Evening Market Update

 

 

 

Equities Inch Forward with Holiday in View

Stocks posted modest gains in light volume on Friday, closing a fourth-consecutive down week in quiet fashion ahead of the long holiday weekend. Equities shrugged off continued concerns about Greece and a slump in pending home sales, while positively viewing an improvement in consumer sentiment as well as personal income and spending, and Treasuries were mixed. Equity news was light, with Marvell Technology issuing positive guidance and Medco Health Solutions Inc losing a prescription contract to CVS Caremark Corp. Please note that all US markets will be closed on Monday in observance of the Memorial Day holiday.

The Dow Jones Industrial Average rose 38 points (0.3%) to 12,442, the S&P 500 Index increased 5 points (0.4%) to 1,331, and the Nasdaq Composite gained 14 points (0.5%) to 2,797. In light volume, 693 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil rose $0.36 to $100.56 per barrel, wholesale gasoline gained $0.02 to $3.03 per gallon, and the Bloomberg gold spot price advanced $16.88 to $1,536.08 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was 0.9% lower at 74.92. For the week, including dividends, the DJIA lost 0.6%, the S&P 500 Index fell 0.2% and the Nasdaq Composite declined 0.2%.

Marvell Technology Group Ltd. (MRVL $16) reported 1Q earnings ex-items of $0.29 per share, below the $0.30 consensus estimate of analysts surveyed by Reuters, with revenues declining 6% year-over-year (y/y) to $802 million, compared to the $826 million that the Street had forecasted. Revenues were also down 11% compared to 4Q. The chipmaker said its 1Q results reflected typical seasonality of its consumer centric end markets. However, shares were nicely higher as the company issued 2Q EPS guidance that exceeded analysts' expectations, while noting that 1Q was the low point in its revenue cycle.

Medco Health Solutions Inc. (MHS $59) was down after the pharmacy-benefits management firm announced that it was notified by the Blue Cross Blue Shield Association of its intentions to transition its mail order and specialty pharmacy benefit coverage for the Federal Employee Program (FEP) to CVS Caremark Corp. (CVS $39). The FEP contract generates nearly $3 billion in annual net revenues, including about 9.8 million mail order prescriptions, and MHS said it represents less than 10% of the company's estimated 2011 earnings. CVS traded slightly higher.

Personal income and spending rise, sentiment and housing data later this morning

Personal income rose 0.4% month-over-month (m/m) in April, matching expectations of economists surveyed by Bloomberg, and March’s 0.5% increase was revised modestly downward to a 0.4% gain. Also, personal spending was 0.4% higher m/m in April, compared to expectations of a 0.5% advance, and March’s 0.6% rise was revised to a 0.5% increase. The personal savings rate came in at 4.9% for April, matching March's downwardly revised rate.

Also, the PCE Price Index, which is released with the income and spending data, was up 2.2% y/y in April, inline with expectations, after March’s 1.8% increase was unrevised. The core PCE Price Index, which excludes food and energy, was up 0.2% m/m, matching forecasts, while y/y, core prices moved 1.0% higher, as expected.

Meanwhile, the University of Michigan's Consumer Sentiment Index, was unexpectedly revised higher to 74.3 from the preliminary reading of 72.4 for the month of May, compared to the unrevised level that economists expected. The surprising revision came as the economic conditions and outlook components were adjusted to the upside, while inflation expectations were downwardly revised.

Finally, pending home sales fell sharply, dropping 11.6% m/m in April, compared to the 1.0% decline that economists had projected, and March's 5.1% gain was revised to a 3.5% increase. Moreover, compared to last year, in which buyers rushed to beat the contract signing deadline to qualify for the government’s home buyer tax credit, sales were down 26.8%, after falling a downwardly revised 12.9% in March. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales. The National Association of Realtors (NAR) said the data implies a "slower-than-expected market recovery in upcoming months", as unusual weather and economic softness added to ongoing problems that are hobbling a recovery. The NAR added that, the fall in pending home sales was larger than can be implied by broad economic factors, "so we need to see if it's just a one-month aberration."

After an early close for the upcoming holiday weekend, Treasuries were mixed, paring losses that came immediately following the housing data, with the yield on the 2-year note down 1 bp to 0.48%, while the yields on the 10-year note and the 30-year bond advanced 2 bps to 3.07% and 4.24%, respectively.

Please note, all US markets will be closed on Monday in observance of the Memorial Day holiday. 

European sovereign debt crisis remains focus overseas

The European banks were higher following an analyst upgrade of the sector and after the Financial Times reported that banks in the European Union could evade part of the more restrictive Basel III capital requirements, citing an unreleased draft that would allow banks to include their insurance subsidiaries in their capital. The rise in financial stocks came despite continued sovereign debt concerns after Greek Prime Minister Papandreou failed to gain support from the country's main opposition parties following talks in the debt-laden nation for new austerity measures that are needed to continue to receive financial aid from the eurozone bailout package, per Bloomberg. This comes after comments yesterday from Luxembourg's Jean-Claude Junker, the head of the eurozone finance ministers, who suggested that a review of the bailout program might conclude that Greece doesn’t have enough loan commitments to carry it through the next 12 months, which he said could stop the International Monetary Fund's next loan disbursement. Today, Junker toned down his comments, saying "I don’t know" what the final assessment will be.

Economic news in Europe was mixed, with a read UK consumer confidence unexpectedly improving in May, while a separate report showed UK home prices rose more than forecasted this month, consumer prices in Germany came in flat for May, as expected, but a report on eurozone economic confidence this month deteriorated slightly more than economists had anticipated.

In Asia/Pacific economic news, Japan's national consumer prices rose inline with economists’ forecasts in April, while excluding food and energy, prices declined as expected. After the closing bell in Asia, Fitch Ratings cut its outlook on Japan to negative from stable, citing negative pressure from rising government indebtedness. Elsewhere, South Korea posted favorable trade data. 

Global uneasiness continues to stymie stocks

Although the tale of the tape to end the week showed a modest move in the equity markets, US stocks posted the fourth-straight weekly loss, a feat not seen since early 2010. The modest declines came as economic data fostered growing uncertainty regarding the elasticity of the recent soft patch in the economy. 1Q GDP was left unrevised at a 1.8% annualized rate of expansion, compared to expectations of growth over 2%, as personal consumption was smaller than initially forecasted, while the Richmond Fed Manufacturing Index fell into a level depicting contraction. Moreover, although new home sales came in stronger than forecasted, they remained near record lows to keep the outlook for a recovery in the housing sector depressed, exacerbated by Friday's plunge in pending home sales. Adding to list, durable goods orders fell more than anticipated and jobless claims unexpectedly rose.

The soured sentiment was not confined to the US markets. The euro-area debt crisis remained a source of uneasiness, with uncertainty regarding a default by Greece continuing to dampen the mood in Europe, exacerbated by outlook downgrades of Italy and Belgium by credit rating agencies and Spain's ruling party sustaining a massive defeat in regional elections. Moreover, worries about a slowdown in China also darkened the backdrop following a report that showed the lowest rate of manufacturing activity since July 2010.

Jobs will be the focus in a holiday-shortened week

The holiday-shortened week will start with another housing metric to be released on Tuesday, the S&P/CaseShiller Home Price Index, forecasted to show a 0.2% decline m/m and 3.35% decrease y/y in March. Pricing data lags sales data by a month and prices are expected to remain under pressure amid a still depressed housing market. Other major readings include some key reports on the health of the economy in May, with Wednesday's release of the ISM Manufacturing Index, forecasted to decline to 57.6 from 60.4, and the prices paid component is expected to fall to 81.3 from 85.5 according to a Bloomberg survey of economists. Meanwhile, the ISM Non-Manufacturing Index, to be released on Friday, is anticipated to increase to 54.0 from 52.8. A reading of 50 separates expansion from contraction.

However, employment will be the main focus for the week, with readings within the ISM reports, as well as both the ADP Employment Change and initial jobless claims set to be released. The week concludes with the Labor Department's nonfarm payrolls on Friday, expected to grow 185,000 in May, after rising 244,000 in April, and the unemployment rate is estimated to decline to 8.9% from 9.0%.

Other releases on the US economic calendar include the Chicago Purchasing Manager's Index, Consumer Confidence, construction spending, vehicle sales, factory orders, MBA Mortgage Applications, as well as unit labor costs and nonfarm productivity. Additionally, retailers will be reporting same-store sales for April. Elsewhere in the Americas, Canada reports its 1Q and March GDP, as well as industrial product and raw materials price indexes, Brazil releases its manufacturing PMI and 1Q GDP, and Mexico reports its manufacturing and non-manufacturing PMI indexes. The Bank of Canada will meet to discuss monetary policy, but no change to rates is expected.

Releases in Europe include eurozone CPI and unemployment, manufacturing and service PMI reports from the euro-zone and the UK, home prices and mortgage approvals in the UK, and German retail sales and employment. Asia/Pacific reports will include Japan's household spending, industrial and vehicle production, jobless rate, vehicle sales and capital spending, Australia's home prices, building approvals, new home sales, 1Q GDP and retail sales, China's manufacturing and services PMIs, and leading index, and South Korea's May trade balance and industrial production.