Evening Market Update

Consumer Confidence and Earnings Bolster Stocks

A better-than-expected rise in consumer confidence and some favorable earnings reports helped to push stocks higher in today’s session. Dow member 3M Co, along with Ford Motor Co and UPS exceeded analysts’ profit forecasts, but while Netflix also beat the Street, its 2Q guidance disappointed, and shares of Coca-Cola and Lexmark International suffered after falling short of expectations. Elsewhere, IBM upped its dividend and added to its stock buyback program. Treasuries ended higher, despite the upward move in stocks, as US home prices declined further during February and regional manufacturing activity in Richmond unexpectedly deteriorated.

The Dow Jones Industrial Average rose 115 points (0.9%) to 12,595, the S&P 500 Index was 12 points (0.9%) higher at 1,347, and the Nasdaq Composite was 22 points (0.8%) higher at 2,848. In moderate volume, 909 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.07 to $112.21 per barrel, wholesale gasoline gained $0.03 to $3.31 per gallon, while the Bloomberg gold spot price declined $5.48 to $1,501.75 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies— was 0.3% lower at 73.79.

Dow member 3M Co. (MMM $96) posted 1Q EPS of $1.49, above the $1.44 that analysts were expecting, with revenues increasing 15% y/y to $7.3 billion, compared to the $6.9 billion that the Street had estimated. The company noted that sales in emerging markets were strong and it was able to “more than overcome” the impact of the massive earthquake and tsunami in Japan. MMM raised its full-year EPS outlook. Shares finished higher.

However, fellow Dow member  Coca-Cola Co. (KO $67) reported 1Q EPS ex-items of $0.86, below the $0.87 consensus estimate of analysts surveyed by Reuters, with revenues jumping 40% year-over-year (y/y) to $10.5 billion, compared to the $10.6 billion that the Street had forecasted. The company said worldwide volume grew 6%, driven by volume gains in both sparkling and still beverages, but net revenues in Europe declined, and it estimates that the events in Japan had a $0.01 impact on 1Q earnings as a result of lost revenues. Shares were lower.

Ford Motor Co. (F $16) achieved 1Q earnings ex-items of $0.62 per share, well above the $0.50 that the Street projected, as revenues increasing 18% y/y to $33.1 billion, above the $30.6 billion that analysts anticipated. The automaker said it will increase total company 2Q production, but it expects results in the latter part of the year may not be as strong 1Q, due to lower expected profit at Ford Credit, increasing commodity costs and seasonal factors that tend to favor the first half of the year. Shares were higher.

Netflix Inc. (NFLX $229) announced 1Q EPS of $1.11, four cents above the Street’s estimates, with revenues growing 46% y/y to $719 million, exceeding the $706 million that analysts had forecasted. However, the online movie and TV subscription service company issued 2Q EPS guidance that missed analysts’ expectations. NFLX finished nearly 9% lower.

United Parcel Service Inc. (UPS $74 ¹) reported 1Q profits of $0.88 per share, exceeding the $0.85 that analysts had expected, as revenues rose 7.2% y/y to $12.6 billion, compared to the $12.7 billion that the Street was looking for. The package delivery and logistics firm saw volumes grow modestly, led by a gain of over 4% in its international segment, despite “rapidly rising fuel costs” and “challenging weather conditions.” UPS raised its full-year outlook and shares were higher.

Shares of Lexmark International Inc. (LXK $33) moved over 12% lower after reporting a 16% decline in 1Q profits to $1.14 per share, well short of the $1.25 consensus estimate of analysts surveyed by Reuters and guidance it gave in February, as revenues fell 0.8% to $1.03 billion, also below estimates. The printer maker cited higher-than-expected restructuring costs for the disappointing results, and said it will have to incur additional costs in 2Q, prompting it to lower its earnings guidance for the same period to a range of $1.00-1.10 per share, with revenue growth expected to drop by a “low-single-digit percent” from the $1.04 billion it reported a year ago. Analysts were expecting the company to report 2Q EPS of $1.15 on sales of $1.05 billion.

Elsewhere, Dow member International Business Machines (IBM $168) raised its quarterly dividend by 15% to $0.75 per share, the sixteenth straight year it has bumped the payout, and authorized an additional $8 billion to its stock repurchase program. Shares finished marginally higher.

Consumer confidence improved, but home prices and manufacturing activity declined

The S&P/Case-Shiller Home Price Index showed a decline in home prices of 3.33% y/y in February, compared to the 3.30% drop that economists surveyed by Bloomberg had expected. Washington DC was the only market to post a y/y gain, with an annual growth rate of 2.7%. Month-over-month (m/m), home prices were 0.18% lower—the eighth consecutive monthly decline—compared to forecasts, which called for a decline of 0.40%, with Detroit the only city with a positive monthly change. The report revealed that ten of the eleven cities that made new lows in January saw new lows again in February, and although prices were down compared to a year ago, they remain slightly above the April 2009 bottom.

Meanwhile, the  Consumer Confidence Index  improved more than expected, increasing from an upwardly revised 63.8 in March to 65.4 for April, compared to the improvement to 64.5 that economists anticipated. The favorable read on sentiment came as consumers’ assessment of the short-term outlook on business conditions and the current situation both improved, while their appraisal of jobs being “plentiful” increased. Moreover, the inflation outlook component of the report showed consumers expect inflation to decline to 6.3%, from 6.7% in March, twelve months from now.

Finally, the Richmond Fed Manufacturing Index showed manufacturing activity in the Southeast unexpectedly decelerated, declining from an unrevised 20 in March to 10 in April, compared to the unchanged reading that was expected by economists. A reading above zero depicts expansion. The surprising drop in the index came as new orders volume, shipments, and order backlog all decreased solidly, while the number of employees dipped from 16 to 14, but wages increased from 19 to 22.

Treasuries were higher following the data, with the yield on the 2-year note down 3 bp to 0.62%, the yield on the 10-year note 6 bps lower to 3.31%, and the 30-year bond yield declining 7 bps to 4.39%.

Tomorrow brings the much awaited conclusion of the two-day Federal Open Market Committee (FOMC) 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. The statement will be released earlier than usual, at 12:30 p.m. EST, as it will be followed by the first post-statement news conference and Q&A session led by Fed Chair Bernanke beginning at 2:15 p.m. EST. The news conference will be accompanied by the Fed’s updated economic forecast, which is typically released in the Minutes following two-day meetings.

The Fed is conducting the news conference in an aim to increase transparency and improve understanding of its policy, as communication is viewed as one of the “tools” in the Fed’s toolbox to influence market expectations about interest rates. By being the first speaker after the FOMC meeting tomorrow, Bernanke will have the opportunity to set the tone for future discussions. Bernanke, along with Vice Chair Yellen and New York Fed President Dudley, are the key members of the inner circle within the FOMC who have consistently said that the recovery is still tenuous, and the Beige Book noted that economic improvement has been moderate. However, at the last FOMC meeting on March 15, several members noted upside risks to inflation.

While investors’ focus will likely be on the FOMC statement and press conference, the US economic calendar will also provide data in the form of durable goods orders, forecasted to rise 2.3% m/m after falling 0.9% in February, while ex-transportation, orders are expected to rise 2.0% following a 0.6% decline in February.

Overseas markets return from holiday break

Sentiment across the pond was positive after returning to business from a holiday break with most overseas markets finishing in the green. Economic news was light, with a read on UK business optimism improving by a smaller amount than economists forecasted, and a separate report showing the 2010 euro-zone debt-to-GDP ratio rose from 79.3% to 85.1%. Elsewhere, Spain, a key peripheral nation that has been feared to be near a bailout, conducted a short-term debt auction, and although the yield that it had to pay rose, stocks in the nation were higher.

In Asia on the other hand, the mood was less than cheery following media reports that China raised capital requirements for its top five lenders, some earnings releases disappointed, and commodity issues fell victim to some profit-taking as metals prices declined. Moreover, Japan reported that its department store sales during March, the month the earthquake and tsunami hit the nation, fell 14.7% y/y.

Tomorrow, the international economic calendar will be a bit busier with reports scheduled for release to include 1Q GDP out of the UK, eurozone industrial orders, German CPI, the leading economic index from Taiwan, Australian CPI, 1Q GDP from South Korea, and retail sales and trade balance from Japan.