Evening Market Update

Blue Chips Slip on Housing, Key Earnings Reports

Weak same-store sales reported by Dow member Wal-Mart Stores and a disappointing outlook from fellow Dow component Hewlett-Packard soured sentiment early in today’s trading session. Adding to concerns about the sustainability of the economic recovery, industrial production came in flat, while housing starts and building permits were much lower than forecasts. However, the S&P 500 and the Nasdaq were able to bounce off the lows of the day to finish mostly unchanged, while industrials pressured the Dow, keeping the blue-chip index well entrenched in the red. In other earnings news, Dow member Home Depot posted better-than-forecasted earnings and raised its guidance, Urban Outfitters missed on the bottom-line, but topped revenue expectations, and after the close Dell reported EPS that exceeded expectations, but also fell short of revenue projections. Treasuries finished mostly higher amid the disappointing economic data.

The Dow Jones Industrial Average fell 69 points (0.6%) to 12,480, the S&P 500 Index was flat at 1,329, while the Nasdaq Composite eked out a 1 point (0.0%) gain to 2,783. In moderate volume, 971 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq. WTI crude oil closed $0.46 lower at $96.91 per barrel, wholesale gasoline lost $0.01 to $2.92 per gallon, while the Bloomberg gold spot price fell $4.79 to $1,484.54 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—fell 0.3% to 75.39.

After the closing bell, Dell (DELL $16) reported a 1Q profit of $0.55 per share, well above the $0.44 consensus estimate of analysts, on revenues of $15.02 billion, which was short of the $15.41 billion projected.

Hewlett-Packard Co. (HPQ $37) posted fiscal 2Q EPS ex-items of $1.24, compared to the $1.21 that analysts surveyed by Reuters had expected, with revenues increasing 3% year-over-year (y/y) to $31.6 billion, matching the Street’s forecast. The Dow member was scheduled to report its 2Q results tomorrow after the closing bell but moved up its release following a leaked memo from CEO Leo Apotheker warning employees of “another tough quarter.” HPQ lowered its full-year guidance, due to the near-term impact of the Japan earthquake and tsunami, as well as continued softness in sales of consumer PCs and reduced operating profit expectations for services. Shares were solidly lower.

Meanwhile, Dow member Wal-Mart Stores Inc. (WMT $56) reported 1Q earnings ex-items of $0.97 per share, two cents above the consensus estimate of analysts, with revenues rising 4.4% y/y to $103.4 billion, above the $102.9 billion that the Street had expected. The world’s largest retailer said its 1Q US same-store sales—sales at stores open at least a year—declined 0.3% y/y, excluding a gain of 0.7% in fuel sales, as customer traffic decreased, offsetting an increase in average ticket price compared to the same period last year. In a conference call with analysts, the company CEO Mike Duke noted that “core US Wal-Mart customers are still stretched,” per Dow Jones Newswires. WMT issued 2Q EPS guidance that was roughly inline with expectations. Shares were lower.

Fellow Dow component Home Depot Inc. (HD $37) announced 1Q profits of $0.50 per share, above the $0.49 that the Street had forecasted, as revenues inched 0.2% lower y/y to $16.8 billion, compared to the $17.0 billion that analysts were anticipating. The world’s largest home-improvement retailer said its same-store sales dipped 0.6% y/y, due to a slow spring selling season. However, HD raised its full-year EPS outlook and shares were nicely higher.

Finally, Urban Outfitters Inc. (URBN $33) achieved 1Q EPS of $0.23, one penny below the consensus estimate of analysts, with revenues increasing 9% y/y to $524 million, topping the $522 million that the Street had projected. The specialty retailer said its same-store sales declined by 5% y/y. URBN traded solidly higher.

Housing starts and building permits fall, industrial production flat, while capacity declines

Housing starts for April fell 10.6% month-over-month (m/m) to an annual rate of 523,000 units from an upwardly revised 585,000 units in March, and compared to expectations of 569,000 units by a survey of economists by Bloomberg. Also, building permits dropped 4.0% m/m in April to an annual rate of 551,000 units, after March’s downward revision to a 574,000 rate. The expectation was for permits to come in at 590,000 units. While the declines were led by the multi-family sector, single-family starts also fell 5.1% from a downwardly revised March figure and single-family permits decreased 1.8% from a negatively adjusted March reading.

The housing sector remains moribund, with existing home supply able to meet a majority of demand due to the constant stream of foreclosures added to the market. Foreclosures are likely to continue, with Zillow.com announcing more than 28% of homeowners are underwater on their mortgages as of the first quarter of 2011. Greater improvement in the labor market is likely needed before there will be a sustained recovery in housing.

Elsewhere, industrial production in April was flat m/m, below the expectation for a rise of 0.4%, and March’s reading was revised down 0.1% to a gain of 0.7% and February’s figure was also negatively adjusted. April’s decline was led by an 8.9% plunge in auto production, likely due to supply chain disruption from the quake and tsunami in Japan, and after rising by 3.6% in March. Additionally, business equipment fell 0.4%, marking the second consecutive decrease after being an area of strength during the prior 12 months. Capacity utilization unexpectedly fell to 76.6% from a downwardly adjusted 77.0%, remaining 3.5% below its average rate from 1972 to 2010.

Treasuries finished mostly higher following the housing and production data, with the yield on the 2-year note unchanged at 0.52%, while the yield on the 10-year note was down 4 bps to 3.11% and the 30-year bond rate declined 5 bps to 4.22%.

Omnipresent debt worries and lower German investor sentiment dampen Europe

Focus remained on the euro-area debt crisis and a meeting between eurozone officials resulted in talks about the possibility of getting Greek bondholders to extend the debt-laden nation’s debt repayment schedule. Also, officials approved the 78 billion euro ($110.8 billion) bailout program for Portugal yesterday, but the financial aid package still needs to be approved by eurozone governments.

Meanwhile, the European economic front offered data that stymied sentiment, with the German ZEW Survey of Economic Sentiment deteriorating to a level of 3.1 for May from 7.6 the month prior, and well below the 4.5 level expected by economists, while UK consumer prices came in hotter than expected in April.

In the Asia/Pacific region, economic news was in short supply. However, the minutes from the May 3 monetary policy meeting of the Reserve Bank of Australia garnered some attention, showing that policymakers felt further rate hikes may be needed to control inflation. The report noted that, “If economic conditions continued to evolve as expected, higher interest rates were likely to be required at some point if inflation was to remain consistent with the medium-term target.”

Fed’s view in focus tomorrow

Midday tomorrow brings the release of the minutes from the April Federal Open Market Committee (FOMC) meeting. The last meeting brought no changes to the 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.

In another change in conjunction with press conferences after two-day meetings, the Fed issued its economic forecast after the meeting, instead of within the minutes. Similar to the reduced growth in the 1Q GDP report and moderating PMIs, the Fed reduced its expectation of economic growth, and also raised its inflation forecast, while positively reducing the unemployment rate projection.

While headline inflation has some investors concerned, the Fed’s preferred measure of inflation is personal consumption expenditure (PCE) inflation, which excludes food and energy. Meanwhile, the injection of liquidity into the money supply from the QE2 program has been blamed in part for the falling dollar in late 2010 and early 2011, contributing to the rise in commodity prices. During the Q&A session at the FOMC meeting press conference, Bernanke said that there wasn’t much the Fed could do about gas prices and that the policy regarding the US dollar was under the purview of the Treasury department.

The only other item set for release in the US tomorrow is MBA Mortgage Applications.

Economic reports scheduled for release tomorrow on the international front include GDP from Spain, employment figures and consumer confidence from the UK, Japanese GDP and housing loans, consumer confidence in New Zealand, and employment data from Australia. As well, the Bank of England will release the minutes from its last monetary policy meeting.