Evening Market Update

 

 

 

Stocks Climb Higher as Fed Continues to Stay Its Course

US stocks moved solidly higher on the day, after receiving a nice afternoon jolt from the comments of Fed Chairman Ben Bernanke in the inaugural post-policy meeting news conference. In the preceding policy statement, the Fed kept its monetary policy stance mostly unchanged and said it will allow its asset purchase program to conclude at the end of June, while giving no indication of any additional measures. The Fed continued to view the effects of the recent spike in commodity prices as “transitory” and reiterated that the unemployment rate “remains elevated.” The Committee did lower its growth estimates for the year, while raising its inflation expectations. Treasuries were mixed, as the other domestic economic releases included an increase in March durable goods orders and a decrease in mortgage applications. Corporate earnings continued to dominate the equity front, headlined by better-than-expected profits from Dow member Boeing Co, while Corning Inc and Whirlpool Corp also managed to beat the Street’s top- and bottom-line forecasts. Meanwhile, shares of Amazon.com Inc gained ground, even after the company came up well short of earnings projections, and Broadcom Corp issued disappointing 2Q guidance. In M&A news, Dow member Johnson & Johnson reached an agreement to acquire Swiss medical-device maker Synthes for about $21.3 billion.

The Dow Jones Industrial Average rose 96 points (0.8%) to 12,691, the S&P 500 Index was 8 points (0.6%) higher at 1,356, and the Nasdaq Composite was 22 points (0.8%) higher at 2,870. In moderate volume, 963 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.14 to $113.35 per barrel, wholesale gasoline gained $0.08 to $3.44 per gallon, while the Bloomberg gold spot price increased $21.57 to $1,527.82 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies— was 0.4% lower at 73.57.

Dow member Boeing Co. (BA $76 ¹) posted 1Q earnings of $0.78 per share, above the $0.69 consensus estimate of analysts surveyed by Reuters, but revenues declined 2% year-over-year (y/y) to $14.9 billion, missing the $15.2 billion that the Street forecasted. BA reaffirmed its full-year guidance. BA traded higher.

Amazon.com Inc. (AMZN $197) reported 1Q EPS of $0.44, well below the $0.60 that the Street had expected as operating expenses jumped 41.5% y/y, but revenues rose 38% y/y to $9.9 billion, above the $9.5 billion that analysts had anticipated. The online retailer said its North American sales rose 45% y/y and international sales gained 31%, as worldwide electronics and other general merchandise revenues surged 59%. Meanwhile, the company’s media sales increased 15%. AMZN issued 2Q revenue guidance that came in above analysts’ forecasts, but its outlook for operating earnings missed expectations. Despite the huge profit shortfall, shares moved solidly higher as the bulk of the expenses are being seen as short-term costs aimed at expanding distribution facilities, boosting its online streaming services, and promoting its Kindle e-reader.

Corning Inc. (GLW $21) announced 1Q EPS of $0.47, three cents above the expectation of analysts, as revenues rose 24% y/y to $1.9 billion, exceeding the Street’s forecast of $1.8 billion. The maker of glass for flat-panel TVs, computers, and mobile phones said sales at its display technologies unit increased 5% quarter-over-quarter (q/q) as glass price declines were more moderate than last quarter. Shares finished nicely higher.

Whirlpool Corp. (WHR $89) achieved 1Q profits ex-items of $2.11 per share, easily exceeding the $1.64 that the Street was expecting, as revenues rose 3% y/y to $4.4 billion, above the $4.3 billion that analysts had projected. The appliance maker said its ongoing cost reduction efforts helped mitigate “significant material cost inflation.” WHR reaffirmed its full-year EPS outlook. Shares were higher.

Broadcom Corp. (BRCM $35) moved sharply lower after the chipmaker issued 2Q revenue guidance that was below expectations, forecasting revenues between $1.75-1.85 billion, versus the $1.89 billion that was estimated by analysts. The guidance accompanied its 1Q profit report, in which it posted EPS ex-items of $0.68, compared to the $0.59 that was anticipated, and revenues of $1.8 billion that matched forecasts.

In M&A news, Dow member Johnson & Johnson (JNJ $66) announced that it has reached an agreement to acquire Swiss medical-device maker Synthes for 159 Swiss francs ($181.10) per share in cash and stock, or about $21.3 billion. JNJ traded higher.

No change to Fed policy, Bernanke adds insight in news conference and Q&A session

As expected, the Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting by making no changes to the fed funds rate or the size or duration of the asset purchase program. The Fed modestly downgraded its assessment of the economy, as it did in the Beige Book released two weeks ago, saying the recovery was proceeding at a moderate pace, versus the “firmer footing” description at the last meeting in mid-March. However, the Fed continued to note that the job market is improving gradually. The Fed said that business and household spending continue to expand and the housing market “continues to be depressed.”

In the statement, the Fed noted several times that inflation has increased in recent months. However, the Committee expects these effects to be transitory and said it will pay close attention to the evolution of inflation and inflation expectations, and that longer-term inflation expectations thus far have remained stable, and measures of underlying inflation are still subdued. The Fed’s range of estimates for growth this year was cut to 3.1%-3.3%, down from a previous estimate of 3.4%-3.9% in January. Additionally, estimates of inflation were raised to 2.1%-2.8% from 1.3%-1.7% in January, while core inflation projections were increased to a 1.3%-1.6% range from a prior range of 1.0%-1.3%.

To promote a stronger pace of recovery and help ensure inflation over time is consistent with its mandate, the asset purchase program, which consists of $600 billion of longer-term Treasuries, will be completed by the end of the current quarter. The Committee will regularly review the pace of securities purchases and overall size of the program in light of incoming information and will adjust the program as needed to best “foster maximum employment and price stability.” Voting on today’s decision was unanimous.

In the inaugural post-statement news conference and Q&A session, Fed Chairman Ben Bernanke said there was “a bit less momentum in the economy” that led to the cut in growth estimates, but that the slowdown in the first quarter is viewed by the Committee as being “transitory.” When asked to define the “extended period” terminology from the policy statement, Bernanke said it suggests at least two meetings, but added that the term was purposely vague because the Fed doesn’t know how conditions will change. Bernanke admitted that high gas prices are a serious problem for Americans, but said there is little that the Federal Reserve can do about them, as oil prices are determined by global markets. The Chairman added that the Fed’s bond-purchase program (QE2) is unlikely to have a significant impact on financial markets when it concludes at the end of this quarter, as the end date is well anticipated.

Treasuries were lower, as the yield on the 2-year note rose 1 bp to 0.65%, the yield on the 10-year note was 5 bps higher at 3.36%, and the 30-year bond yield advanced 7 bps to 4.46%.

Meanwhile, durable goods orders rose more than forecasted, increasing 2.5% month-over-month (m/m) in March, compared to the 2.3% increase that was expected by economists surveyed by Bloomberg, and February’s figure was favorably revised to a 0.7% increase from a 0.9% decline. However, ex-transportation, orders increased at a smaller rate than expected, gaining 1.3% in March, compared to the expectation of a 1.9% rise, but February’s figure was adjusted upwardly, to a 0.6% rise, after the initial 0.6% drop that was reported. Meanwhile, orders for non-defense capital goods excluding aircraft, considered a good proxy for business spending, was slightly below expectations, increasing by 3.7% in March, compared to the 3.8% gain that was anticipated, after rising by an upwardly revised 0.5% in February, from the initial report of a 1.3% decline.

Finally, the MBA Mortgage Application Index declined by 5.6% last week, after the Purchase Index fell 13.6% and the Refinance Index dipped 0.6%, while the average 30-year mortgage rate moved lower by 3 basis points (bps) to 4.80%.

UK GDP matches expectations, S&P lowers credit rating of Japan

There were some key economic reports across the pond that were worth noting, with the UK reporting 1Q GDP growth that was inline with economists’ expectations—but rebounding from 4Q’s contraction—Germany announcing that its April consumer prices rose at a level that matched forecasts, while German consumer confidence fell more than expected and euro-zone industrial new orders rose at a rate that was smaller than anticipated.

In Asia/Pacific, Standard & Poor’s lowered Japan’s sovereign credit rating outlook to negative from stable. The rating agency predicts that rebuilding costs following last month’s earthquake could be as high as 50 trillion yen ($611 billion), which would require more borrowing and could boost net government debt to as high as 145% of GDP in fiscal 2013. In other news out of Japan, retail sales figures fell 8.5% y/y in March, as expected following the natural disaster that closed many stores and depressed spending. Elsewhere, Australia was pressured by rate-hike concerns after a report revealed the nation’s 1Q consumer prices rose more than expected, with the quarter-over-quarter (q/q) rate accelerating at a pace not seen since 2006, per Bloomberg. Additionally, South Korea’s 1Q GDP expanded at a q/q rate that was below economists’ expectations.

Q1 GDP on tap for tomorrow

Tomorrow’s US economic calendar will be highlighted by the first reading of 1Q GDP, forecasted to show a 2.0% q/q annualized rate of expansion, after growing 3.1% in 4Q. The personal consumption component, expected to rise 2.0%, after expanding 4.0% in 4Q, will likely garner the most attention, given its weight in the calculation of GDP—accounting for nearly three-quarters of total output—and the growing inflationary pressures amid the recent spike in commodities that could impact discretionary spending. However, data on the health of the consumer in 1Q showed spending, along with sentiment, were relatively undeterred by the rising food and energy prices. Inflation data released with the output report will also be in focus, with the GDP Price Index expected to accelerate from 0.4% to 2.3%, while the Core PCE Price Index—excluding food and energy—is forecasted to increase 1.4%, after rising 0.4% in 4Q.

Other reports on tomorrow’s calendar will be weekly initial jobless claims, expected to decline from 403,000 to 395,000, and pending home sales, expected to rise 1.5% m/m in March.

On the international front, releases will include Japan’s jobless rate, CPI, industrial production, vehicle starts and housing starts, and the Bank of Japan will conclude its monetary policy meeting, with economists expecting the central bank to keep its benchmark interest rate at a 0-0.1% range. Other reports include the German unemployment rate and French consumer spending, while China will report its leading index sometime in the next two days