Evening Market Update

Bargain Hunting After String of Losses

After posting six-straight days of losses, stocks posted gains today, led by shares in the energy and materials sectors. Oil added to yesterday’s gain after OPEC failed to boost quotas and a crop report today that showed reduced corn plantings amid poor weather boosted materials shares. Even a rise in the US dollar as the euro fell in a “sell the news” reaction to a signal from the European Central Bank (ECB) of a possible rate hike next month failed to deter the bullish sentiment for US stocks. The dollar also benefitted from a narrowing of the trade deficit and Treasuries fell. In other economic news, jobless claims unexpectedly rose and wholesale inventories increased at a smaller rate than expected. In equity news, a reduced forecast by Texas Instruments Inc was viewed as previewed by Nokia Corp and both Men’s Wearhouse and J.M. Smucker beat and raised.

The Dow Jones Industrial Average rose 75 points (0.6%) to 12,124, the S&P 500 Index advanced 9 points (0.7%) to 1,289, and the Nasdaq Composite gained 9 points (0.4%) to 2,685. In moderate volume, 910 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq. WTI crude oil gained $1.19 to $101.93 per barrel, while wholesale gasoline rose $0.06 to $3.04 per gallon, and the Bloomberg gold spot price added $6.65 to $1,544.25 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.3% higher at 74.17.

Texas Instruments Inc. (TXN $33) cut its 2Q revenue and EPS guidance due to lower demand from wireless customer Nokia Corp. (NOK $6), which recently slashed its revenue outlook. TXN said it expects EPS to be in a range of $0.51-0.55, compared to the prior range of $0.52-0.60, while revenues are forecasted to come in between $3.36-3.50 billion, versus its previous estimate of $3.41-3.69 billion. Analysts surveyed by Reuters had expected the chipmaker to post revenues of $3.55 billion and EPS of $0.58 for the quarter.

TXN also said the expected impact of the Japanese tragedy was unchanged, as it expects to report per-share charges of about $0.05, while production at one of its plants in Japan has been restored and its more severely impacted facility is ramping up faster that it previously expected, according to the Wall Street Journal. TXN tradiedhigher despite the announcement as analysts pointed out that the company’s business excluding Nokia, which is more than 90% of its total performance, remains on track to meet to meet expectations.

Men’s Wearhouse Inc. (MW $32) reported fiscal 1Q EPS ex-items of $0.53, above the $0.49 that the Street had projected, with revenues increasing 22.6% year-over-year (y/y) to $580 million, compared to the $577 million that analysts were anticipating. The apparel retailer said its same-store sales—sales at stores open at least a year—rose 10.8% y/y at its flagship Men’s Wearhouse locations. MW also raised its full-year EPS outlook and issued 2Q guidance that exceeded expectations. Shares were nicely higher.

J.M. Smucker Co. (SJM $78) reported fiscal 4Q EPS ex-items of $1.00, one penny above analysts’ forecasts, with revenues growing 11% y/y to $1.2 billion, roughly inline with the Street’s expectations. The food company issued full-year 2012 revenue guidance that exceeded expectations, while saying that costs of products sold are estimated to increase about 25% y/y, driven by “significantly higher commodity costs,” but price increases have been taken in response to these higher costs. Shares rose.

Jobless claims rise but trade deficit narrows, while wholesale inventories miss forecasts

Weekly initial jobless claims unexpectedly increased, rising by 1,000 to 427,000, versus last week's figure which was upwardly revised by 4,000 to 426,000, compared to the decline to 419,000 that economists surveyed by Bloomberg had expected. However, the four-week moving average, considered a smoother look at the trend in claims, fell by 2,750 to 424,000, while continuing claims dropped by 71,000 to 3,676,000, below the forecast of economists, which called for continuing claims to come in at 3,700,000.

However, the trade deficit surprisingly narrowed, shrinking to $43.7 billion in April from a favorably revised $46.8 billion in March, versus the estimate of economists surveyed by Bloomberg, which called for the deficit to widen to $48.8 billion. Exports increased 1.3% month-over-month (m/m) to $175.6 billion, as weakness in the US dollar during the month boosted exports of industrial supplies and materials, as well as capital goods, offsetting a $0.8 billion decline in exports of automotive vehicles, parts, and engines. Meanwhile, imports declined 0.5% to $219.2 billion, led by a nearly $3 billion drop in the automotive category, while consumer goods rose by over $2 billion. Also, the US imported less crude oil in April, down 14.5% m/m, to about 252 billion barrels, outweighing a sharp increase in the price of oil, which rose from $93.76 per barrel in March to $103.18 per barrel.

Finally,  wholesale inventories rose by an amount slightly below forecasts, increasing 0.8% m/m in April, compared to the 1.0% increase that was forecasted by economists, while March’s 1.1% gain was revised to a 1.3% increase. Sales rose 0.3%, with nondurable goods rising 0.9% m/m, offsetting a 0.6% drop in durable goods sales. The inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—increased to 1.14 in April from March’s 1.13 rate.

Treasuries were lower amid the strength in the equity markets and following the trade data, with the yield on the 2-year note up 3 bps to 0.41%, the yield on the 10-year note 5 bps higher at 2.99%, and the 30-year bond rate advanced 3 bps to 4.22%.

ECB signals rate hike, as expected

Central bank action dominated international news, with both the Bank of England (BoE) and the European Central Bank (ECB) leaving their respective benchmark interest rates unchanged at 0.50% and 1.25%, respectively, as expected. But traders paid close attention to the customary press conference by ECB President Jean-Claude Trichet where he used the term “strong vigilance” referring to the ECB’s efforts to promote price stability in the eurozone, language that was seen as a signal that the central bank intends to raise rates at its next meeting in July. The head of the ECB also noted that risks to the medium-term inflation outlook “remain on the upside,” and the central bank revised its 2011 forecast for inflation higher, but left its 2012 outlook mostly unchanged, compared to its March forecasts. However, the euro came under pressure, as the July rate-hike signal was widely expected, and Trichet pointed out that the central bank never “precommits” on rates and it is “not signaling any particular pace” for its next rate decisions.

In other European economic news, business sentiment in France deteriorated in May more than economists had expected, the UK trade deficit came in smaller than estimated, and Greece’s 1Q GDP was revised to a smaller rate of expansion on a quarter-over-quarter (q/q) basis, and its y/y GDP was adjusted to a larger rate of contraction than initially reported.

In Asia/Pacific, Japan’s 1Q annualized GDP contraction was revised to a slightly smaller rate than initially reported, from a 3.7% annualized decline to a 3.5% contraction, but economists had expected a favorable revision to a 3.0% drop. Elsewhere, Australia’s employment change rose at a smaller rate than estimated, helping cool some expectations that the Reserve Bank of Australia will restart its rate-hike campaign, and the Reserve Bank of New Zealand left its benchmark interest rate unchanged at 2.50%, but noted that a gradual increase in its interest rate over the next two years will be required to offset an acceleration in GDP and underlying inflation.

China’s trade data likely tomorrow’s economic spotlight

Amid a US economic calendar that is relatively light, with the sole report being an expected 0.7% decline in the import price index, traders will likely be parsing the trade data from China tomorrow. Other economic releases include German wholesale and consumer prices, French and UK industrial production, Italy GDP, and Canada’s employment situation. In central bank action, the Bank of Korea meets to discuss policy, but no change to rates is expected.