Weekend Market Update

Earnings Continue to Bring Green

With indexes at multi-year highs, stocks ended the month in modest fashion, with earnings providing positive backdrop with a blowout quarter from Dow member Caterpillar and beats by fellow members Merck & Co and Chevron Corp despite a weak showing from Dow component Microsoft Corp and lowered guidance from Research In Motion. Elsewhere, Goodyear Tire & Rubber Co posted strong earnings and in M&A action, French oil major Total SA offered to acquire 60% of US solar panel manufacturer SunPower Corp. In economic news, Midwest manufacturing activity slowed and 1Q employment costs, personal income and spending all rose, while April's consumer sentiment reading was revised higher and Treasuries rose.

The Dow Jones Industrial Average rose 47 points (0.4%) to 12,811 on Friday, the S&P 500 Index was 3 points (0.2%) higher at 1,364, and the Nasdaq Composite was 1 point higher at 2,874. In moderately strong volume, 975 million shares were traded on the NYSE and 2.5 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.07 to $113.93 per barrel, wholesale gasoline gained $0.03 to $3.40 per gallon, and the Bloomberg gold spot price increased $25.85 to $1,562.05 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies-was 0.1% lower at 73.02. For the week, including dividends, the DJIA gained 2.5%, the S&P 500 Index rose 2.0% and the Nasdaq Composite advanced 1.9%.

Dow member Microsoft Corp. (MSFT $26) 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, shares fell as the company said revenue for its Windows 7 segment was down 4% y/y, inline with the PC trends, estimating consumer demand for computers down 8%, while business demand rose 9%.

Caterpillar Inc. (CAT $115 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 said demand continued to improve, it raised production, and its cost control was "excellent." CAT raised its full-year guidance on higher expected revenues and profit, as it believes the pace of world economic growth will support continued recovery in key industries, but the company said its outlook would have been greater if not for the impact of the disaster in Japan. The company's CEO reiterated that, "We’re on a roll and in a hurry." CAT rose nicely.

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. Upstream earnings-production and exploration-rose 27% to $5.98 billion due to higher prices for crude oil, while downstream profits-refining-more than tripled to $622 million from improved margins on refined petroleum products. CVX was higher.

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. MRK traded higher.

Goodyear Tire & Rubber Co. (GT $18) was over 10% higher after the company reported 1Q earnings ex-items of $0.51 per share, trouncing the $0.12 estimate of analysts, as revenues rose 27% y/y to a quarterly record high of $5.4 billion, topping the $4.8 billion that the Street expected. The company said all of its businesses made great progress in offsetting higher raw material costs through improved price/mix improvements.

In other North American earnings news, Canada's Research In Motion Ltd. (RIMM $49) 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. RIMM fell nearly 15%.

In M&A action, French oil major Total SA (TOT $64) said it agreed to acquire 60% of solar panel manufacturer SunPower Corp (SPWRA $22) in a deal that values the US-based company at $2.3 billion. Total said that “Energy demand will keep increasing and all energy sources will be needed,” but that oil and gas will remain its main business. Shares of TOT were modestly higher and SPWRA rose 35%.

Personal income and spending rise, manufacturing slows, and sentiment slightly higher

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.

Meanwhile, the final University of Michigan's Consumer Sentiment Index, was revised slightly higher to 69.8 from the preliminary reading of 69.6 for the month of April, and a couple ticks below the 70.0 level that economists expected. The modest upward revision came as the economic outlook component was adjusted to the upside.

Elsewhere, the Chicago Purchasing Managers Index declined more than expected, falling from 70.6 in March to 67.6 in April, with most of the components of the index declining, led by production, new orders, and inventories. The employment component declined from 65.6 in March to 63.7 in April.

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 were higher, showing little reaction to the data but rising as the session progressed, with the yield on the 2-year note down 1 bp to 0.61%, the yield on the 10-year note declining 3 bps to 3.28% and the 30-year bond falling 2 bps to 4.39%.

International holidays soften weak economic data overseas

Trading was lighter than usual overseas, as UK markets were closed for the royal wedding and Japan was closed for the Emperor's birthday, softening the impact from weak economic data. Germany-Europe’s largest economy-reported that its retail sales unexpectedly fell 2.1% m/m 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.

In Asia, South Korea reported that its industrial production rose at a much slower rate than economists forecasted, while the HSBC version of China's PMI Manufacturing Index remained at 51.8 in April. While the reading on China's manufacturing PMI denotes a level that depicts continued expansion in manufacturing activity, there were some aspects of slowing in both production, as well as delivery times, while positively, input prices fell. The Chinese government version of PMI will be reported over the next few days.

Elsewhere in the Americas, Canadian GDP unexpectedly fell 0.2% m/m in February and posted its slowest annual rise in a year, at 2.9%. When talking about the economy at the last Bank of Canada meeting, Governor Carney noted that growth would be slowed by the impact of the Japanese quake and tsunami on auto production, as well as the drag of the higher Canadian dollar on exports.

Stocks find support as Fed maintains stance

The equity markets posted solid broad-based gains to finish out the month, as a historic monetary policy meeting from the US Federal Reserve fostered some fuel for stocks. As expected, the Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting by making no changes to the fed funds rate or the size or duration of the asset purchase program. However, the reaction in the equity markets to the first-ever press conference by a Fed Chairman following the announcement was favorable for the equity markets and set the tone for the rest of the week, offsetting a disappointing US 1Q GDP report and an unexpected rise in jobless claims. Fed Chief Ben Bernanke continued to view the threat of broad-based inflation amid the recent surge in commodity prices as "transitory", and maintained that the Fed is focused on providing an economic environment that will boost employment as the unemployment rate “remains elevated.”

Meanwhile, a rebound in new home sales and signs of resiliency in consumer confidence in the face of rising food and energy prices complimented mostly better-than-expected global corporate earnings, sending the major equity markets to multi-year highs. The Dow Jones Industrials and the S&P 500 Index rose to levels not seen in nearly three years, while the Nasdaq Composite Index reached the best level in over ten years.

Jobs under the microscope next week

Next week brings some key reports on the health of the economy in April, starting with Monday's release of the ISM Manufacturing Index, forecasted to decline to 59.5 from 61.2, and the prices paid component is expected to fall to 83.0 from 85.0 according to a Bloomberg survey of economists. Meanwhile, the ISM Non-Manufacturing Index, to be released on Wednesday, is anticipated to rise to 57.5 from 57.3. A reading of 50 separates expansion from contraction.

Employment will be the main focus for the week, with readings within the ISM reports, as well as both the ADP Employment Change and initial jobless claims set to be released. The week concludes with the Labor Department's nonfarm payrolls on Friday, expected to grow 190,000 in March, after finally posting two consecutive months of solid gains, with February increasing 216,000 and January rising 194,000. The unemployment rate is estimated to remain flat at 8.8% after declining four-straight months.

Other releases on the US economic calendar include construction spending, factory orders, vehicle sales, MBA Mortgage Applications, unit labor costs and nonfarm productivity, and consumer credit. Additionally, retailers will be reporting same-store sales for April. Elsewhere in the Americas, Canada reports industrial product and raw materials price indexes, building permits, the Ivey Purchasing Managers Index, and unemployment, while Mexico reports its manufacturing PMI and consumer confidence.

Releases in Europe include euro-zone PPI and retail sales, manufacturing and service PMI reports from the euro-zone and the UK, home prices, mortgage approvals and PPI in the UK, and German factory orders and industrial production. Asia/Pacific reports will include Japan's vehicle sales, Australia's home prices, retail sales, new home sales, and building approvals, China's manufacturing and services PMIs, and South Korea's April trade balance and manufacturing PMI. The European Central Bank, Bank of England and Reserve Bank of Australia meet, but no change to policy is expected at any of the three banks.