Evening Market Update

 

 

Stocks Gain Ground on Encouraging Economic Reports

US equities finished higher on a day chalk full of economic data and corporate earnings, although the major averages still finished the week slightly in the red. The headline release was the Consumer Price Index, which rose inline with expectations, although core prices were cooler than economists predicted. Additionally, consumer sentiment improved more than forecast and readings on manufacturing activity exceeded estimates. In equity news, Dow member Bank of America fell short of the Street’s earnings estimate, but managed to exceed revenue projections, while Google led technology stocks lower after it reported lower-than-expected EPS after yesterday’s close. Additionally, Mattel matched analysts’ profit forecasts and increased its dividend. Treasuries finished the session higher, while WTI crude oil jumped to over $109 per barrel.

The Dow Jones Industrial Average rose 57 points (0.5%) to 12,342, the S&P 500 Index was 5 points (0.4%) higher at 1,320, and the Nasdaq Composite increased 4 points (0.2%) to 2,765. In moderate volume, 1.0 billion shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.28 to $109.39 per barrel, wholesale gasoline was $0.05 higher at $3.29 per gallon, and the Bloomberg gold spot price increased $12.98 to $1,487.13 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies— was 0.2% higher at 74.87. For the week, including dividends, the DJIA was 0.3% lower, while the S&P 500 Index and the Nasdaq Composite both lost 0.6%.

Dow member  Bank of America Corp. (BAC $13 ¹) announced 1Q earnings of $0.17 per share, below the $0.26 consensus estimate of analysts surveyed by Reuters, with revenues falling 15.9% year-over-year (y/y) to $26.9 billion, but exceeding the $26.7 billion that the Street had forecasted. The company said its results for the quarter were positively affected by lower credit costs, gains from equity investments, and higher asset management and investment banking fees. BAC said these factors were partially offset by higher legacy mortgage-related costs, higher litigation expenses, and lower sales and trading revenue. Shares were lower.

Elsewhere, Google Inc. (GOOG $531) reported 1Q EPS ex-items of $8.08, slightly lower than the $8.10 estimate of analysts, while revenue ex-traffic acquisition costs (TAC) came in at $6.5 billion, which beat the $6.3 billion forecast. GOOG said capital expenditures were $890 million, due mainly to IT infrastructure spending, and it expects to continue to make “significant capital expenditures.” The world’s largest internet search engine said its paid clicks metric increased 18% y/y, while its cost-per-click rose 8% y/y. Also, the company continued to expand its headcount, adding 1,916 full-time employees in the first quarter, as its work force is now 28% larger than it was a year ago. Shares traded solidly lower.

Moreover, Mattel Inc. (MAT $27) posted 1Q EPS of $0.05, inline with analysts’ forecasts, as revenues rose 8% y/y to $952 million, topping the $904 million that the Street had projected. The toymaker said its girls and boys business unit revenues rose 15% y/y, and also announced that it will pay a quarterly dividend of $0.23 per share, representing an annualized dividend of $0.92 per share, an increase of 11% y/y. MAT finished solidly higher.

Core consumer prices cooler than expected, manufacturing and sentiment improve

The Consumer Price Index showed prices at the consumer level were up 0.5% month-over-month (m/m) in March, matching the forecasts of economists surveyed by Bloomberg, and the increase seen in February. Meanwhile, the core rate, which strips out food and energy, was 0.1% higher m/m in March, compared to the estimate of a 0.2% increase, which was the rate of increase seen in February. On a y/y basis, consumer prices were 2.7% higher in March, up from 2.1% in February, and the core CPI was up 1.2% y/y, after rising by 1.1% in February. Economists expected headline CPI to come in at 2.6% and a core rate of 1.2% y/y. Gasoline and food prices continued to rise, accounting for almost three quarters of the headline increase in March, while price indexes for apparel and household furnishings both declined to offset increases in transportation and shelter, resulting in the smaller-than-expected increase in the core rate.

Meanwhile, the  Empire Manufacturing Index, a measure of manufacturing in the New York region, rose in April to a level of 21.70, compared to the estimates of economists, which expected a decrease to 17.00, from the previous month’s level of 17.50. The index moved further into expansionary territory depicted by a reading above zero. Also, March industrial production grew at a faster pace than expected, rising 0.8% m/m, after an upwardly revised 0.1% increase seen in February.

With inflation concerns dominating sentiment as of late, today’s economic calendar helped to soothe some of those concerns, although persistently higher food and energy is likely to keep inflation sentiment among consumers uneasy. Today’s April  preliminary University of Michigan Consumer Sentiment Index, which rose more than expected to 69.6 from 67.5 in March, compared to the 68.8 level that was forecasted, illustrates this inflation uneasiness as the 1-year inflation expectation remained at an elevated 4.6%—the highest since August 2008—and has been ratcheted up since the 2.7% level that was seen back in October 2010.

Treasuries moved higher on the tame inflation data, as the yield on the 2-year note fell 8 bps to 0.69%, the yield on the 10-year notes declined 9 bps to 3.41%, and the 30-year bond yield lost 8 bps to 4.46%.

Moody’s downgrades Irish debt rating, Chinese data raises inflation concerns

Euro-area debt concerns were exacerbated by Moody’s Investors Service downgrading the sovereign credit rating of troubled nation Ireland, while keeping its outlook on the bailed-out nation negative. Also, despite the favorable read in the US, inflation concerns held sentiment in check, as a report showed euro-zone consumer prices came in hotter-than-forecasted in March, supporting the European Central Bank’s (ECB) interest rate hike last week, and exacerbating inflationary sentiment.

Sentiment in the Asia/Pacific region was torn between optimism of global economic growth and concerns of further monetary policy tightening in some of the emerging markets on the heels of data released out of China and India. China reported that its 1Q GDP expanded by 9.7% y/y, from 9.8% in 4Q and above economists’ expectations of 9.4% growth, while a separate report showed industrial production increased 14.8% y/y in March, above the 14.0% gain that was expected. However, inflation concerns in the region were supported by a larger-than-forecasted reading of y/y consumer prices in China—despite a slight decline in the m/m rate—which was followed by India’s wholesale prices increasing more than expected. Other reports from China included: retail sales exceeding economists’ forecasts, and fixed asset investment coming in above estimates.

Meanwhile, back in the Americas, Mexico’s central bank concluded its monetary policy meeting with a vote to keep its benchmark interest rate unchanged at 4.5%, inline with the expectation of economists. The rate has remained at this level for 18-straight meetings, and the central bank said it will likely keep rates on hold amid slowing inflation, even though Mexico is the only major Latin American country that uses inflation targeting that has yet to raise rates in the past year.

Equities post modest losses as 1Q earnings seasons gets off to a lackluster start

US stocks finished slightly in the red for the week as a sluggish start to 1Q earnings season overshadowed continued M&A activity, favorable retail sales, and a benign reading on consumer prices. Dow members dominated the earnings headlines, with Alcoa Inc. (AA $17) getting the ball rolling by posting revenues that missed expectations and noting the impact of higher energy and materials costs, but reports out of the financial sector supplied the bulk of the disappointment, culminating with Friday’s results from Bank of America. BAC’s report followed JPMorgan Chase & Co’s (JPM $45) midweek release, which although topped the Street’s revenue and earnings expectations, most of the upside was attributed to a reversal of some loan-loss reserves and mortgage-related costs were seen to “continue for a while.”

Meanwhile, inflation uneasiness also contributed to the declines for the week, as even though Friday’s core consumer price data was welcomed, earlier reports showed import prices and core producer prices both exceeded expectations. Exacerbating sentiment, initial jobless claims surprisingly jumped above the key 400,000 level, the trade balance narrowed by a smaller amount than forecasted and small business confidence unexpectedly fell. The negative tone set by the data offset signs of improving employment conditions noted in the Federal Reserve Beige Book.

Housing to highlight US economic data next week

The holiday-shortened week kicks off with a read on homebuilder sentiment from Monday’s NAHB Housing Market Index, while Tuesday brings housing starts, expected to rise 9.6% m/m in March to an annual rate of 525,000 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 1.1% m/m to 540,000 units. Wednesday will bring the March existing home sales report, which reflects closings from contracts entered one to two months earlier, forecasted to rise 2.5% m/m to an annual rate of 5.0 million units.

Last month’s housing data was particularly gloomy, with single-family permits and new home sales falling to new record lows and prices of existing home sales falling to the lowest level since April of 2002. However, there have been regional pockets of strength, housing affordability remains high, and job growth is a key factor to ongoing demand.

Other releases on the US economic calendar include the MBA Mortgage Applications Index, weekly initial jobless claims, the Philadelphia Fed’s Business Activity Index, and the Conference Board’s Index of Leading Indicators. US markets will be closed on Friday in observance of Good Friday. Other reports in the Americas include Canada’s CPI, leading indicators, as well as wholesale and retail sales, and the unemployment rate for Mexico and Brazil.

Other international releases include Japan’s consumer confidence, machine tool orders and leading index, Australia’s leading index, import prices and PPI, and China’s property prices, preliminary April manufacturing PMI, and leading index. Economic releases in Europe will include euro-zone consumer confidence and preliminary April manufacturing and services PMIs, German PPI and IFO survey of business confidence, and UK housing prices and retail sales. The central banks of Sweden and Brazil are expected to raise rates and the minutes will be released from the last Reserve Bank of Australia and Bank of England meetings.