Evening Market Update

Commodities Plunge, Take Stocks Along for the Ride

Stocks pulled back sharply today after a strong start to the week, as a broad drop in commodities combined with increasing global inflation concerns to sink sentiment. Crude oil and gasoline prices tumbled on a decrease in demand, while continuing uncertainty around a financial aid package for Greece put further pressure on the euro, sending the US dollar higher. In equity news, Dow member Walt Disney Co. missed on the top- and bottom-lines, while Macy’s Inc. reported better-than-expected 1Q earnings and doubled its quarterly dividend. Elsewhere on the equity front, Dow component Intel Corp increased its quarterly dividend, Yahoo announced a restructuring at Alibaba Group, which it owns a 43% stake in, and AIG commenced a 300 million share offering along with the US Treasury. Treasuries moved higher on the equity selloff, after showing little reaction to a larger-than-expected widening of the US trade deficit and an increase in mortgage applications.



The Dow Jones Industrial Average fell 130 points (1.0%) to 12,630, the S&P 500 Index declined 15 points (1.1%) to 1,342, and the Nasdaq Composite lost 27 points (0.9%) to 2,845. In moderate volume, 980 million shares were traded on the NYSE and 2.3 billion shares changed hands on the Nasdaq. WTI crude oil plunged $4.88 to $99.00 per barrel, wholesale gasoline fell $0.24 to $3.14 per gallon, while the Bloomberg gold spot price lost $13.38 to $1,502.88 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 1.0% higher at 75.30.



Dow member Walt Disney Co. (DIS $42) reported fiscal 2Q earnings of $0.49 per share, below the $0.57 consensus estimate of analysts surveyed by Reuters, with revenues increasing 6% year-over-year (y/y) to $9.08 billion, versus the $9.12 billion that the Street had expected. The company saw revenue growth at its media networks and parks & resorts segments, but its studio entertainment posted a 13% y/y decline in revenues and a 65% drop in profits, due to decreases in worldwide home entertainment and theatrical distribution, as well as higher film cost write-downs. Shares were solidly lower.



Meanwhile, fellow Dow component Intel Corp. (INTC $23) announced that its Board of Directors has approved a 16% increase in its quarterly dividend to $0.21 per share, beginning with the dividend that will be declared in 3Q 2011. This is the second dividend increase in the past six months and the chipmaker said worldwide demand for computing continues to increase “at a very rapid rate,” putting it in track for revenue growth of over 20% this year. INTC traded nicely higher.



Moreover, Macy’s Inc. (M $28) announced 1Q EPS of $0.30, well above the $0.18 that the Street had estimated, as revenues rose 5.7% y/y to $5.9 billion, inline with what analysts had anticipated. The department store said its 1Q same-store sales—sales at stores open at least a year—increased 5.4% y/y, and it raised its full-year EPS guidance. The company also doubled its quarterly dividend to $0.10 per share. Shares of Macy’s finished solidly higher.



American International Group Inc. (AIG $31) moved higher after the insurer and the US Treasury commenced a registered public offering of AIG common stock. AIG offered 100 million shares and the US Treasury is selling 200 million shares of the 1.66 billion that it acquired from its bailout of the company during the financial crisis. The size of the initial offering was smaller than what was expected, according to the Wall Street Journal, and is being seen as a gauge of whether the government will be able to sell its stake for a profit, with the break-even price about $28.70 per share, per Dow Jones Newswires.



Shares of Yahoo Inc. (YHOO $17) fell over 7% after the company disclosed that Chinese e-commerce company Alibaba Group has transferred ownership of its online payments company to a new entity controlled by Alibaba CEO Jack Ma. The restructuring raises concerns that the People’s Bank of China will prohibit foreign ownership of the online payment company, which could divert economic profit away from Alibaba, of which YHOO owns a 43% stake in as of March 31st, and into the new entity.



Trade deficit widens, mortgage applications rise for a second-straight week



The trade deficit widened by a larger amount than anticipated, increasing from a favorably revised $45.4 billion in February to $48.2 billion in March, versus the estimate of economists surveyed by Bloomberg, which called for the deficit to widen to $47.0 billion. Exports increased 4.7% m/m to $172.7 billion, but imports rose 4.9% to $220.8 billion. The price of crude oil that was imported rose from $87.17 per barrel in February, to $93.76 per barrel in March, and the quantity of oil imported increased 21.8% m/m to 295.1 million barrels.



In other economic news, the MBA Mortgage Application Index increased by 8.2% last week, after the index that can be quite volatile on a week-to-week basis, rose by 4.0% in the previous week. The gain came as the Refinance Index rose 9.0% and the Purchase Index registered a 6.7% increase, while the average 30-year mortgage rate declined by 9 basis points (bps) to 4.67%.



Treasuries moved higher amid the declines in the equity markets, after showing little reaction to the economic data. The yield on the 2-year note fell 4 bps to 0.55%, the yield on the 10-year note declined 6 bps to 3.16% and the 30-year bond was 4 bps lower at 4.31%.



BoE ups inflation outlook, China reports higher inflation



Sentiment in Europe was hamstrung by cooled expectations that new financial aid for debt-laden Greece is imminent, as Germany’s Chancellor Merkel said yesterday that, “We can offer solidarity only if Greece’s stability and eagerness to reform is proven,” per Bloomberg. Elsewhere, the Bank of England (BoE) increased its inflation outlook, with BoE Governor King saying “there is a good chance” that inflation could reach 5% later this year, and inflation remains “uncomfortably high.” King also warned that the recent pattern of revisions to the central bank’s projections of “downward to growth and upward to inflation has continued.” However, the central bank pointed out that inflation is likely to fall back through 2012 and into 2013 as the temporary impact of its recently increased value added tax (VAT), and higher energy and import prices dissipates and some downward pressure from a margin of spare capacity persists. The BoE outlook is prompting some to increase expectations that the central bank may need to increase interest rates sooner than initially thought. Bloomberg noted that based on UK sterling overnight interbank data, money markets are expecting a 25 bps rate hike in the BoE’s benchmark interest rate by December, and before the inflation forecast, a rate hike was expected in January. In the BoE’s report, it pointed out that under the assumption that its benchmark interest rate moves inline with market interest rates and its asset purchase plan remains at 200 billion pounds, the chances of inflation being above or below the target of 2% in the medium term are judged to be about the same.



Economic news in the Asia/Pacific region was focused on China, with a report showing consumer prices, although slowing modestly in April from March, came in above expectations. China’s Consumer Price Index (CPI) increased 5.3% y/y, after rising 5.4% in the previous month, compared to the 5.2% gain that economists had expected, fostering some concerns about continued monetary policy tightening by the government, which reiterated recently that its top priority was to contain inflation. Moreover, some gauges of financial market liquidity also added to the uneasiness, as new yuan loans and fixed asset investments each exceeded expectations and accelerated in April from March. However, some of the concerns were limited by other reports, which showed the Producer Price Index (PPI) cooled more than anticipated, while industrial production and retail sales both increased by smaller-than-forecasted amounts.



Retail sales and PPI on tap for tomorrow



Tomorrow, the US economic calendar will heat up with the release of advance retail sales, expected to rise 0.6% m/m in April for both the headline rate and excluding autos, while ex-auto and gas, sales are forecasted to increase 0.5%. Also, the Producer Price Index (PPI) will be reported, expected to show prices at the wholesale level increased 0.6% m/m in April, while ex-food and energy, the core rate is projected to show a 0.2% m/m rise. On a y/y basis, headline PPI is anticipated to be 6.5% higher, and core PPI is forecasted to be up 2.1%. The consumer has shown some resiliency in the face of higher food and energy prices threatening their discretionary income, with many retailers posting stronger-than-expected April same-store sales last week, aided by a later Easter holiday this year. Meanwhile, the recent surge in commodity prices has elevated the PPI data as of late and we have seen the impact of higher input prices in this year’s 1Q corporate earnings season, as a plethora of companies have noted an impact on earnings, with some beginning to pass along some of the burden to the consumer in the form of higher prices. The PPI will likely remain in focus as it is viewed a gauge of pricing pressures that could be facing the retail sector and ultimately the consumer.