Morning Market Update

Nearly Unchanged Ahead of Key Week of Data

The US equity markets are flat in early action following a long holiday weekend as traders digest earnings reports, while awaiting key data from the economic front, headlined by the Federal Reserve’s policy meeting and subsequent press conference by Fed Chairman Bernanke. Treasuries are modestly higher ahead of the release of new home sales. In earnings news, after the close on Thursday chipmakers SanDisk Corp and Advanced Micro Devices Inc both reported profits that exceeded analysts’ forecasts, while just ahead of the opening bell, Johnson Controls Inc posted earnings and revenues that topped the Street’s estimates. In M&A news, Tenet Healthcare Corp announced that it has unanimously rejected Community Health Systems Inc’s revised $3.3 billion proposal to acquire all outstanding shares of THC. Overseas, trading was light, with European and some Asian markets closed for holidays, but stocks that saw action finished mostly lower.

As of 8:43 a.m. ET, the June S&P 500 Index Globex future is at fair value, the Nasdaq 100 Index is 3 points above fair value, and the DJIA is 1 point below fair value. WTI crude oil is $0.61 higher at $112.90 per barrel, and the Bloomberg gold spot price is up $5.04 at $1,512.08 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.2% at 73.95.

SanDisk Corp. (SNDK $49) reported 1Q EPS ex-items of $1.03, three cents above the consensus estimate of analysts surveyed by Reuters, with revenues increasing 19% year-over-year (y/y) to $1.3 billion, roughly inline with the Street’s forecast. The flash memory chipmaker—chips used in mobile phones, digital cameras, and navigation devices—said its mobile business drove growth in 1Q and it has been actively managing its supply chain following the recent events in Japan and it remains on track to “deliver a strong 2011.” SNDK reaffirmed its full-year revenue outlook.

Fellow chipmaker Advanced Micro Devices Inc. (AMD $9) announced 1Q earnings of $0.08 per share, above the $0.05 that analysts had expected, with revenues increasing 2% y/y to $1.6 billion, matching the projection on the Street. The company said its results were highlighted by “strong demand” for its first generation Fusion Accelerated Processing Units, as shipments “greatly exceeded” expectations. AMD issued 2Q revenue guidance that was inline with estimates.

Johnson Controls Inc. (JCI $41) achieved fiscal 2Q EPS ex-items of $0.56, one penny above the Street’s forecast, with revenues increasing 22% y/y to $10.1 billion, compared to the $9.4 billion that analysts had projected. The automotive component and building energy efficiency solutions company said it had double-digit improvements in all three business segments. JCI increased its full-year revenue outlook.

In M&A news, Tenet Healthcare Corp. (THC $7) announced that it has unanimously rejected Community Health Systems Inc’s (CYH $31) revised $6.00 per share in cash, or about $3.3 billion, proposal to acquire all outstanding shares of THC. The company said CYH’s offer “grossly undervalues” the company and is not in the best interests of THC or its shareholders. CYH said it is “disappointed” by the rejection and it remains ready to engage in constructive discussions to move this transaction forward.

Housing data to kick off the week, but Fed meeting and 1Q GDP loom on the horizon

Treasuries are modestly higher in morning action ahead of some key data from the economic calendar this week, with the yield on the two-year note unchanged at 0.65%, while the yields on the 10-year note and the 30-year bond are down 2 bps to 3.37% and 4.45%, respectively.

Later this morning, new home sales will be released, forecasted to rise 12% month-over-month (m/m) to an annual rate of 280,000 in March, after falling to a record low of 250,000 units in February. The new home sales report is considered a timely indicator of conditions in the housing market as it is based on signings, while existing home sales uses closings. Tomorrow the housing focus will continue with the release of the S&P/CaseShiller Home Price Index, forecasted to show a 0.4% decline m/m and 3.3% decrease y/y in February.

However, as the week matures the Fed and 1Q GDP will likely headline the economic front, with Wednesday’s conclusion of the two-day Federal Open Market Committee (FOMC) meeting, poised to take top billing. 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.

Moreover, the week caps off with Friday’s first reading of 1Q gross domestic product (GDP), expected to grow at a 1.9% quarter-over-quarter (q/q) annualized rate, slowing from the 3.1% pace in the fourth quarter. The largest component of GDP, personal consumption, is expected to grow 2.1% in 1Q, after advancing 4.0% in 4Q. With regard to inflation readings, the GDP Price Index is expected to rise 2.4%, and the core PCE Index, which excludes food and energy, is forecasted to increase 1.3%.

Other releases on this week’s US economic calendar include: durable goods orders, Consumer Confidence, the Richmond Fed Manufacturing Index, the MBA Mortgage Applications Index, weekly initial jobless claims, pending home sales, the 1Q Employment Cost Index, personal income and spending, the Chicago Purchasing Managers Index, and the final University of Michigan Consumer Sentiment Index.

All remains quiet on the European front

The markets in Europe remained closed for holidays. European stocks appear to be attractively valued. However, outside of companies with high exposure to growth coming from the United States and emerging world, we remain suspect of the ability for European stocks in general to outperform in the face of growth headwinds.

Asia finds pressure in thin trading ahead of key data in the US

Stocks in Asia finished mostly lower in lighter-than-usual trading with markets in Australia, New Zealand, and Hong Kong closed for holidays, and traders treading cautiously ahead of the key reports that are due out in the US this week. Japan’s Nikkei 225 Index declined 0.1%, pressured by the nation’s automakers following reports of steep declines in output for March, when Japan was hit by the massive earthquake and tsunami causing widespread production halts. Meanwhile, some negative earnings reports also weighed on other markets in the region, as Taiwan’s Taiex Index decreased 0.2%, on the heels of a solid decline in shares of Acer Inc. (ASIYF $15) after the supplier of notebook computers posted profits that missed expectations, offsetting a report that showed the nation’s industrial production rose more than expected in March.
Also, India’s BSE Sensex 30 Index dipped 0.1%, pressured by shares of Reliance Industries after the nation’s largest company by market value, per Bloomberg, reported earnings that came up short of analysts’ expectations. However, despite a decline in shares of POSCO (PKX $111) after the steelmaker posted earnings that were below estimates, South Korea’s Kospi Index rose 0.8% to a new record high, aided by optimism in the auto sector after a media report suggested KIA Motors Corp. (KIMTF $63) posted record high vehicle sales in 1Q, but the company did not confirm the report. Finally, China’s Shanghai Composite Index fell 1.5% on uneasiness regarding further policy tightening in the wake of rising commodity costs.