Evening Market Update

Bulls Charge Higher on Mixed Economic Data and Earnings

US stocks posted modest gains today, even after the release of a lower-than-expected read on 1Q GDP and an unexpected increase in jobless claims, which highlighted a full slate of economic data. The disappointing reports were somewhat offset by the continued resiliency in consumer spending and a jump in pending homes sales. The equity front did its best to further the day’s gains, as Q1 earnings continued to pour in. Dow member Procter & Gamble came up just short of top- and bottom-line expectations, but managed to gain market share, while fellow Dow component Exxon Mobile exceeded earnings projections but fell short of revenue estimates. Elsewhere, PepsiCo and eBay both topped profit expectations, while Starbucks posted results that were inline, but issued disappointing guidance. In M&A news, Constellation Energy Group and Exelon Corp reached a definitive agreement to combine the two companies, valued at about $7.9 billion. Treasuries moved higher on the GDP data, while the prices of gold and silver surged to all-time highs as the US dollar continued to move lower. 

The Dow Jones Industrial Average rose 72 points (0.6%) to 12,763, the S&P 500 Index was 5 points (0.4%) higher at 1,360, and the Nasdaq Composite was 3 points (0.1%) higher at 2,873. In moderate volume, 962 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.12 to $112.88 per barrel, wholesale gasoline was flat at $3.43 per gallon, while the Bloomberg gold spot price increased $9.10 to $1,536.15 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies— was 0.2% lower at 73.13.

Dow member Procter & Gamble Co. (PG $64) reported fiscal 3Q EPS of $0.96, one cent below the consensus estimate of analysts surveyed by Reuters, with revenues increasing 5% year-over-year (y/y) to $20.2 billion, just shy of the Street’s estimate of $20.3 billion. The company said cost savings and reductions in the effective tax rate were partially offset by negative impacts from higher input costs and higher expansion investments, but it saw broad-based volume and market share growth. Shares were modestly higher.

Fellow Dow member Exxon Mobil Corp. (XOM $87) announced 1Q earnings of $2.14 per share, versus the $2.07 that analysts were anticipating, with revenues growing 26% y/y to $114 billion, just below the $114.9 billion that the Street had projected. The company said its upstream earnings—production and exploration—rose 49% y/y, due to higher crude oil and natural gas prices, while its downstream profits—refining—were up from $37 million a year ago to $1.1 billion, on higher industry refining margins. XOM traded lower as the company’s production in its upstream unit was below some analysts’ forecasts.

PepsiCo Inc. (PEP $70) achieved 1Q EPS ex-items of $0.74, one penny above the expectation of analysts, with revenues increasing 27% y/y to $11.9 billion, exceeding the $11.7 billion that the company was projected to report on the Street. The company said its worldwide snacks and beverage units posted volume growth of 3% and 12%, respectively, but it is experiencing a “high level” of input cost inflation. PEP finished higher.

Starbucks Corp. (SBUX $37) reported fiscal 2Q EPS ex-items of $0.34, inline with the Street’s estimate, as revenues increased 10% y/y to $2.8 billion, compared to the $2.7 billion that analysts were expecting. The coffee retailer said its 2Q same-store sales—sales at stores open at least a year—rose 7% y/y, driven by increases in traffic and the average ticket price. SBUX issued full-year EPS guidance that missed expectations as it faces “dramatically higher commodity costs.” Shares moved lower.

eBay Inc. (EBAY $34) announced 1Q EPS of $0.47, one penny above the Street’s forecasts, as revenues increased 16% y/y to $2.5 billion, matching expectations of analysts. The global ecommerce and online payment company raised its full-year guidance and its 2Q revenue outlook was above expectations. Shares were solidly lower even after the results as some analysts are pointing to the company’s slower growth in its international unit and its operating margins that were disappointing. 

In M&A news, Constellation Energy Group Inc. (CEG $36) and Exelon Corp. (EXC $42) announced that they have reached a definitive agreement to combine the two companies in a stock-for-stock transaction, valued at about $7.9 billion. Under the terms of the deal, CEG shareholders will receive 0.930 shares of EXC for each share they own, with the resulting company retaining the Exelon name and being headquartered in Chicago. CEG was solidly higher, while EXC moved modestly to the upside. 

First read on 1Q GDP softer than expected, jobless claims jump, housing data surprises

The first look at 1Q Gross Domestic Product, the broadest measure of economic output, showed a slightly smaller expansion than expected, rising at a 1.8% annualized rate of growth, compared to the 3.1% increase in 4Q, and the 2.0% growth that was forecasted by a survey of economists by Bloomberg. However, personal consumption increased more than anticipated, gaining 2.7%, down from the 4.0% that was posted in 4Q, but above the 2.0% growth that was forecasted.

The GDP Price Index rose 1.9%, compared to the 2.3% increase that economists anticipated, and a solid acceleration from 0.3% in 4Q. Meanwhile, the core PCE Index, which excludes food and energy, increased 1.5%, versus the 1.4% rise that was expected, and the 0.4% increase seen in the previous quarter.

The deceleration in 1Q came as government spending fell, with Federal expenditures dropping on a solid decline in national defense, and state and local government spending also declining, for a total subtraction of 1.1 percentage points (pps) from GDP. Also, imports—which are a subtraction from GDP—took 0.7 pps away from GDP, to offset a 0.6 pp boost from an increase in exports. On the positive side, personal consumption contributed 1.9 pps to 1Q output—after boosting GDP by 2.8 pps in 4Q—while private domestic investment and private inventory investment contributed 1.0 and 0.9 pps, respectively, to the expansion. The reaction to the slightly slower pace of US output was tempered somewhat by the continued resiliency shown in personal consumption despite the growing headwinds from higher food and energy prices, complimented by a solid increase in durable goods, which added 0.8 pps to GDP. Durable goods are products meant to last at least three years and are considered a good measure of discretionary spending.

The report followed yesterday’s monetary policy meeting by the Federal Reserve and first-ever press conference by Fed Chairman Ben Bernanke, in which the Fed Chair was asked about the expected weak 1Q GDP report. He reiterated the latest consensus by suggesting it was likely sub-2%, and released the latest Fed economic forecasts, which included their expected range for full-year 2011 GDP growth of 3.1-3.4%, down from 3.4-3.9% in January. Moreover, the Fed maintained its very accommodative policy stance and said it will allow its asset purchase program to conclude at the end of June. 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 also raised its inflation expectations.

Meanwhile, weekly initial jobless claims jumped by 25,000 to 429,000, versus last week's figure which was upwardly revised by 1,000 to 404,000, well above the 395,000 level that economists had expected. The four-week moving average, considered a smoother look at the trend in claims, increased by 9,250 to 408,500, while continuing claims fell by 68,000 to 3,641,000, below the forecast of economists, which called for continuing claims to come in at 3,680,000.

Finally, pending home sales rose more than expected on a month-over-month (m/m) basis, gaining 5.1% in March, compared to the 1.5% increase that economists were anticipating, but February’s 2.1% gain was revised to a 0.7% rise. However, compared to last year, the gauge of the pipeline of existing home sales is down 11.5%, after falling 10.5% in February.

Treasuries moved higher on the weak GDP data, although some of the gains were pared following weak demand in a $29 billion auction of seven-year notes. The yield on the 2-year note fell 2 bps to 0.62%, the yield on the 10-year note declined 4 bps to 3.31%, and the 30-year bond yield lost 4 bps to 4.41%.

Mixed data out of Europe, BoJ keeps rates unchanged and lowers GDP outlook

In European economic news, German unemployment fell to the lowest level in almost 19 years, per Bloomberg, while a read on UK consumer confidence unexpectedly deteriorated. Also, German import prices rose at a rate that matched expectations. The equity markets across the pond were led higher by financials, as  Deutsche Bank (DB $65), Germany’s largest bank, reported profits that exceeded analysts’ forecasts. Moreover, Banco Santander (STD $12), Spain’s largest bank, missed earnings expectations, but some analysts expressed some optimism regarding its core capital position and revenue growth, as profits from Latin America grew. However, gains were limited by weakness in technology issues as SAP (SAP $64) posted earnings that missed expectations.

The Asia/Pacific economic front featured a plethora of data out of Japan, headlined by the Bank of Japan (BoJ) keeping its benchmark interest rate unchanged and lowering its GDP outlook, as the March earthquake and tsunami had a larger-than-expected impact. The central bank also voted to maintain its 10 trillion yen asset-purchase program and raised its inflation forecast for fiscal 2011 from 0.3% to 0.7%. Additionally, Japan’s industrial production fell more than anticipated in March, the jobless rate increased more than expected, and the national CPI was unchanged y/y in March.

Back in the Americas, Brazil’s broadest measure of wholesale inflation slowed more than expected in April, as prices rose 0.45% versus the 0.57% estimate of economists. The report comes a week after the Brazilian central bank voted to cool the pace of interest rate hikes, raising the target rate by 25 bps to 12.0%, after 50 bp increases at each of the two previous meetings this year.

Readings on personal income, spending, and consumer confidence due out tomorrow

The US economic calendar tomorrow will include personal income and personal spendingPCE Price Index and a 0.9% increase in the core PCE Price Index, which will both be released with the income and spending data. Meanwhile, the Chicago Purchasing Manager Index will be released for April, with expectations of a decrease to 68.2 from 70.6, and the final April reading of consumer confidence is forecasted to tick slightly upward from 69.6 to 70.0. for March, with incomes expected to increase 0.4% after a 0.3% rise last month, while spending is expected to climb 0.5%, compared to a 0.7% jump last month. Economists will also be looking for a 1.9% increase in the Releases on the international front will include German retail sales, euro-zone CPI, business climate indicator, consumer confidence and the unemployment rate, the Chinese leading index, and the preliminary reading of Q1 GDP out of Taiwan.