Evening Market Update

Notch Another Day in the Positive Column

The markets added to last week’s upward momentum following an increase in personal spending that was inline with expectations and after Ford Motor Co announced that it has reached an agreement to sell its Volvo unit to China’s privately held Geely Holding Corp for $1.8 billion. In other news on the equity front, Apollo Group reported earnings that beat analysts’ forecasts, the US Treasury said that it has retained Morgan Stanley to help it unload the 7.7 billion shares of Citigroup that it acquired as part of its Troubled Asset Relief Program (TARP), and Dow member Boeing conducted a critical ground test of its 787 Dreamliner. Treasuries were mixed following the personal spending report, which also showed that personal income was flat and inflation remains subdued.

The Dow Jones Industrial Average rose 46 points (0.4%) to close at 10,896, the S&P 500 Index gained 7 points (0.6%) to 1173, and the Nasdaq Composite was 9 points (0.4%) higher at 2,404. In light volume, 945 million shares were traded on the NYSE and 1.9 billion shares were traded on the Nasdaq. Crude oil was $2.17 higher at $82.17 per barrel, wholesale gasoline jumped $0.05 to $2.26 per gallon, and the Bloomberg gold spot price gained $2.90 to $1,110.40 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.4% to 81.30.

Apollo Group Inc. (APOL $63) reported fiscal 2Q EPS ex-items of $0.84, three cents above the consensus estimate of Wall Street analysts, with revenues increasing 23% year-over-year (y/y) to $1.1 billion, roughly inline with the Street’s forecast. The for-profit higher education firm and parent of the University of Phoenix said it continued to see a shift in student enrollments towards bachelor degrees in 2Q and it believes the shift in student mix will result in more consistent, higher quality growth and profitability. Shares were higher.

In M&A news, Ford Motor Co. (F $14) announced over the weekend that it reached a definitive agreement to sell its Volvo car unit and related assets to China’s privately held Zhejiang Geely Holding Corp for about $1.8 billion, paid in the form of a $200 million note and the remainder in cash. Also, the US automaker reported that it will prepay $3 billion of revolving debt in April, reducing its overall debt to about $32 billion. Separately, in a filing with Securities and Exchange Commission, Ford said it expects to report a double-digit gain in vehicle sales for March. Despite the news, shares traded lower.

The US Treasury Department announced that it has retained Morgan Stanley (MS $29) as its capital markets advisor as it plans to sell its stake in Citigroup Inc. (C $4), which it acquired as part of its Troubled Asset Relief Program (TARP). The Treasury will fully dispose of about 7.7 billion shares of C common stock over the course of 2010 in the market “through various means in an orderly and measured fashion.” The disposition does not affect the Treasury’s holdings of C trust preferred securities or warrants for its common stock. Shares of C were lower and MS was higher.

Dow member Boeing Co. (BA $74 ¹) was higher after the aerospace firm announced that it has completed a major ground test on its 787 Dreamliner. The tests involved bending the wings upward by about 25 feet and applying loads to the airframe to replicate 150% of the most extreme forces the airplane is ever expected to experience while in service. BA called the initial results positive but said more extensive analysis and review are required before the test can be deemed a success. Delivery of the first plane is planned for 4Q 2010.

Personal income flat, spending increased as expected, labor data the focus for the week

Personal income was flat in February, compared to the Bloomberg estimate of 0.1% gain, and January was revised from a 0.1% increase to a 0.3% rise. Personal spending rose 0.3% in February, inline with the Bloomberg expectation, while January’s 0.5% increase was downwardly revised to a 0.4% gain. The savings rate declined to 3.1% in February, after a slightly upwardly revised 3.4% for January.

Also, the PCE Price Index, which is released with the income and spending data, increased 1.8% y/y in February, matching the consensus forecast, and January’s 2.1% rise was left unchanged. The core PCE Price Index, which excludes food and energy, was flat, compared to expectations of a 0.1% increase. Year-over-year, core prices moved 1.3% higher, inline with the consensus of economists surveyed.

The yield curve steepened as Treasuries finished mixed with the yield on the 2-year note losing 1 bp to 1.04%, while yields on both the 10-year note and the 30-year bond rose 3 bps to 3.87% and 4.78%, respectively.

Mixed reports in Europe

The Euro-Zone Economic Confidence Index rose to 97.7 in March from 95.9 in February, above the 97.1 forecast by economists polled by Bloomberg, and its highest level since May 2008. In other economic news in the region, separate reports showed UK consumer credit rose more than expected in February, while mortgage approvals in the country increased by a smaller amount than was forecasted for February. Elsewhere, the preliminary report of prices at the consumer level in Germany—Europe’s largest economy—rose more than expected, up 0.5% month-over-month (m/m) in March, compared to the 0.3% gain that was anticipated. And, retail sales in Sweden unexpectedly declined, falling 1% m/m in February, compared to the increase of 0.3% that was forecasted.

Greece remained in focus, as the debt-ridden nation conducted its first bond auction since last week’s announcement that euro-area nations—along with the IMF—agreed to a plan to support the country if its capital raising efforts are insufficient. According to Reuters, Greece’s debt agency chief said, “We are pleased to have had a successful 5 billion euro transaction in a maturity that is not plain vanilla.” However, the auction of seven-year bonds, with a yield of 6.0%, drew less demand than its two previous ten-year offerings, but Reuters noted that some of the lower demand may have come from the shorter maturity and light pre-Easter holiday trading.

In the Asia/Pacific region, large retailers’ sales in Japan fell 4% during February, versus the consensus estimate of economists, which called for a 5.5% decrease, while, South Korea’s current account balance came in at a surplus in February, compared to the wider-than-initially reported deficit posted in January. Elsewhere, a report in Australia showed new home sales fell 5.2% m/m in February.

Housing data on docket for tomorrow

The S&P/Case-Shiller Home Price Index will be reported tomorrow and is expected to decline by 0.6% y/y for January, compared to the 3.1% drop that it recorded for December. The index is also forecasted to decrease by 0.25% m/m, which would snap a string of seven consecutive monthly increases. The housing market, along with labor, remains an area of concern regarding the sustainability of the economic recovery as the nascent signs of stabilization continue to be discounted by fears of rising foreclosures, the mid-year expiration of the home buyer tax incentives, and the impact on the home buyer activity if the Fed begins to start tighten its monetary policy. This week, the Fed is set to end its purchases of mortgage-backed securities (MBS) that the end of support from the Fed and government could result in another downturn in the housing arena. As well, the Conference Board Consumer Confidence Index will also be reported.

Economic reports scheduled for release internationally include final 4Q GDP figures from the UK and France, as well as the UK’s GfK consumer confidence reading and current account balance, Spain’s CPI, Japan’s PMI numbers, and retail trade in Australia.