Morning Market Update

Economic Data Drives Downward Direction

After posting solid gains in late-day action in reaction to the Federal Reserve maintaining its stimulative monetary policy, US stocks are lower in early action following reports that showed 1Q GDP expanded at a slower pace than expected, while jobless claims unexpectedly rose. Treasuries are higher following the data, with yields giving back yesterday’s gains, ahead of a read on pending home sales. Meanwhile, the earnings front is painting a mixed picture as Dow member Procter & Gamble Co posted results that missed expectations, while fellow Dow member Exxon Mobil Corp exceeded the Street’s profit forecasts. Elsewhere, PepsiCo Inc topped expectations, Starbucks Corp posted results that were inline, and eBay Inc achieved better-than-expected earnings. In M&A news, Constellation Energy Group Inc. and Exelon Corp announced that they have reached a definitive agreement to combine the two companies, valued at about $7.9 billion. Overseas, Asia was mixed as Japan moved solidly higher, while European markets are mixed.

As of 8:51 a.m. ET, the June S&P 500 Index Globex future is 3 points below fair value, the Nasdaq 100 Index is 5 points below fair value, and the DJIA is 23 points below fair value. WTI crude oil is $0.11 higher at $112.87 per barrel, and the Bloomberg gold spot price is up $3.89 at $1,530.94 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.3% at 73.14.

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.

Fellow Dow member Exxon Mobil Corp. (XOM $88) announced 1Q earnings of $2.14 per share, versus the $2.07 that analysts were anticipating, with revenues of $114 billion coming up just below the $114.9 billion that the Street had projected.

PepsiCo Inc. (PEP $68) 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.

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.”

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.

In M&A news, Constellation Energy Group Inc. (CEG $34) and Exelon Corp. (EXC $41) 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. The resulting company will retain the Exelon name and be headquartered in Chicago.

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

The first look at 1Q Gross Domestic Product (chart), 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 the core PCE Index, which excludes food and energy, increased 1.5%, versus the 1.4% rise that was expected.

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, but were 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.

Treasuries are higher after the GDP and employment reports, with the yield on the 2-year note down 2 bps to 0.62%, the yield on the 10-year note 4 bps lower at 3.32%, and the 30-year bond yield declining 2 bps to 4.44%. Yields are giving back gains that were seen yesterday following the Federal Reserve’s monetary policy meeting and first-ever press conference by Fed Chairman Ben Bernanke, in which the Fed maintained its very accommodative policy stance 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.

Later this morning, the economic calendar will yield the release of pending home sales, expected to rise 1.5% month-over-month (m/m) in March.

Europe mixed on data

The equity markets are mixed in afternoon action following the US Federal Reserve’s announcement yesterday that it will maintain its easy monetary policy, while financials are showing some strength following some upbeat earnings reports. Shares of Deutsche BankBanco SantanderSAP (SAP $68) are sharply lower after the German business software maker posted earnings that missed expectations. 

(DB $62) are nicely higher to buoy the European banking sector after Germany’s largest bank reported profits that exceeded analysts’ forecasts. Moreover, shares of (STD $12) are higher to help the group even as Spain’s largest bank’s earnings missed expectations, but some analysts expressed some optimism regarding its core operating results and revenue growth. However, gains are being limited by weakness in technology issues as shares of
On the economic front, German unemployment fell to the lowest level in almost 19 years, per Bloomberg, while a read on UK consumer confidence unexpectedly fell. Also, German import prices rose at a rate that matched expectations.

The UK FTSE 100 Index is down 0.2%, France’s CAC-40 Index is up 0.4%, Germany’s DAX Index is gaining 0.4%, and Spain’s IBEX 35 Index is 1.0% higher.

Asia mixed after US Fed meeting

Stocks in Asia finished mixed as Japanese equities moved nicely higher following the advance in the US yesterday after the Federal Reserve’s monetary policy meeting, which boosted optimism that the Central Bank will remain accommodative to the economic recovery. The Nikkei 225 Index rose 1.6% despite 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. Also, traders shrugged off a report that showed Japan’s industrial production fell more than anticipated in March. A solid increase in shares of Komatsu (KMTUY $34) supported the upward move after the world’s second-largest maker of construction equipment posted favorable earnings growth. Elsewhere, South Korea’s Kospi Index eked out a 0.1% gain, aided by a sharp advance in shares of Hyundai Motor Co. (HYMLF $187) after the carmaker posted upbeat quarterly results, helping offset weakness in technology issues. Rounding out the day, Australia’s S&P/ASX 200 Index finished flat, while stocks in China moved lower, as the Hong Kong Hang Seng Index declined 0.4% and the Shanghai Composite Index fell 1.3%.