gained 60 points (0.5%) to 12,044, the S&P 500 Index rose 9 points (0.7%) to 1,304, and the Nasdaq Composite advanced 15 points (0.5%) to 2,716. In light volume, 922 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil lost $1.54 to $101.16 per barrel and wholesale gasoline fell $0.03 to $2.99 per gallon, while the Bloomberg gold spot price increased $5.45 to $1,417.25 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-lost 0.7% to 76.73. For the week, including dividends, the DJIA fell 1.1%, the S&P 500 Index declined 1.3% and the Nasdaq Composite decreased 2.5%.

In earnings news, National Semiconductor Corp. (NSM $15) reported fiscal 3Q EPS of $0.24, inline with the consensus estimate of analysts surveyed by Reuters, with revenues declining 5% year-over-year (y/y) to $344 million, below the $352 million that the Street had expected. The company said the decline in sales was due to inventory adjustments in the distribution channel and seasonally lower shipments to wireless handset customers following the holiday sales period. NSM issued 4Q revenue guidance that matched expectations. Shares were higher.

Moreover,  Aeropostale Inc. (ARO $23) announced 4Q EPS ex-items of $0.98, one penny above the Street’s expectations, with revenues increasing 5% y/y to $839 million, topping the $835 million that was estimated by analysts. Same-store sales-sales at stores open at least a year-declined 3% y/y, as the company said the teen retail environment was "highly promotional," and it believes that "we did not execute to our full potential." The company also issued 1Q and full-year earnings guidance that was below the Street's forecasts. Shares fell.

February retail sales grow as expected, while consumer sentiment falls

Advance retail sales for February rose 1.0% month-over-month (m/m), matching the forecast of economists surveyed by Bloomberg, and January’s 0.3% gain was revised to a 0.7% advance. February sales ex-autos advanced 0.7%, inline with expectations, and January’s 0.3% rise was revised to a 0.6% gain. Sales at gasoline stations rose 1.4%, while ex-autos and gas, purchases grew 0.6% in February, versus the 0.5% increase that was anticipated, and the January figure was revised from a 0.2% increase to a 0.5% gain. Purchases excluding autos, gasoline and building materials, the figure used to calculate gross domestic product, increased 0.6%, the same rate as in January. Ten of the thirteen categories rose, paced by strength in the auto and parts sector, which gained 2.3% in February on top of a 1.2% increase in January, while gaining 23.7% y/y.

Meanwhile, the preliminary University of Michigan Consumer Sentiment Index deteriorated more than forecasted, dropping from 77.5 in February to 68.2 for March, compared to the decline to 76.3 that economists had expected. The deterioration in the index came as the current economic conditions component declined from 86.9 to 83.6. However, the economic outlook fell sharply, from 71.6 to 58.3, suggesting the increase in commodities may be weighing on the attitudes of the consumer. This was also illustrated by the inflation outlook component of the report, as consumers raised their outlooks, expecting the one-year rate to increase from 3.4% to 4.6%, and the five-year rate to increase to 3.2%, from 2.9%. Treasuries were mixed following the morning’s retail sales data, while reacting to the inflation readings of the consumer sentiment report. The yield on the two-year note was flat at 0.63%, while the yield on the 10-year note gained 3 bps to 3.39% and the 30-year bond gained 4 bps to 4.54%.

In other economic news, business inventories rose 0.9% m/m in January, compared to the 0.8% increase that was expected, with sales jumping 2.0%, causing the inventory-to-sales ratio-the amount of time it would take to deplete inventories at the current sales pace-to decline to 1.23 months from 1.25 months.

International focus on Japan’s earthquake and tsunami, no Saudi "day of rage"

Most of the focus of the day was on the record magnitude 8.9 earthquake in Japan, which hit industrial regions of the country and triggered a tsunami. The full impact of the disaster is still being assessed. The yen rose in anticipation of a repatriation of funds by Japanese investors and companies and the Bank of Japan pledged to ensure financial stability.

Elsewhere, the lack of a much anticipated "day of rage" in Saudi Arabia and potential for a near-term hit to productivity and economic growth in Japan, the world's third largest oil importer, caused a decline in crude oil prices.

In economic news, China's producer and consumer prices rose more than anticipated and retail sales increased by a smaller amount than expected, while industrial production gained more than forecasted. Meanwhile in Europe, German consumer prices rose slightly hotter than expected y/y, while producer prices in the UK were mixed, with input prices higher than anticipated compared to last year, and core output prices coming in cooler than forecasted. Elsewhere, Italy's 4Q GDP was left unrevised at a 0.1% expansion rate compared to 3Q, while on a y/y basis, the nation's output was unexpectedly revised to a higher rate of growth.

Markets lower on euro-debt concerns and disappointing global trade data

The equity markets posted broad-based losses with lingering Middle East and North African unrest keeping the outlook for commodity prices, especially oil, elevated, while the euro-area debt crisis came back into focus. Moody's Investors Service contributed to the debt concerns in the euro-zone after downgrading the sovereign debt ratings of peripheral nations of Greece and Spain, while a bond auction out of Portugal, which resulted in sharply higher borrowing costs exacerbated sentiment. Adding insult to injury for the bulls, a plethora of disappointing global trade data, with China posting an unexpected deficit on much lower than forecasted increases in imports and exports, and a much wider-than-forecasted deficit in the US.

  Despite beginning talks two months ago regarding an expansion of the European Financial Stability Facility (EFSF) to rescue weaker European nations, policymakers don’t seem any closer to agreement. Continued delay has only exacerbated the crisis of confidence regarding longer-term solvency of weak nations, as well as the ability of the EFSF to address potential future bailouts. European policymakers are meeting weekly this month ahead of a self-imposed deadline for resolution at a March 24-25 summit.

Also, hawkish talk by the European Central Bank (ECB), which indicated a potential rate hike in April, is adding pressure. The possibility of a rate hike has raised the effective rate at which countries tap the EFSF, and could further hamper still-fragile economic growth in much of the euro-zone, which faces the headwind of tough fiscal austerity measures.

Fed meeting the highlight in a busy next week

The first major release in a busy economic week begins with Tuesday's one-day Federal Open Market Committee (FOMC) meeting and midday statement that concludes the meeting. No changes are expected to the fed funds target rate, currently at a level between 0-0.25%, or to the $600 billion asset purchase program, commonly known as quantitative easing, or QE2. Oil prices have spiked since the last meeting held January 25 and there have been indications of future strengthening in the job market.

Inflation readings will be reported after the Fed meeting, with Wednesday's Producer Price Index (PPI) expected to show prices at the wholesale level rose 0.7% month-over-month (m/m) in February, while the core rate, which excludes food and energy, is expected to increase 0.2%, down from January's 0.5%. The release precedes Thursday's Consumer Price Index (CPI) report, forecasted to show a 0.4% m/m increase, while ex-food and energy, it is expected to again rise 0.1%, down from January’s 0.2%. On a y/y basis, the CPI is expected to increase 2.0% at the headline level and 1.0% at the core level.

Meanwhile, housing starts will also be reported Wednesday, expected to fall 4.4% m/m in February to an annual rate of 570,000 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 increase a modest 1.2% m/m to 570,000 units. Thursday also brings the February reading on industrial production, expected to rise 0.6% m/m in February, and capacity utilization is forecasted to increase to 76.5%.

Other releases on the US economic calendar include the Empire Manufacturing Index, import prices, 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 CPI, as well as manufacturing and wholesale sales, Mexico's industrial production, and Brazil's retail sales.

Other international releases include Japan's industrial production, consumer confidence, department store sales, machine tool orders, and leading index, Australia's leading index and dwelling starts, and China's industrial profits, new loans, money supply, and leading index. Economic releases in Europe will include euro-zone industrial production and 4Q employment, CPI and trade balance, German PPI and Zew survey of economic conditions. In central bank action, the Bank of Japan is shortening its regularly scheduled two-day meeting to just Monday, and the Bank of Norway and Swiss National Bank meet.