Morning Market Update

Mixed Amid More Earnings and Economic Data

The US equity markets are mixed in early action following yesterday’s resiliency in the face of a disappointing US 1Q GDP report as traders are digesting another slew of data from the earnings and economic fronts. The economic data has been positive so far this morning, with personal income and spending growing more than expected, while the Employment Cost Index also increased more than forecasted. Treasuries are modestly higher, but reads on consumer sentiment and regional manufacturing are set to be released later this morning. Meanwhile, the earnings front is mixed, with Dow member Microsoft Corp posting inline earnings, but saying that revenues from its Windows segment declined, while fellow Dow components Caterpillar Inc, Merck & Co, and Chevron Inc exceeding that Street’s profit projections. Moreover, Canada’s Research In Motion lowered its 1Q outlook as shipments of its BlackBerry smartphones are expected to be at the low end of expectations. Overseas, Asia finished mostly lower with Japanese markets closed for a holiday, while European stocks are mixed, as the UK markets are closed for the royal wedding.

As of 8:48 a.m. ET, the June S&P 500 Index Globex future is at fair value, the Nasdaq 100 Index is 3 points below fair value, and the DJIA is 20 points above fair value. WTI crude oil is $0.40 higher at $113.26 per barrel, and the Bloomberg gold spot price is up $1.23 at $1,537.43 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.3% at 72.93.

Dow member Microsoft Corp. (MSFT $27) reported fiscal 3Q earnings ex-items of $0.56 per share, matching the consensus estimate of analysts surveyed by Reuters, with revenues rising 13% year-over-year (y/y) to $16.4 billion, exceeding the $16.2 billion that the Street had forecasted. However, the company said revenue for its Windows 7 segment was down 4% y/y, inline with the PC trends, which it characterized as mixed.

Caterpillar Inc. (CAT $113 ¹) announced 1Q EPS of $1.84, above the $1.31 that analysts had anticipated, as revenues jumped 57% y/y to $12.9 billion, versus the $11.6 billion that the Street had projected for the Dow component to report. The construction and mining equipment maker raised its full-year guidance on higher expected revenues and profit, but the company said its outlook would have been greater if not for the impact of the disaster in Japan.

Dow member Chevron Corp. (CVX $109) posted 1Q profits of $3.09 per share, north of the $3.01 that was expected by analysts, with revenues rising 25% y/y to $60.3 billion, versus the $66.6 billion that the Street had forecasted.

Merck & Co. Inc. (MRK $36) achieved 1Q EPS ex-items of $0.92, well above the $0.84 that the Street had estimated, as revenues rose 1.4% y/y to $11.6 billion, exceeding the $11.4 billion that analysts were expecting. The Dow component said it expects full-year EPS to be between $3.66-3.76, versus the $3.69 that analysts had forecasted.

In other North American earnings news, Canada’s Research In Motion Ltd. (RIMM $57) lowered its 1Q EPS guidance from a previous forecast of between $1.47-1.55, to a range of $1.30-1.37. RIMM said the lowered outlook is due to shipment volumes of its BlackBerry smartphones that are expected to be at the lower end of the range of 13.5-14.5 million that it forecasted in March and a shift in the expected mix of devices shipped towards handsets with lower average selling prices. The company also said this mix shift is expected to result in revenue that is slightly below its previous guidance of between $5.2-5.6 billion.

Personal income and spending rise, along with 1Q labor costs, more data still to come

Personal income rose 0.5% month-over-month (m/m) in March, compared to the 0.4% gain that was expected by economists surveyed by Bloomberg, and February’s 0.3% increase was revised favorably to a 0.4% gain. Also, personal spending was 0.6% higher m/m in March, compared to expectations of a 0.5% advance, and February’s 0.7% rise was revised to a 0.9% increase. The savings rate remained at 5.5% in March, after February’s rate was revised lower.

Also, the PCE Price Index, which is released with the income and spending data, was up 1.8% y/y in March, just below expectations of a 1.9% increase, after February’s 1.6% increase was unrevised. The core PCE Price Index, which excludes food and energy, was up 0.1% m/m, inline with forecasts, while y/y, core prices moved 0.9% higher, also matching the consensus estimate.

In other economic news, the 1Q Employment Cost Index rose 0.6%, slightly above the 0.5% that economists had expected, after rising by 0.4% in 4Q.

Treasuries are modestly higher following the personal income and spending data, with the yield on the 2-year note unchanged at 0.61%, while the yields on the 10-year note the 30-year bond are declining 1 bp at 3.30% and 4.40%, respectively.

Later this morning, the US economic calendar will yield the releases of the Chicago Purchasing Managers Index, expected to decline from 70.6 in March to 68.2 in April, and the final revision to the University of Michigan’s Consumer Sentiment Index, forecasted to be revised from 69.6 to 70.0 for April.

Europe mixed as data evokes some profit taking

The European equity markets are mixed in afternoon action, as traders are booking some profits following some disappointing economic data and as global earnings season continues to roll on. However, trading is lighter-than-usual with the UK markets closed for the royal wedding. Germany—Europe’s largest economy—reported that its retail sales unexpectedly fell in March, while a separate report showed euro-zone consumer confidence deteriorated more than previously announced for the month of April. Also, inflation concerns were amplified by reports out of Germany, France, Italy, and the broad euro-zone region all showing prices were hotter than expected. Shares of Daimler (DDAIY $78) are solidly lower as traders reacted to the luxury automaker’s earnings report that showed profits nearly doubled by harvesting some recent gains that have come from favorable results in the sector and the broad-based gains posted by the European markets. However, shares of Yara International (YARIY $57) are nicely higher after the Norwegian fertilizer maker reported earnings that exceeded analysts’ expectations.

France’s CAC-40 Index is down 0.1%, while Germany’s DAX Index is up 0.3% and Italy’s FTSE MIB Index is gaining 0.2%.

Asia mostly lower after disappointing data

Stocks in Asia finished mostly lower following the release yesterday of US 1Q GDP, which showed a smaller rate of expansion than expected, while South Korea reported that its industrial production rose at a much slower rate than economists forecasted. Australia’s S&P/ASX 200 Index fell 1.0% to pace the decline as mining issues came under pressure, and South Korea’s Kospi Index declined 0.7% following the disappointing read on industrial production. The losses in Korea also came as shares of Samsung Electronics (SSNLF $800) finished lower after the chip and flat-panel TV maker reported a steep decline in quarterly profits. Elsewhere, stocks in China were mixed, with the Hong Kong Hang Seng Index falling 0.4% and the Shanghai Composite Index rising 0.9%, after a report that showed the nation’s PMI Manufacturing Index remained at 51.8 in April, a level that depicts continued expansion in manufacturing activity. Meanwhile, trading was lighter than usual as the Japanese markets were closed for a national holiday.