Evening Market Update

Stocks Bouncing Back from Disappointing GDP and Jobs Data

US stocks erased early losses and are mostly higher in afternoon action as the bulls are showing some resiliency in the face an unchanged revision to 1Q GDP growth and an unexpected rise in jobless claims. Treasuries are higher following the data. Meanwhile, technology issues are pacing the advance, supported by a sharp gain in shares of NetApp Inc, which announced better-than-forecasted earnings and the data management firm’s guidance exceeded expectations. Elsewhere, Guess Inc, and Tiffany & Co are nicely higher to aid the upward move after they also achieved forecast-topping profits and provided favorable outlooks. However, Computer Sciences Corp is trading sharply lower after its bottomline results and guidance missed the Street’s projections. Overseas, European stocks finished mixed amid diverging equity news and lingering debt concerns.

At 12:59 p.m. ET, the Dow Jones Industrial Average is nearly unchanged, while the S&P 500 Index is up 0.2% and the Nasdaq Composite is advancing 0.6%. WTI crude oil is down $0.79 at $100.53 per barrel, wholesale gasoline is gaining $0.02 to $3.00 per gallon, and the Bloomberg gold spot price is $2.30 lower at $1,523.05 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.4% at 75.60.

NetApp Inc. (NTAP $56) reported fiscal 4Q earnings ex-items of $0.59 per share, above the $0.53 consensus estimate of analysts surveyed by Reuters, with revenues growing 22% year-over-year (y/y) to $1.4 billion, roughly inline with the Street’s forecast. The data management firm said it is seeing increasing demand for its storage virtualization and cloud computing solutions. NTAP issued 1Q guidance that exceeded analysts’ estimates. Shares are sharply higher.

Guess Inc. (GES $45) is trading sharply higher after the clothing retailer announced 1Q EPS ex-items of $0.55, above the $0.44 expectation of the Street, as revenues rose 10% y/y to $592 million, exceeding the $568 million projection by analysts. The company said revenue increased across all of its operating segments, led by Europe and Asia, which accounted for almost two-thirds of total sales, while US same-store sales—sales at stores open at least a year—declined 3.1% y/y. GES issued 2Q revenue guidance that was above the Street’s forecast, while it reaffirmed its full-year EPS outlook.

Computer Sciences Corp. (CSC $38) posted fiscal 4Q EPS of $1.09, two pennies below the Street’s forecast, with revenues flat y/y at $4.2 billion, inline with analysts’ estimates. The IT services company said it saw “unexpected difficulties” in the Nordics and the delays in the Federal budgets in fiscal year 2011. CSC issued full-year 2012 EPS guidance that came up short of expectations and shares are sharply lower.

Tiffany & Co. (TIF $76) achieved 1Q profits ex-items of $0.67 per share, ten cents above the Street’s forecast, with revenues increasing 20% y/y to $761 million, compared to the $704 million that analysts had forecasted. The upscale jewelry company said it had “healthy” growth in most regions, while it was able to improve gross profits despite higher product costs. TIF offered full-year EPS guidance that was above expectations. TIF is gaining solid ground.

1Q GDP left unrevised and jobless claims unexpectedly rose

The second look at 1Q Gross Domestic Product, the broadest measure of economic output, showed expansion remained at a 1.8% quarter-over-quarter (q/q) annualized rate of growth, compared to the 2.2% rate forecasted by a survey of economists by Bloomberg. 1Q’s growth follows the 3.1% increase in 4Q. Also, personal consumption gained 2.2%, down from the 2.7% that was initially reported, and the 4.0% that was posted in 4Q. Economists expected consumption to be upwardly revised to a 2.8% increase. The GDP Price Index rose 1.9%, unchanged from the previous report as economists anticipated, while the core PCE Index, which excludes food and energy, was downwardly revised to a rise of 1.4%, versus the unadjusted 1.5% rate that was expected.

The unchanged reading comes as the US Department of Commerce received more complete data about 1Q than it had at the time of the initial report and it showed consumer spending was slower than forecasted and imports—a subtraction to output—were higher than the early data suggested. These revisions offset positive contributions that came from upward adjustments to exports, private inventory investment, and nonresidential fixed investment.

Today’s report was disappointing as it was led by an unexpected downward revision to consumer spending—the most important component of GDP—even as we have seen the consumer remain relatively resilient in the face of higher food and energy costs and a slowly improving employment market. The data will likely add to the calls by some for another round of monetary policy stimulus by the Federal Reserve, which is set to end its current stimulus efforts, known as QE2, at the end of June, and exacerbated sentiment regarding the growing debt problems facing our nation.
 With both QE1 and QE2, the money pumped into the economy has largely just remained in the financial system, instead of moving through the economy via lending—known as the velocity of money. Until this starts to flow, substantial headway in improving the unemployment rate, and raising wages will continue to be difficult. However, there are some glimmers of hope on that front as we are seeing banks' willingness to lend expand. As banks lend more, and consumers and businesses put that money to work in the economy, we should see money rotating through the economy, increasing the velocity of money, and making the Fed’s program much more effective. Should the above start to take hold, inflation risk would rise. Despite the Fed’s insistence on extremely loose monetary policy, we believe that they are well-versed in how to fight inflation and wouldn’t hesitate to tighten quickly should inflation expectations become unhinged.

On the debt situation, Liz Ann, Brad, and Michelle believe one of the reasons for the Fed’s actions is their reluctance to tighten at the same time that state and local governments are slashing budgets. The Federal government seems destined to remove money from the economy in the form of spending cuts and tax hikes. In the near term, the debt ceiling needs to be raised and the agreement that allows that to happen will be instructive as to the path the upcoming fight over the 2012 budget may take. Many reports had the debt ceiling being reached some time in May, but there are several accounting maneuvers the Treasury Department has already used to extend that deadline to early August. While we will likely come close to that before an agreement is reached, there is virtually no chance the United States will default on any of its debt obligations and we will soon be turning our attention back to the budget process. 

Meanwhile, weekly initial jobless claims unexpectedly increased, rising by 10,000 to 424,000, versus last week's figure which was upwardly revised by 5,000 to 414,000, compared to the decline to 404,000 that economists had expected. However, the four-week moving average, considered a smoother look at the trend in claims, declined by 1,750 to 438,500, and continuing claims fell by 46,000 to 3,690,000, below the forecast of economists, which called for continuing claims to come in at 3,700,000.

Treasuries are higher in afternoon action following the GDP and employment data, with the yields on the 2-year and 10-year notes, as well as the 30-year bond, down 4 bps to 0.50%, 3.09%, and 4.24%, respectively.

Europe mixed amid divergent equity news and as Greek debt worries continue

The equity markets in Europe finished mixed, as oil & gas issues advanced following recent weakness, while traders digested some mixed equity news and concerns about a default by Greece continued to keep sentiment uneasy. The euro pared gains on the US dollar sharply after the head of the group of eurozone finance ministers Jean-Claude Juncker said the International Monetary Fund (IMF) may not release its portion of next month’s installment of aid to the debt-laden Greek nation. Juncker said the disbursement of funds will depend on next week’s audited budget results, and whether it reveals that Greece can meet the bailout agreement’s requirement of a financing guarantee for the next twelve months. Elsewhere, the disappointing read on US 1Q GDP added some pressure on stocks. In equity news, shares of  Man Group Plc. (MNGPY $4) were solidly higher after the world’s largest publicly-traded hedge fund, per Bloomberg, posted better-than-expected earnings. Also, UBS AG (UBS $19) traded higher after the Wall Street Journal reported that the lender intends to split off its investment banking unit, according to people familiar with the matter. However, UBS denied the report. Meanwhile, shares of UK luxury retailer Burberry Group Plc. (BURBY $42) came under solid pressure after giving a cautious outlook.

In economic news, German import prices rose by a much smaller amount than expected in April, French consumer confidence improved inline with economists’ forecasts, and Italian business confidence fell more than expected.

The UK FTSE 100 Index was up 0.2%, while France’s CAC-40 Index was 0.3% lower, Germany’s DAX Index declined 0.8%, and Greece’s Athex Composite Index decreased 0.2%.