Evening Market Update

Stocks Finish Strong to End Three-Day Skid

US equities got back on the winning track today after a rough start to the week, as early losses were erased by a modest afternoon rally led by strength in energy stocks. A disappointing read on April durable goods orders contributed to that early decline, but a closer review showed some positive aspects to the report, including a sharp upward revision to the March orders number. Treasuries were mixed, as the only other report from the economic docket showed that mortgage applications rose for the fourth consecutive week. In equity news, Applied Materials and Costco Wholesale both beat the Street’s top- and bottom-line forecasts, while Hormel Foods matched analysts’ profit projections. Outside of earnings news, shares of American International Group fell after the company priced a public offering of 300 million shares that was below yesterday’s closing price.

The Dow Jones Industrial Average rose 38 points (0.3%) to 12,395, the S&P 500 Index increased 4 points (0.3%) to 1,320, and the Nasdaq Composite gained 15 points (0.6%) to 2,761. In moderate volume, 966 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.54 to $101.13 per barrel, wholesale gasoline gained $0.03 to $3.02 per gallon, and the Bloomberg gold spot price fell $1.54 to $1,525.10 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was flat at 75.92.

Applied Materials Inc. (AMAT $14) reported fiscal 2Q EPS ex-items of $0.38, one penny above the consensus estimate of analysts surveyed by Reuters, with revenues increasing 25% year-over-year (y/y) to $2.9 billion, exceeding the $2.8 billion that the Street had anticipated. The semiconductor equipment maker said it had record sales in its solar business, while sales from its chip segment were down compared to last quarter. AMAT said “near-term economic conditions have tempered our growth expectations.” AMAT overcame early weakness to finish higher.

American International Group Inc. (AIG $28) traded lower after the US Treasury and the insurer priced a public offering of 300 million shares of the company as part of its plan to pay back the government for its financial crisis bailout. The offer was priced at $29 per share, below the $29.56 previous closing price, raising a total of $8.7 billion. The breakeven price for the government’s share was $28.70 per share, reducing the taxpayer’s stake to 77% from 92%.

Costco Wholesale Corp. (COST $80) announced fiscal 3Q earnings, excluding an inventory charge, of $0.80 per share, three pennies north of the Street’s projection, as revenues grew 16% y/y to $20.2 billion, compared to the $20.1 billion that analysts had forecasted. The retailer said its 3Q same-store sales—sales at stores open at least a year—rose 12% y/y, including gasoline sales and foreign currency translation, which had positive impacts. Excluding gasoline price inflation and strengthening foreign currencies, same-store sales were up 7%. COST moved lower as analysts are concerned about the impact on profits going forward of rising inflationary pressures, which forced the aforementioned inventory charge and caused its unadjusted earnings to miss the Street’s forecasts.

Hormel Foods Corp. (HRL $29) achieved fiscal 2Q EPS of $0.40, inline with analysts’ estimates, with revenues increasing 15% y/y to $2.0 billion, topping the $1.8 billion that the Street had anticipated. The company said it had sales growth in all five of its segments, and its refrigerated foods and Jennie-O Turkey Store segments led the way. HRL raised its full-year EPS guidance as it said it will combat higher input costs through efficiency gains and increased pricing. HRL was solidly lower amid concerns about profit margin pressure it could face as costs for pork and turkey are expected to rise.

Durable goods fall, while mortgage applications post fourth-straight weekly gain

Durable goods orders dropped more than estimated, falling 3.6% month-over-month (m/m) in April—the largest drop since October 2010—compared to the 2.5% decline that was expected by economists surveyed by Bloomberg, but March’s figure was favorably revised to a 4.4% increase from a 2.5% gain. Also, ex-transportation, orders unexpectedly fell, dropping 1.5% in April, compared to the expectation of a 0.5% rise, while March’s figure was adjusted upward, to a 2.5% increase, after the initial 1.3% gain that was reported. Meanwhile, orders for non-defense capital goods excluding aircraft, considered a good proxy for business spending, were below expectations, decreasing by 2.6% in April, compared to the 2.1% decline that was anticipated, after rising by a favorably revised 5.4% in March, from the initial report of a 3.7% increase.

The report lived up to its volatile nature, evidenced by the steep upward revisions to the March figures, as well as sharp drops orders for aircraft and motor vehicles. The declines were attributed mostly to Dow member Boeing Co. (BA $76 ¹) receiving two orders during the month, compared to 98 in March, per Bloomberg, and supply-chain disruptions in the auto sector as a result of the March earthquake and tsunami in Japan. Nonetheless, after stripping out the more volatile components, the April data left much to be desired as this report is used as an indicator of manufacturing activity and capital investments by businesses, which are pivotal to the employment outlook. However, digging deeper into the report, there were some positive aspects, as orders for computers and electronic products rose 0.7%, and unfilled orders—a gauge of future demand—have increased in twelve of the past thirteen months. Moreover, inventories increased 0.9%—the sixteenth-straight monthly advance and are at the highest level since the series was first published—which may provide a boost to 2Q GDP.

In other economic news, the MBA Mortgage Application Index rose by 1.1% last week, after the index that can be quite volatile on a week-to-week basis, increased by 7.8% in the previous week. The fourth-consecutive weekly increase came as the Purchase Index rose 1.5% and the Refinance Index moved 0.9% higher, despite a 9 basis point (bp) increase in the average 30-year mortgage rate to 4.69%.

Treasuries were mixed after showing little reaction to the data, as the yield on the 2-year note was 1 bp lower at 0.53%, while the yield on the 10-year note gained 1 bp to 3.13%, and the 30-year bond rate rose 3 bps to 4.28%.

Lack of data out of Europe leaves focus on debt struggles

In a light day of European economic news, the UK reported that its 1Q GDP remained unrevised at a quarter-over-quarter (q/q) rate of expansion of 0.5%, as strength in exports offset weakness in private consumption. Other reports released today included: stronger-than-forecasted UK service sector activity in March, and a larger-than-estimated drop in Italian retail sales.

Economic news out of the Asia/Pacific region was also sparse, as Japan’s exports fell by a slightly smaller amount than economists had forecasted for April, while Australia’s Leading Index rose.

Back in the Americas, Brazil’s main consumer confidence index declined for the third consecutive month in May, as higher interest rates and rising prices weighed on sentiment in South America’s largest economy.

Markets look for an upward revision to GDP tomorrow

Tomorrow, the economic calendar will yield the second revision to 1Q GDP, the broadest measure of the nation’s output, forecasted to be revised from a 1.8% quarter-over-quarter (q/q) annualized rate of expansion in the initial report to a growth rate of 2.2%. The upward adjustment is expected as the personal consumption component is projected to be revised from a gain of 2.7% to 2.8%, while March inventory data released after the preliminary reading showed larger-than-estimated increases—the change in inventories are added to the calculation to GDP. However, the data will likely have a limited impact on the markets given that we are nearly two-thirds into 2Q and concerns have ramped up recently regarding the pace of the economic recovery as the year matures. Manufacturing activity is showing signs of deceleration, the euro-debt crisis is festering, and worries about impact of China’s tightening measures on the global economy are persisting, to foster the flare-up in uneasiness.

The only other release on tomorrow domestic economic calendar will be weekly initial jobless claims, forecasted to fall from 409,000 to 404,000.

The international front will be quiet again tomorrow, as the only reports on tap are French consumer confidence, the German import price index, and the Brazilian unemployment rate.