Evening Market Update

Stocks Notch Modest Gains in Choppy Trading

The equity markets struggled to find a definitive direction today, but still managed to finish slightly higher after digesting a healthy mix of earnings reports, economic data, and deficit-talk from President Obama. Early gains came courtesy of a favorable US retail sales report and a rebound in overseas markets, but momentum quickly turned on news of a smaller-than-expected increase in business inventories and a decline in mortgage applications. However, stocks got a boost in afternoon action as the Fed Beige Book noted generally improved economic activity. Also, President Obama revealed a deficit reduction plan aimed at cutting $4 trillion from the deficit within 12 years. In equity news, Dow member JPMorgan Chase beat the Street’s earnings estimates, although the results appeared to have benefitted from a reversal of some loan-loss reserves. Additionally, Riverbed Technology gave upbeat preliminary 1Q results and Silgan Holdings announced an agreement to acquire Graham Packaging for $1.25 billion in cash and stock. Treasuries moved higher after reversing early losses.

The Dow Jones Industrial Average rose 7 points (0.1%) to 12,271, the S&P 500 Index was flat at 1,314, and the Nasdaq Composite increased 17 points (0.6%) to 2,762. In modest volume, 899 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.68 to $106.93 per barrel, wholesale gasoline gained $0.08 to $3.24 per gallon, and the Bloomberg gold spot price increased $2.81 to $1,455.79 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies— was 0.1% higher at 74.96.

Dow member JPMorgan Chase & Co. (JPM $46) reported 1Q EPS of $1.28, above the $1.16 consensus estimate of analysts surveyed by Reuters, and although revenues declined 8% year-over-year (y/y) to $25.8 billion, the top line results were higher than the $25.2 billion that the Street expected. JPM said its earnings benefited by $0.29 per share from reduced credit card loan loss reserves, partially offset by $0.26 per share in losses from mortgage assets and expenses for estimated costs of foreclosure-related matters.

The company’s Chairman and CEO Jamie Dimon said the firm’s results reflected a strong quarter across its investment banking unit and solid performances from its card services, commercial banking, Treasury & securities services, and asset management businesses. He added that these results partially benefitted from improved credit trends, and it intends to meet the global Basel III capital requirements “substantially ahead of time,” but unfortunately losses from mortgage-related issues “will continue for a while.” Also, the company’s retail financial services unit posted a wider net loss y/y and revenues fell 19%, reflecting losses in mortgage and home equity portfolios. Shares gave up early gains to finish lower, and the report weighed heavily on the broader financial sector.

Riverbed Technology Inc. (RVBD $35) traded sharply higher after the IT performance company issued preliminary 1Q results that exceeded expectations. RVBD said it expects revenue to be in the range of $163-164 million, and EPS to range between $0.19-0.20. Analysts were expecting the company to post 1Q revenues of $161 million and EPS of $0.18.

In M&A news, consumer goods packaging firm Silgan Holdings Inc. (SLGN $44) announced that it has reached a definitive agreement to acquire plastic container company Graham Packaging Co. Inc. (GRM $22) in a cash and stock transaction valued at about $19.56 per share, or $1.25 billion, excluding debt. Under the terms of the deal, GRM shareholders will receive 0.402 shares of SLGN and $4.75 in cash for each share they own. GLGN was up over 10%, while GRM moved over 30% higher.

Retail sales rise, mortgage applications fall

Advance retail sales for March rose 0.4% month-over-month (m/m), just below the 0.5% increase that was forecasted by economists surveyed by Bloomberg, but February’s 1.0% gain was revised to a 1.1% advance. March sales ex-autos increased 0.8%, topping expectations of a 0.7% increase, and February’s 0.7% rise was revised nicely higher to a 1.1% gain. Sales at gasoline stations rose 2.6%, while ex-autos and gas, sales gained 0.6% in March, versus the 0.5% increase that was anticipated, and its February figure was revised from a 0.6% increase to a 0.9% gain.

Purchases excluding autos, gasoline and building materials (the figure used to calculate gross domestic product) increased 0.4% after increasing 1.1% in February, upwardly revised from the 0.6% originally reported. Ten of the thirteen categories rose, paced by strength in furniture sales, which gained 3.6%, and electronics, where the 2.1% increase was the largest advance in a year. Elsewhere, the auto and parts sector, a previous leader, fell 1.7%, but still posted a 1.9% gain for the three month period relative to the prior three months.

Consumer spending has been resilient along with the improvement in the job market. Meanwhile, the rise in gasoline prices has prompted consumers to reduce their gasoline consumption to be able to afford purchases elsewhere, with MasterCard SpendingPulse reporting fewer gallons of gasoline were sold in each of the last five weeks relative to the same period a year ago. While some investors question whether rising commodity prices will fuel inflation in the US, high unemployment is keeping a lid on wages. Tomorrow, we will get a look at the latest look at input prices in the form of the Producer Price Index, expected to increased 1.0% m/m in March, after rising 1.6% in February, while excluding food and energy, core producer prices are forecasted to rise 0.2%, matching the gain seen in February. Year-over-year, headline producer prices are expected to rise 6.1% and core prices are projected to be 1.9% higher.

Elsewhere, business inventories increased 0.5% m/m in February, compared to the 0.8% increase that was expected. Sales rose 0.2%, causing the inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—to remain at January’s upwardly revised level of 1.24 months.

In other economic news, the MBA Mortgage Application Index decreased by 6.7% last week, after the index that can be quite volatile on a week-to-week basis, declined by 2.0% in the previous week. The decrease came as the Refinance Index fell 7.7%, accompanied by a 4.7% drop in the Purchase Index, and the average 30-year mortgage rate moved higher by 5 basis points (bps) to 4.98%.

Treasuries overcame early losses to climb higher, as the yield on the 2-year note decreased 1 bp to 0.73%, while the yields on the 10-year note and 30-year bond both declined 3 bps to 3.46%, and 4.54%, respectively.

Fed notes mixed bag in assessment of US economy

The Federal Reserve Beige Book was released mid-day, 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 April 26-27. The report noted that most Districts described economic improvement as moderate but that gains were widespread across sectors. While manufacturing led, some contacts voiced uncertainties about the future outlook due to disruptions due to Japan, the geopolitical climate and “ambiguity about US government spending plans.” Seven Districts reported actual or expected disruptions due to the tragedy in Japan. Elsewhere, consumer spending was reported as mixed, and despite pockets of weakening, little change was noted to residential real estate markets.

The strongest part of the report was the commentary regarding jobs, with four Districts citing examples of concern among contacts about “being able to obtain certain types of skilled workers,” and most Districts reported signs of improvement in at least some parts of their labor markets. However, wage pressures were described as weak or subdued. Elsewhere, other input costs were higher and widely reported to be putting increasing pressures on prices. The ability to pass through cost increases varied, although manufacturers generally found less resistance than either retail or construction, where weak demand was a limiting factor.

However, commentary regarding lending was somewhat sobering. While most Districts cited loan demand as either unchanged or slightly improved, many noted weak demand in some segments, and that credit standards were either unchanged or slightly tighter, and that competition for quality loans was “intense.”

European markets recover despite data, Canada predicts slower growth in Q2

Economic news from across the pond was mostly unfavorable, with a report showing euro-zone industrial production accelerated m/m in February, but the increase was below economists’ expectations. Moreover, UK jobless claims unexpectedly rose in March, while consumer prices in France and wholesale prices in Germany both came in hotter than forecasted.

In Asia/Pacific economic news, South Korea’s unemployment rate unexpectedly remained at 4.0%, Australia’s consumer confidence improved in April, and the Bank of Korea said that inflation will likely increase by a higher amount than it previously forecasted.

Back in the Americas, the Bank of Canada released its Monetary Policy Report, which forecasted a 2.0% annualized growth rate for the Canadian economy in the April-June period, compared to a 4.2% expansion in Q1. The Canadian central bank kept is benchmark interest rate at 1.0% yesterday as expected, where it has been since September of 2010. Governor Mark Carney reiterated today that further increases would be “carefully considered,” and added that the Canadian economy faces “strong headwinds” from the persistent strength of the Canadian dollar.

In addition to the aforementioned Producer Price Index, tomorrow’s US economic calendar will also include weekly initial jobless claims, which are expected to decline slightly to 380,000 from a previous reading of 382,000.

There are no major releases on the international front tomorrow, although China is scheduled to release money supply and new yuan loans sometime this week.