Evening Market Update

Global Uncertainty, Lack of Catalyst Temper Markets

The US equity markets finished modestly lower after trading in a fairly tight range for most of the session. Optimism over continued progress by Japan to cool a nuclear reactor north of Tokyo was offset by festering Middle East uncertainty, as US and European airstrikes on Libya continued, putting upward pressure on oil prices. Meanwhile, European debt concerns and inflation worries abroad that stoked expectations that rate hikes in Europe could come sooner than expected compared to the US also stymied sentiment. On the equity front, Bristol Myers Squibb reported upbeat clinical trial results of its melanoma treatment, Dollar General beat the Street’s earnings expectations and upped its guidance, while Walgreen Co disappointed investors with its gross margin and Carnival Corp lowered its full-year earnings forecast citing an increase in fuel prices. Treasuries ended mixed after paring losses following a larger-than-expected deceleration in manufacturing activity in the Southeast.

The Dow Jones Industrial Average fell 18 points (0.2%) to 12,019, the S&P 500 Index lost 5 points (0.4%) to 1,294, and the Nasdaq Composite declined 8 points (0.3%) to 2,684. In moderately light volume, 824 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.88 to $104.97 per barrel, wholesale gasoline was unchanged at $3.00 per gallon, while the Bloomberg gold spot price fell $1.27 to $1,426.40 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies— was flat at 75.44.

Bristol Myers Squibb Co. (BMY $26) reported that a clinical trial of its investigational melanoma drug met the primary endpoint of improving survival in previously-untreated patients with metastatic melanoma. BMY said a regulatory filing for the treatment is currently under review by the US Food and Drug Administration. BMY traded higher.

Walgreen Co. (WAG $39) reported fiscal 2Q EPS of $0.80, inline with the consensus estimate of analysts surveyed by Reuters, with revenues increasing 8.9% year-over-year (y/y) to $18.5 billion, topping the $18.4 billion that the Street had estimated. Same-store sales—sales at stores open at least a year—rose 4.1% y/y. Shares were solidly lower as the company pre-announced its sales performance earlier this month and some analysts noted that WAG’s flat gross margin was below expectations.

Carnival Corp. (CCL $39) reported fiscal 1Q EPS of $0.19, inline with expectations, as revenues increased 7.6% y/y to $3.4 billion, exceeding the $3.3 billion that the Street had expected. The travel cruise company said it had “significant improvement” in ticket prices for its European brands and since the start of the calendar year, booking volumes and prices for the remaining three quarters are running higher that the prior year. However, the company lowered its full-year 2011 EPS outlook as fuel prices have “increased significantly,” but the weakening of the US dollar is expected to partially offset some of the costs for higher fuel. Shares finished lower.

In other earnings news, Dollar General Corp. (DG $31) reported a fiscal 4Q profit ex-items of $0.65 per share, above the $0.59 per share expected by analysts polled by Reuters, as revenues rose 9.4% to $3.49 billion, which was slightly below the $3.52 billion forecast. Same-store sales—sales at stores open at least a year—rose 3.8% y/y. The low-price retailer also upped its guidance for the year, saying it sees EPS in a range of $2.20-2.30 on a sales increase of between 11-13%, above the $2.14 EPS and 9.4% increase in sales forecast by analysts. Shares finished higher.

Southeast regional manufacturing activity slows

The lone report on today’s economic calendar is the Richmond Fed Manufacturing Index, which showed manufacturing activity in the Southeast decelerated more than expected, declining from an unrevised 25 in February to 20 in March, compared to the 24 reading that was expected by economists surveyed by Bloomberg. The larger-than-forecasted drop in the index came as new orders volume, shipments, and order backlog all decreased, while the number of employees remained at a reading of 16, but wages increased slightly from 18 to 19.

Treasuries ended the day mixed after paring losses on the manufacturing report. The yield on the 2-year note was up 2 bps to 0.66%, the 10-year note yield fell 1 bp to 3.33%, and the 30-year bond yield was 2 bps lower at 4.44%.

Euro debt and inflation concerns offset Japanese optimism

Reports out of the UK heightened inflation concerns and stoked expectations that rate hikes in Europe could come sooner than expected compared to the US, after the nation’s Consumer Price Index (CPI) increased to 4.4% y/y in February from the 4.0% y/y rise reported in January, and compared to the 4.2% y/y increase that economists had forecasted. Separately, the UK Retail Price Index (RPI) also rose more than expected, and Britain’s budget deficit unexpectedly widened, per Bloomberg. Also hamstringing sentiment, European finance ministers continued to grapple with the execution of bringing its temporary European Financial Stability Facility (EFSF) up to full lending capacity, but they did agree on enabling a permanent bailout fund as of 2013, per Bloomberg. Yields on debt-laden euro-zone nations continued to rise, with rates of recently bailed-out Ireland leading the way, complicating the ability for the troubled nations to raise capital on their own.

In Asia, Japanese stocks jumped 4.4% after being closed for a holiday yesterday, as slow progress continues to be made to cool nuclear reactors at a power facility north of Tokyo, which was damaged by the massive earthquake and tsunami that hit the nation earlier this month. However, the risk of a Japanese nuclear meltdown remains far from being averted and uncertainty regarding the full impact of the tragedy on the world’s third largest economy kept markets in the region in check. Moreover, Middle East and North African unrest remained in focus, with US and European led airstrikes on Libya continuing, fostering uncertainty regarding the path to stability in the region. While attention on the Japanese disaster and events in the Middle East and North Africa were the focal point overseas, there were a few economic reports worth a mention. Japan’s All Industry Index gained ground during January, slightly above expectations and following a decline the month prior, while Taiwan’s unemployment rate declined more than what economists were forecasting for February.

Back in North America, retail sales in Canada unexpectedly fell 0.3% m/m during January, well short of the 1.0% increase expected by economists.

More housing data on the horizon

Tomorrow, the US economic calendar will be focused on the housing market, with the release of new home sales, forecasted to rise 2.1% month-over-month (m/m) in February to an annual rate of 290,000 units. However, new home sales remain near the all-time low of 274,000 reached in August 2010, and the report will likely do little to contradict what Schwab’s Chief Investment Strategist Liz Ann Sonders, Director of Market and Sector Analysis, Brad Sorensen, CFA and Senior Market Analyst, Michelle Gibley, CFA have noted for some time, that the overall residential real-estate market is generally finding its bottom. New home sales are considered a timelier indicator of conditions in the housing market as they are based on signings instead of closings, such as with existing home sales, which fell more than economists expected on Monday, dropping 9.6% to an annual rate of 4.88 million units. New home sales will likely continue to remain lackluster as a rash of foreclosures—with lenders possibly foreclosing on more homes than any other year since the housing crisis began in 2006—is keeping the supply of existing homes on the market elevated and dampening the outlook for new home purchases. Moreover, home prices are likely to remained subdued as discounting of foreclosed homes compete for sales, especially from all cash buyers, which are on the rise given the still tight credit standards.

Also gracing the US economic calendar is the MBA Mortgage Applications Index.

Economic reports internationally will be light tomorrow, with only industrial orders out of the euro-zone being reported.