Evening Market Update

Despite Consumer Optimism, Markets Rangebound

Stocks showed little reaction to the eighth-consecutive monthly rise in home prices for January and a better-than-expected reading in the Conference Board’s Consumer Confidence index, but managed to end the day modestly higher. Traders are treading cautiously before key data expected in the latter part of the week, which includes Friday’s nonfarm payrolls report. On the equity front, Apple Inc. is reportedly developing a new iPhone that could end the exclusivity of Dow member AT&T’s service for the device, and industrial firm Danaher Corp offered a favorable 1Q EPS outlook. Treasuries finished mixed.

The Dow Jones Industrial Average rose 12 points (0.1%) to close at 10,907, the S&P 500 Index was flat at 1,173, and the Nasdaq Composite was 6 points (0.3%) higher at 2,411. In light volume, 907 million shares were traded on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil was $0.20 higher at $82.37 per barrel, wholesale gasoline rose $0.01 to $2.27 per gallon, and the Bloomberg gold spot price lost $6.53 to $1,103.20 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.2% to 81.49.

The Wall Street Journal reported that Apple Inc. (AAPL $236) is developing a new iPhone that would work on a type of wireless network called CDMA, which is used by competitors Verizon Wireless—a joint venture between Dow member Verizon Communications (VZ $30) and Vodafone (VOD $23)—as well as Sprint Nextel Corp. (S $4). The report cites people briefed by the company and suggests that this could set the stage for US phone carriers other than Dow component AT&T Inc. (T $26), which is currently the exclusive service provider of the iPhone, to sell the device as soon as this year. VZ, AAPL, and S all have not commented, but the report quotes a spokesperson for T as saying, “There has been lots of incorrect speculation on CDMA iPhones for a long time. We haven’t seen one yet and only Apple knows when that might occur.” APPL, VZ, and VOD were higher, while T and S were under pressure. Meanwhile, shares of Qualcomm Inc. (QCOM $42)—a maker of CDMA chips—were higher.

Danaher Corp. (DHR $81) was solidly higher after the industrial machinery firm issued its 1Q outlook, in which the company said it expects adjusted EPS for the quarter to be at or above $0.90. DHR previously said it anticipated 1Q earnings to be at or above the high end of the range of $0.77-0.82 per share, and analysts are expecting the firm to report EPS of $0.83.

Home prices continue to improve, consumer confidence tops expectations

The S&P/Case-Shiller Home Price Index was released showing a decline in home prices of 0.7% year-over-year (y/y) in January—the smallest y/y decline in three years—inline with what had been expected, and following the 3.1% y/y decline in December. Month-over-month (m/m), home prices were 0.32% higher on a seasonally adjusted basis, the eight-consecutive monthly increase, compared to the forecast, which called for the m/m rate to decline 0.25%. Compared to last year, Las Vegas has been hit the hardest, with prices down 17%, while m/m, Los Angeles and San Diego showed gains of over 1% after seasonal adjustments, offsetting more modest declines in Miami, Charlotte, and New York.

Although the report showed continued stabilization in prices of homes the markets showed little enthusiasm as the data depicts conditions two months ago and as more recent data have not supported much optimism that the housing market is on the mend. Last week’s reports, which showed an unexpected drop in new home sales and the third-straight monthly fall in existing home sales—and accompanying jump in the supply in properties on the market—suggest the housing market possibly remains far from contributing any significant support to the overall economic recovery. Adding insult to injury, headwinds remain on the horizon, adding uncertainty regarding whether more darkness remains in the offing for the sector. Another wave of foreclosures are expected to add to the large supply of homes on the market and the lone underperform sector rating belongs to consumer discretionary issues, partly due to concerns about a near-term threat to the housing market with the end of support from the Fed and government—tomorrow the Fed is set to end its purchases of mortgage-backed securities (MBS).

Meanwhile, the Conference Board released its consumer confidence report, which improved to a level that exceeded expectations, rising to 52.5 in March, compared to the expectation of an improvement to 51.0. February’s reading was upwardly revised to 46.4. The headline number gained as respondents’ gauge of the present economic situation being “good” rose, while those saying conditions are “bad” declined. Also, those saying jobs are “hard to get” decreased, while those saying jobs are “plentiful” ticked higher. The report also revealed that expectations of improvement for the next six months increased and those anticipating worsened conditions fell.

Treasuries were mixed with the yield on the 2-year note gaining 1 bp to 1.06%, while the 10-year note yield was flat at 3.87%, and the 30-year bond yield lost 2 bps to 4.75%.

Debt concerns cast shadow overseas

Anxiety over Greece, Ireland, and Iceland trumped mostly positive reports in Europe on Tuesday. Final 4Q GDP in the UK was revised higher from a 0.3% quarter-over-quarter (q/q) expansion to a 0.4% increase, above the forecast of economists, calling for the figure to remain at 0.3%. The upgrade came as output in the form of services, construction, and agriculture were all revised higher. Meanwhile, separate reports showed UK home prices rose 0.7% m/m in March, versus the 0.2% increase that was anticipated, and the nation’s current account posted a narrower-than-expected 1.7 billion pound deficit, the smallest gap since 1Q 2008. In other economic news in the region, German import prices rose 1.0% m/m in February, compared to the 0.4% increase that was expected by economists, France’s 4Q GDP remained at an unrevised 0.6% q/q expansion, as expected, and retail sales in Spain fell more than expected y/y in February, while its consumer prices rose more than anticipated y/y in March.

In its review of banking capital requirements through 2012, Ireland’s Financial Regulator established new benchmarks for the nation’s major banks covered under the government’s “bad bank” provisions. The agency set the core Tier 1 ratio, a key metric of financial strength, at 8% and an equity Tier 1 ratio of 7%. As well, banks must “set out plans to ensure that capital is in place by the end of 2010.” According to Bloomberg, the nation’s banks have a 31.8 billion euro hole to plug, including Allied Irish Banks (AIB $4) which needs to raise 7.4 billion euros, Bank of Ireland Plc (IRLBF $1.30) requiring 2.66 billion euros, and Anglo Irish Bank Corp. (AGIBY $0.19), which was nationalized last year, looking at a shortfall of 18.3 billion euros. The country’s Finance Minister said, “The worst fears have been surpassed“, and that the detailed information gleaned from the process was “truly shocking.”

Standard & Poor’s downgraded Iceland’s long- and short-term local currency credit ratings to BBB/A-3 from BBB+/A-2 with the outlook at negative, saying that, “The potentially prolonged application of foreign exchange controls will restrict Iceland’s monetary and fiscal flexibility and investment prospects.” Elsewhere, some cautiousness towards Greece, after a disappointing response in the secondary market for Greek bonds, sapped yesterday’s optimism that came from its successful debt auction and last week’s agreement by euro-zone nations to provide financial support if necessary.

In the Asia/Pacific region, vehicle production in Japan jumped 74.9% in February y/y, the job-to-applicant ratio ticked slightly higher, and the nation’s jobless rate remained at 4.9%—the lowest in about a year. The reports offset a separate report that showed Japanese industrial production fell 0.9% m/m in February, compared to the decline of 0.5% that economists had forecasted. Meanwhile, in South Korea, an index of manufacturers’ outlook rose to the highest level since 4Q 2002, per Bloomberg.

Reports on the US economic calendar tomorrow will include the ADP Employment Change Report, where the forecast is that private sector employers added 35,000 jobs in March after declining by 20,000 in February. The ADP report is a reading of the state of the job market excluding government payrolls, which are expected to be boosted by Census Bureau hiring over the next several months. As well, the MBA Mortgage Application Index, factory orders and the Chicago PMI will be released.

Internationally, the economic calendar will provide German employment figures, France’s PPI, euro-zone CPI, and Italy will provide both CPI and PPI data. Housing starts and construction orders in Japan and industrial production in Korea will round out the reports.