Evening Update

Bulls Emerge Through Cloud of Mixed Data

Stocks gained for the third-straight day as traders sifted through numerous economic reports and earnings releases. Markets were down early in the day due to an unexpected increase in weekly jobless claims and a Producer Price Index reading that was higher than expected. However, the tide turned later in the morning when the Philadelphia Fed’s Business Activity Index and the Index of Leading Economic Indicators both came in higher than analysts’ anticipated. Treasuries ended the day lower, although the yield curve steepened to a record level. In equity news, Dow component Wal-Mart beat EPS estimates, but missed revenue targets and reported weak same-store sales, while fellow Dow member Hewlett-Packard also beat the Street’s earnings forecast. Coca-Cola, also a Dow component, increased its dividend by 7%, DirecTV beat analysts’ earnings estimates, and Applied Materials matched the Street’s profit projections. In other equity news, MGM Mirage and Las Vegas Sands both reported greater than expected losses.

The Dow Jones Industrial Average gained 84 points (0.8%) to close at 10,393, the S&P 500 Index rose 7 points (0.7%) to 1,107, and the Nasdaq Composite increased 15 points (0.7%) to 2,242. In moderately light volume, 1.0 billion shares were traded on the NYSE and 2.0 billion shares were traded on the Nasdaq. Crude oil was $1.77 higher at $79.10 per barrel, wholesale gasoline was up $0.06 to $2.07 per gallon, and the Bloomberg gold spot price gained $15.79 to $1,122.60 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.1% to 80.41.

Dow component Wal-Mart Stores Inc. (WMT $53) announced 4Q EPS ex-items of $1.17, five cents above the consensus estimate of Wall Street analysts, with revenues increasing 4.6% year-over-year (y/y) to $112.8 billion, below the $114.4 billion that the Street had expected. The world’s largest retailer said its Wal-Mart US 4Q same-store sales—sales at stores open at least a year—came in below the company’s forecasts. WMT said it expects 1Q EPS to be between $0.81-0.85, compared to the $0.85 that analysts are expecting, and the company said its full-year EPS is forecasted to come in a range of $3.90-4.00, compared to the $3.97 that the Street is looking for. Shares were lower.

Fellow Dow member Hewlett-Packard (HPQ $50) reported fiscal 1Q EPS ex-items of $1.10, five cents above the Street’s forecast, with revenues increasing 8% y/y to $31.2 billion, above the $29.9 billion that analysts were anticipating. HPQ said solid performance across the business and disciplined execution on its cost initiatives contributed to strong growth in EPS. Revenues rose 9% y/y in the Americas, 1% in Europe, Middle East and Africa, 26% in the Asia/Pacific region, while revenues in the BRIC countries—Brazil, Russia, India and China—jumped 41% to account for 10% of its total revenue. HPQ’s personal systems posted a 20% increase in revenues, led by a sharp increase in PC unit shipments, while its services revenues declined 1%.The company said it is “well-positioned to outperform the market,” and the strength of its portfolio, leaner cost structure and accelerating market momentum give it confidence to raise its full-year outlook. HPQ also reported 2Q guidance that mostly exceeded analysts’ forecasts. HPQ was higher.

Coca-Cola Co. (KO $56) announced that the Dow member’s Board of Directors approved the 48th consecutive annual dividend increase, increasing the quarterly payout approximately 7% from $0.41 to $0.44 per share. The beverage firm said the increase reflects the Board’s confidence in its long-term cash flow. Shares finished the day higher.

DirecTV (DTV $33) reported 4Q EPS ex-items of $0.48, compared to the $0.40 that analysts were expecting, with revenues rising 13% y/y to $5.98 billion, compared to the $5.9 billion that the Street was looking for. The satellite TV provider added 119,000 net subscribers during the quarter, versus a 301,000 increase in the same period last year, with its monthly subscriber churn rate increasing from 1.42% last year to 1.52%. DTV said the decline in subscriber additions and increase in its churn rate were mostly due to the competitive environment, a weaker economy and more stringent credit and spending policies. The company announced a new $3.5 billion share repurchase program. Shares were higher.

Applied Materials (AMAT $13) reported fiscal 1Q EPS ex-items of $0.13, inline with the Street’s forecast, as revenues rose 39% y/y to $1.85 billion, compared to the $1.7 billion that analysts were expecting. The company said due to global demand improving in its customers’ end markets, it raised its full-year revenue target to reflect higher anticipated demand in its semiconductor, LCD display and crystalline silicon solar businesses. The company also issued 2Q guidance that exceeded the Street’s forecasts. Despite the outlook, AMAT traded lower..

MGM Mirage (MGM $11) reported 4Q loss ex-items of $0.25 per share, twelve cents below the Street’s forecast, as revenue fell 11% y/y to $1.45 billion, which was inline with expectations. The casino and resort operator saw occupancy remain relatively flat over the past year, even amid heavy discounting. The company opened a $8.5 billion CityCenter development in December and also sees considerable growth potential in the booming Macau region, as it prepares for a Hong Kong listing of its Macau assets later this year. Fellow casino operator Las Vegas Sands (LVS $16) also reported a larger-than-expected loss of $0.04 per share, versus analysts’ estimates of $0.02 per share, although net revenue increased 17.5% y/y to $1.28 billion. The company reported record results in its Macau properties, which were partially offset by lower operating results in Las Vegas. Shares of both companies were lower.

Jobless claims and producer prices jump, but Philly activity rises more than expected

Weekly initial jobless claims jumped, rising by 31,000 to 473,000, versus last week's figure which was revised upward by 2,000 to 442,000, and compared to the consensus, which called for claims to dip to 438,000. The four-week moving average, considered a smoother look at the trend in claims, declined slightly by 1,500 to 467,500, and continuing claims remained at an upwardly revised 4,563,000, compared to the 4,500,000 forecast.

The Producer Price Index showed prices at the wholesale level rose 1.4% month-over-month (m/m) in January, after advancing an upwardly revised 0.4% in December. The average economist forecast surveyed by Bloomberg called for prices to increase 0.8%. Meanwhile, the core rate, which excludes food and energy, increased 0.3% m/m compared to the forecast for a 0.1% increase. On a year-over-year basis, headline producer prices were 4.6% higher, and the core rate was up 1.0%.

Energy was the driver of the larger than expected increase in today’s inflation report as the Bureau of Labor Statistics said about three-fourths of the advance in prices at the wholesale level were traced to higher prices for energy goods, which jumped 5.1%—rising for the fourth consecutive month. The steep advance in energy goods came courtesy of an 11.5% jump in gasoline prices, while home heating oil was also a major factor in the PPI’s headline increase. Another aspect of the report that stood out was the 9.6% surge in prices for crude goods—materials that are at the earliest stage of the processing into final goods—led by energy materials, which could add some upward pressure on prices down the road.

The report caused some concern on the Street as it suggested pricing pressures—which have remained subdued—could force the Fed into monetary tightening mode sooner than anticipated, potentially hampering the economic recovery. However, some of the increase in prices should have been expected, given the stage of the economic recovery, and tomorrow’s release of the Consumer Price Index will likely be a more relevant indicator of inflation pressures, as it points to the potential purchasing power of the consumer, which their activity makes up the lion’s share of the economy (economic calendar). The headline reading of consumer prices is expected to increase 0.3% m/m, and the core rate is expected to show a 0.1% increase. Year-over-year, the core rate—a gauge that the Fed closely monitors—is forecasted to be up 1.8%, compared to the Fed’s implied target of between 1-2%.

The Philly Fed Business Activtiy Index (chart) rose slightly more than expected, advancing to 17.6 in February from 15.2 in January, and compared to the Bloomberg survey of economists, which expected the index to increase to 17.0. A reading above zero denotes expansion. The underlying components of general activity, new orders and shipments, both jumped further into expansionary territory, and for the third-straight month, more firms reported an increase in employment than reported declines.

In other economic news, the Conference Board released the Index of Leading Economic Indicators (LEI) (chart) for January, which rose a smaller-than-expected 0.3% versus the expectation of a 0.5% increase, marking the tenth consecutive monthly increase, and December’s report was upwardly revised to a 1.2% advance. Of the ten components that make up the index, a favorable yield curve, increasing pace of deliveries, and an increase in the average workweek, were partially offset by worse numbers for initial jobless claims and building permits.

Treasuries were lower on the day, as the yield curve steepened to a record level on the mixed economic data and concerns about the upcoming bond issuances. The yield on the 2-year note rose 2 bps to 0.87%, the yield on the 10-year note gained 6 bps to 3.80%, and yield on the 30-year bond increased 4 bps to 4.74%.

Canadian price levels rise, Bank of Japan keeps interest rate unchanged

In international economic news, Canada’s consumer price index rose 1.9% y/y, the fastest pace in more than a year. The increase was slightly higher than the 1.8% analysts were expecting and follows a 1.3% rise in December. The monthly inflation rate was 0.3%, which brings the country closer to its target inflation rate of 2%, although the Bank of Canada predicts that it won’t reach that target until the third quarter of next year. In European news, Switzerland’s trade surplus expanded in January, while Sweden’s unemployment rate rose more than expected in January and a separate report showed the nation’s consumer prices fell more than expected m/m in January. Moreover, the UK posted its first budget deficit since at least 1993, per Bloomberg news.

The Bank of Japan voted to keep its benchmark interest rate at 0.1% and said that beating deflation is a “critical challenge”. The BOJ also indicated that it would keep the “extremely accommodative financial environment” and elected to maintain its loan program for commercial banks and hold monthly purchases of government debt at 1.8 trillion yen.

CPI highlights tomorrow’s economic calendar

The aforementioned Consumer Price Index is the only major release on the US economic calendar tomorrow. On the international front, Japan will release its monthly all industry activity index, while reports out of Europe include German PPI, UK retail sales, and Eurozone preliminary PMI surveys for manufacturing and services for February. Canada will release retail sales and leading indicators.