Morning Market Update

Stocks Gain Ground Before Fed Meeting Breaks New Ground

The US equity markets are higher in early action as traders digest another slew of earnings releases and a mixed durable goods orders report, ahead of the Federal Reserve’s monetary policy decision, and the unprecedented press conference by Fed Chair Ben Bernanke that will follow in the afternoon. Treasuries are lower in morning action after the March durable goods report showed headline orders rose more than expected, while excluding certain volatile components, orders were softer than forecasted. However, the declines seen in the February durable goods data were revised to gains. In other economic news, mortgage applications declined last week. In earnings news, Dow member Boeing Co topped the Street’s earnings expectations, but its revenues fell short of forecasts, and Amazon.com Inc severely missed analysts’ earnings projections, while Whirlpool Corp posted top- and bottom-line results that exceeded estimates. In other equity news, Dow member Johnson & Johnson announced that it has reached an agreement to acquire Swiss medical-device maker Synthes for about $21.3 billion. Overseas, Asia was mixed, while European stocks are higher on a flood of favorable corporate results.

As of 8:51 a.m. ET, the June S&P 500 Index Globex future is 3 points above fair value, the Nasdaq 100 Index is 7 points above fair value, and the DJIA is 8 points above fair value. WTI crude oil is $0.05 higher at $112.26 per barrel, and the Bloomberg gold spot price is up $1.96 at $1,508.21 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is unchanged at 73.77.

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.

Amazon.com Inc. (AMZN $182) 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.

Whirlpool Corp. (WHR $88) 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.

In M&A news, Dow member Johnson & Johnson (JNJ $65) 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.

Durable goods orders rise, mortgage applications decline, while Fed commands the focus

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.

In other economic news, the MBA Mortgage Application Index declined by 5.6% last week, after the index that can be quite volatile on a week-to-week basis, rose by 5.3% in the previous week. The decrease came as 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%.

Treasuries are lower in morning action following the data, with the yields on the 2-year and 10-year notes 4 bps higher at 0.68% and 3.35%, respectively, while the 30-year bond yield is advancing 2 bps to 4.41%.

However, this afternoon 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, 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.

Earnings supporting European equities ahead of the Fed

The equity markets in Europe are higher in afternoon action, led by a plethora of upbeat earnings reports, ahead of the conclusion of the US Federal Reserve’s policy meeting. Automakers are receiving a boost from several favorable earnings reports, with VolkswagenRenault (RNSDF $57), Porsche (POAHY $7), and Volvo (VOLVF $17) all moving solidly to the upside after the companies reported forecast-topping results. Moreover, shares of Ericsson (ERIC $13) are sharply higher after the company easily topped analysts’ earnings forecasts, but shares of Barclays (BCS $20) are solidly lower after it reported profits that missed expectations. (VLKAY $33),
Even though the earnings front is commanding the most attention, there were some key economic reports across the pond that are worth noting, with the UK reporting 1Q GDP growth that was inline with economists’ expectations, 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.

The UK FTSE 100 Index is up 0.2%, France’s CAC-40 Index is rising 0.8%, and Germany’s DAX Index is advancing 0.9%.

Asia mixed as US optimism boosts Japan

Stocks in Asia finished mixed, with Japan’s Nikkei 225 Index rising 1.4% on the heels of yesterday’s favorable earnings reports and better-than-expected reading on consumer confidence out of the US, which boosted the outlook for Japanese export-related stocks. The advance in Japan came even as Standard & Poor’s lowered the nation’s sovereign credit rating outlook to negative, and shares of Sony Corp. (SNE $30) finished solidly lower after the company said its PlayStation online video game network was breached and customer information was compromised. However, Australia’s S&P/ASX 200 Index declined 0.8% after a long Easter holiday break, 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. Elsewhere, South Korea’s Kospi Index finished flat as the aforementioned enthusiasm in the US was offset by a report showing the nation’s 1Q GDP expanded at a q/q rate that was below economists’ expectations. Finally, stocks in China erased early gains and finished lower, with the Shanghai Composite Index and the Hong Kong Hang Seng Index declining 0.5%.