Evening Market Update

Stocks Fall as US Dollar and Commodities Dominate

Equities fell to end the week following the decline in commodities and rise in the US dollar, on concerns about waning demand with growth slowing, and possibility a move to risk reduction after margin requirements were raised in several commodities last week. Meanwhile, the dollar moved higher and the euro lower despite strong GDP growth and an increase in the inflation forecast out of the euro-zone, possibly exacerbated by euro-zone debt concerns. Additionally, a benign inflation reading and increase in consumer sentiment in the US had little benefit to stocks, but added to the increase in Treasuries. In equity news, Nordstrom Inc and Nvidia Corp issued disappointing outlooks, Yahoo Inc fell after Chinese ecommerce company Alibaba Group failed to notify its Board of the transfer in ownership of its online payment business, while Rambus ended sharply lower after an appeals court said it wrongly destroyed documents regarding several patent infringement cases.

The Dow Jones Industrial Average fell 100 points (0.8%) to 12,596, the S&P 500 Index lost 11 points (0.8%) to 1,338, and the Nasdaq Composite declined 35 points (1.2%) to 2,828. In moderate volume, 898 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil closed $0.68 higher to $99.65 per barrel, wholesale gasoline gained $0.01 to $3.07 per gallon, while the Bloomberg gold spot price fell $12.05 to $1,493.83 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—rose 0.8% to 75.79. For the week, including dividends, the DJIA lost 0.3%, the S&P 500 Index fell 0.2% and the Nasdaq Composite was nearly unchanged.

Nordstrom Inc. (JWN $48) shares fell after the upscale retailer lowered its full-year EPS guidance to a range of $2.80-2.95, a decrease of $0.15 per share, and compared to the $3.11 estimate that analysts surveyed by Reuters expected. JWN said the lowered outlook reflects charges related to its acquisition of HauteLook. Also, the company reported that 1Q revenues rose 12% year-over-year (y/y) to $2.2 billion, below the $2.3 billion that the Street forecasted. The announcement from the company is overshadowing its 1Q EPS results, which came in at $0.69, two cents above analysts’ projections and a 6.5% y/y increase in 1Q same-store sales—sales at stores open at least a year.

In other earnings news, Nvidia Corp. (NVDA $18) reported 1Q earnings ex-items of $0.27 per share, above the $0.19 that analysts had expected, and revenues that declined 4% y/y to $962 million, but were up 8.5% compared to 4Q last year, and exceeded the $948 million that the Street was looking for. However, the graphics chipmaker issued 2Q revenue guidance that missed expectations. NVDA was down sharply.

Meanwhile, Yahoo Inc. (YHOO $17) reported that it was notified by Chinese ecommerce firm Alibaba Group (ALBIY $9) of two transactions that occurred without the knowledge or approval of the Alibaba Group Board of Directors. The first was the transfer of ownership of online-payment business Alipay in August 2010, and the second was the deconsolidation of Alipay effective in 1Q 2011. Yahoo owns about a 40% stake in Alibaba Group, per Bloomberg, which also reported that a spokesperson for Alibaba Group said the company’s Board was told about the change in ownership of Alipay in July 2009 and it discussed the online payment rules for three years. The company spokesperson also said the action taken over Alipay was “in the best interest” of Alibaba and its shareholders. Yahoo added that it continues to work closely with Alibaba to protect economic value for all interested parties. YHOO was solidly lower.

Elsewhere, Rambus Inc (RMBS $16) ended the day down over 15% after initially triggering six separate circuit breakers and four trading halts midday after an appeals court re-examined patent infringement cases from Micron Technology Inc (MU $10) and Hynix Semiconductor. The court was examining whether Rambus wrongly destroyed documents and whether cases could continue in light of this information. Rambus said they were disappointed with the decisions and would have a conference call after the close of trading today. Shares of MU were also lower.

Consumer prices rise mostly inline with forecasts, while sentiment improves

The Consumer Price Index showed prices at the consumer level were up 0.4% month-over-month (m/m) in April, inline with the forecasts of economists surveyed by Bloomberg, and March’s 0.5% increase was unrevised. Meanwhile, the core rate, which strips out food and energy, was 0.2% higher m/m in April, also matching estimates, with March’s 0.1% increase being left unrevised. On a y/y basis, consumer prices were 3.2% higher in April, up from 2.7% in March, and the core CPI was up 1.3% y/y, after rising by 1.2% in March. Economists expected headline CPI to come in at 3.1% and a core rate of 1.3% y/y.

The headline rate was, as expected, boosted by rising food and energy prices, with gasoline prices increasing 3.3% m/m, to account for nearly half of the overall gains, while food also contributed with a 0.4% gain. However, the increase in food was the smallest gain this year. Meanwhile, the bulk of the heavy lifting of the core rate came from a 1.2% m/m increase in used cars and trucks, along with a 0.7% gain in new vehicles, while prices for shelter rose modestly and medical care costs were higher.

In other economic news, the  preliminary University of Michigan Consumer Sentiment Index showed consumers appear to be more optimistic than expected for May, as it rose from 69.8 in April to 72.4 in May, compared to the slight increase to 70.0 that economists projected. The better-than-anticipated improvement came as the economic outlook component rose from 61.6 to 67.4, more than offsetting a decline in the current economic conditions, which fell from 82.5 to 80.2. Also, the 1-year inflation outlook ticked lower from 4.6% to 4.4%, but the 5-year expectation increased slightly from 2.9% to 3.0%.

Treasuries rose following the inflation data and as equities fell, with the yield on the 2-year note down 2 bps to 0.53%, the yield on the 10-year note declining 5 bps to 3.17%, and the 30-year bond 5 bps lower at 4.31%.

Favorable GDP reports from Europe offset by an increased inflation forecast

Early enthusiasm overseas was fostered by eurozone 1Q GDP rising at a 0.8% quarter-over-quarter (q/q) rate, above the 0.6% growth that economists expected, while the y/y pace of expansion came in at 2.5%, larger than the 2.2% increase that was projected. GDP reports out of France and Germany, which both grew at higher-than-expected rates, led the way, offsetting a smaller-than-estimated rate of growth reported out of Italy. In other economic news, France reported that its 1Q nonfarm payrolls and wages grew more than economists expected.

Meanwhile, the European Commission raised its 2011 inflation outlook, which increased concerns that the European Central Bank (ECB) may need to tighten monetary policy further, and while the euro began the day in the green, falling commodity prices and a rise in the US dollar contributed to a late-day slide. Additionally, the debt problems in the peripheral eurozone applied some pressure to the European currency ahead of next week’s meeting between eurozone leaders to discuss how to handle the fiscal problems facing the recently bailed out peripheral nations of Greece, Ireland, and Portugal.

Stocks in Asia finished the week digesting China’s bank reserve requirement increase that came after Asian trading closed yesterday, while after the close of Asian trading today, Hong Kong announced that its 1Q GDP expanded at a rate of 2.8% quarter-over-quarter (q/q), above the 1.2% growth that was expected by economists, and the y/y pace of output increased 7.2%, compared to the 5.5% rise that was estimated, after rising 6.4% in 4Q. Elsewhere, the Bank of Korea kept its benchmark interest rate unchanged at 3.00%, surprising some economists as the consensus estimate called for an increase to 3.25%.

Modest moves lower this week as commodities continue to show volatility

The major US equity markets finished out the week with minimal moves away from where the week began, but the session-to-session moves were anything but modest as stocks were at the mercy of the commodity markets. Prices in the sector jumped and fell above and below the flatline, taking the equity markets along for the ride before coming to rest modestly below the unchanged mark. The lion’s share of the movements were driven by the US dollar as most commodities are denominated in the greenback, which managed to gain ground for the second-straight week, due mainly to a downward move in the euro. European debt concerns festered, courtesy of mixed economic data out of China and uncertainty towards whether debt-troubled Greece will get new aid from the eurozone bailout package or will it need to restructure its outstanding debt, to the detriment of investors that include major eurozone countries. Meanwhile, outside of the resource sector, this week’s data did little to decide the tug-of-war between the bulls and bears. M&A activity continued to help sentiment, highlighted by Dow member Microsoft Corp’s (MSFT $25) agreement to acquire internet phone company Skype Technologies SA for $8.5 billion, US inflation data continued to suggest broad-based inflation remains contained, and jobless claims pulled back from the recent jump in the previous weeks. However, April retail sales report showed slower growth—but favorable March revisions—Dow member Cisco Systems Inc. (CSCO $17) issued a disappointing outlook, small business optimism deteriorated, and the US trade deficit widened more than anticipated.

Housing and Fed minutes to highlight US economic data next week

The week kicks off with a read on homebuilder sentiment from Monday’s NAHB Housing Market Index, while Tuesday brings housing starts, expected to rise 3.8% m/m in April to an annual rate of 570,000 units after rising 7.2% in March, while building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, are forecasted to be flat m/m at 585,000 units after jumping 11.2% in March. Thursday will bring the April existing home sales report, which reflects closings from contracts entered one to two months earlier, forecasted to rise 2.0% m/m to an annual rate of 5.2 million units.

Additionally, midday Wednesday brings the release of the minutes from the April Federal Open Market Committee (FOMC) meeting. The last meeting brought no changes on rate or the outlook, and was followed by the first-ever post-meeting press conference by the Chairman. With regard to the asset purchase program known as QE2, the Fed said that it would complete purchases by the end of the second quarter, and would regularly review its balance sheet. During the Q&A session at the press conference, Bernanke said that there wasn’t much the Fed could do about gas prices or the growth rates in emerging markets, and said that the policy regarding the US dollar was under the purview of the Treasury department.

The other major report for the week is Tuesday’s industrial production report, expected to advance 0.4% m/m in April after gaining 0.8% in March, while capacity utilization is forecasted to increase to 77.6%. Other releases on the US economic calendar include the Empire Manufacturing Index, the MBA Mortgage Applications Index, weekly initial jobless claims, the Conference Board’s Index of Leading Indicators and the Philadelphia Fed’s Business Activity Index. Other reports in the Americas include Canada’s manufacturing sales, leading indicators, CPI, wholesale and retail sales, Mexico’s GDP and Brazil’s job creation.

Other international releases include Japan’s machine orders, consumer confidence, machine tool orders, GDP, capacity utilization and industrial production, Australia’s consumer confidence, and Taiwan’s export orders. Economic releases in Europe will include euro-zone CPI, March trade balance and consumer confidence, German PPI and the Zew Economic Sentiment Survey, and UK housing prices, consumer confidence, CPI and retail price index, and retail sales. The Bank of Japan is expected to meet to discuss monetary policy, while the minutes will be released from the last Reserve Bank of Australia and Bank of England meetings. Additionally, European finance ministers will be meeting Monday and Tuesday, with the agenda expected to include programs for peripheral nations needing financial assistance.