Evening Market Update

Stocks Slide on Disappointing Jobs and Service Sector Data

US equities finished in the red, but off the lowest levels of the day, as investors were discouraged by an unexpected drop in a read on US service-sector activity and a smaller-than-expected increase in private sector payrolls, which also raised worries for Friday’s broader labor report. Treasuries moved higher on the news, as the only other release from the domestic economic front was a rise in mortgage applications. The data overshadowed some promising corporate earnings news, as Comcast, Time Warner and Green Mountain Coffee Roasters all beat the Street’s earnings estimates, while Las Vegas Sands came up short of its profit forecast. In M&A news, Applied Materials agreed to acquire Varian Semiconductor Equipment Associates for approximately $4.9 billion, and the board of Ralcorp Holdings rejected a revised $4.9 billion offer to be acquired by ConAgra Foods.

The Dow Jones Industrial Average was 84 points (0.7%) lower at 12,724, the S&P 500 Index declined 9 points (0.7%) to 1,347, and the Nasdaq Composite fell 13 points (0.5%) to 2,828. In moderately strong volume, 1.1 billion shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil tumbled $2.11 to $108.94 per barrel, wholesale gasoline lost $0.01 to $3.32 per gallon, and the Bloomberg gold spot price fell $20.78 to $1,515.13 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies— was flat at 73.10.

Comcast Corp. (CMCSA $26) reported 1Q earnings ex-items of $0.36 per share, two cents above the consensus estimate of analysts surveyed by Reuters, but revenues, although rising 32% year-over-year (y/y) to $12.1 billion, came in below the $12.8 billion that the Street had anticipated. The company said its cable unit saw continued momentum in both its residential and business services operations, while it had “particularly strong” growth in high-speed internet, consistent growth in voice services, and improved video customer results. Shares gave up early gains to finish lower.

Time Warner Inc. (TWX $36) posted 1Q EPS ex-items of $0.58, two pennies above the Street’s estimate, with revenues increasing 6% y/y to $6.7 billion, compared to the $6.4 billion that analysts had expected. TWX said its advertising revenues rose 20% y/y, led by a jump at its Turner Broadcasting unit from the NCAA Division 1 men’s basketball championship events, as well as strong domestic pricing and international expansion. The company reaffirmed its full-year EPS outlook. TWX was sizably lower.

Las Vegas Sands Corp. (LVS $43) traded lower after the hotel and casino operator reported 1Q EPS ex-items of $0.37, well below the $0.44 that analysts were expecting, overshadowing a 58% y/y increase in revenues to $2.1 billion that matched expectations. Analysts pointed out that the company’s results in Singapore and Las Vegas were below expectations.

Green Mountain Coffee Roasters Inc. (GMCR $76) moved sharply higher after the company posted fiscal 2Q earnings ex-items of $0.48 per share, above the $0.39 Street estimate, with revenues more than doubling y/y to $648 million, exceeding the $628 million that analysts had expected. GMCR said healthy post-holiday inventory levels at in-store brewers and sales of its Keurig single-cup brewing systems helped drive results. The company raised its full-year guidance.

In M&A news, Applied Materials Inc. (AMAT $15) announced that it signed a definitive agreement to acquire Varian Semiconductor Equipment Associates Inc. (VSEA $61) for $63 per share in cash for a total price of about $4.9 billion. AMAT said the transaction is expected to be accretive to its adjusted earnings in the first year. AMAT traded lower, while VSEA was over 50% higher.

Moreover, ConAgra Foods Inc. (CAG $26) reported that it has made a proposal to acquire the parent of the Post cereal brand, Ralcorp Holdings Inc. (RAH $87) for $86 per share in cash, or about $4.9 billion, including the assumption of $2.5 billion in debt. However, the board of RAH unanimously rejected the revised offer, saying it is not in the best interests of shareholders. The board also adopted a shareholder rights plan in an effort to reduce the likelihood that any person or group would gain control of the company without paying a control premium. Shares of both companies moved higher..

Service sector activity slows, ADP jobs rise less than expected, and mortgage apps gain

The ISM Non-Manufacturing Index showed expansion in service sector activity unexpectedly decelerated, falling from 57.3 in March—a near six-year high—to 52.8 for April, compared to the slight increase to 57.5 that economists surveyed by Bloomberg forecasted. A reading of 50 separates expansion from contraction. The index sits at the lowest level since August, as new orders fell sharply to 52.7 from 64.1, business activity dropped 6 points to 53.7, and employment dipped from 53.7 to 51.9. However, the prices paid component declined from 72.1 to 70.1. The report disappointed the markets following yesterday’s ISM Manufacturing Index, which showed a slightly larger rate of expansion than economists forecasted, but all the components of today’s service-sector report remained in expansion territory, suggesting the industry that makes up a majority of the economy continues to contribute to economic growth.

Meanwhile, the ADP Employment Change Report showed private sector payrolls rose by 179,000 jobs in April, below the forecast of economists surveyed by Bloomberg, which called for a 198,000 increase, but March’s 201,000 job gain was revised to a rise of 207,000 jobs. The release does not include government hiring and firing and comes ahead of Friday’s broader nonfarm payrolls report, where economists expect an increase of 185,000 jobs in April, after posting a 216,000 increase in March. Excluding government hiring, April private sector payrolls are expected to increase 200,000, after expanding by 230,000 in March.

In other economic news, the MBA Mortgage Application Index increased by 4.0% last week, after the index that can be quite volatile on a week-to-week basis, fell by 5.6% in the previous week. The gain came as the Refinance Index rose 6.0%, while the Purchase Index posted a 0.3% increase, and the average 30-year mortgage rate declined by 4 basis points (bps) to 4.76%.

Treasuries moved higher on the economic data and weakness in equities, as the yield on the 2-year note fell 2 bps to 0.59%, while the yields on the 10-year note and the 30-year bond were 3 bps lower at 3.22% and 4.33%, respectively.

Economic worries pressure European sentiment ahead of central bank meetings

European economic news featured reports on April service-sector activity in Italy, France, and Germany—Europe’s largest economy—all showing smaller-than-forecasted expansion, resulting in the euro-zone services report growing at a rate that was below economists’ expectations. Also, the UK reported a much larger-than-anticipated deceleration in construction activity, an unexpected decline in home prices, and mortgage approvals that were below projections. Additionally, a report showed that euro-zone retail sales fell much more than estimated in March.

In other economic news, Portugal announced that it reached an agreement on the bailout package it will request from the European Union (EU) and the International Monetary Fund (IMF). The debt-laden nation will receive a 78 billion-euro ($116 billion) three-year loan package and the plan includes an eased target for reducing its deficit this year. 

The lone release on tomorrow’s US economic calendar will be weekly initial jobless claims, expected to decline to 410,000 from 429,000. The international front will be more active, headlined by policy meetings and interest rate decisions from the European Central Bank (ECB) and the Bank of England (BoE). The ECB is expected to keep its benchmark interest rate at 1.25% after raising it by 25 bps last month, but traders will be monitoring the tone of the central bank’s statement for any clues to whether they plan to increase rates in subsequent meetings to fight inflation. The BoE is also expected to leave its benchmark interest rate unchanged at 0.5%, especially after a recent fall in inflation rates from 4.4% to 4.0% in March. Other releases on the international front include UK PMI services, German factory orders, Canadian building permits and Australian building approvals and retail sales.