March Goes Out Like a Bear
Stocks finished the day lower, but traders still cheered the closing of the fourth-straight quarter of gains. Markets reacted to a surprising ADP Employment Change Report that showed private sector payrolls declined, as well as a larger-than-expected decline in the Chicago PMI. In equity news, Dow member Boeing announced that it will take an income tax charge that will result in a reduction of Q1 earnings due to healthcare reform, while Honeywell International increased its EPS guidance for the current quarter. In earnings news, Dollar General Corp reported better-than-expected EPS, SAIC Inc. also beat analysts’ estimates but lowered guidance and Rite Aid reported a wider loss than expected. Treasuries gained on the heels of the employment numbers and showed little reaction to a report of an increase in factory orders and mortgage applications.
The Dow Jones Industrial Average fell 51 points (0.5%) to close at 10,857, the S&P 500 Index was 4 points lower at 1,169, and the Nasdaq Composite declined 13 points (0.3%) to close at 2,398. In moderately-light volume, 1.2 billion shares were traded on the NYSE and 2.3 billion shares were traded on the Nasdaq. Crude oil was $1.12 higher at $83.49 per barrel, wholesale gasoline rose $0.04 to $2.31 per gallon, and the Bloomberg gold spot price gained $9.50 to $1,113.10 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.5% to 81.07.
Honeywell International Inc. (HON $45) increased its 1Q EPS guidance to a range of $0.45-0.49, from the previous outlook of between $0.40-0.45, and compared to the consensus of Wall Street analysts, which expect the company to report 1Q EPS of $0.44. The company said it continues to see signs of recovery throughout its portfolio and the increased outlook reflects both stronger orders and sales in several short cycle end markets, as well as continued execution of strong cost controls. Also, HON said it now expects its full-year EPS to be near the high end of its guidance range of $2.20-2.40. The Street is looking for HON to post annual EPS of $2.40. The company said the revised guidance includes a one-time charge of $13 million after tax due to the new US healthcare law. Shares were higher.
Meanwhile, Dow member Boeing (BA $73 1) announced that it will take an income tax charge of $150 million as a result of the recently passed healthcare reform, which is expected to reduce 1Q net earnings by about $0.20 per share. The aerospace company said the impact was not contemplated in the guidance issued by the company at the end of January and it will be updated when 1Q results are released. Shares finished lower.
Dollar General Corp. (DG $25) reported 4Q EPS ex-items of $0.51, above the $0.43 consensus estimate of analysts, with sales increasing 11.9% year-over-year (y/y) to $3.2 billion, matching the Street’s forecast. Same-store sales—sales at stores open at least a year—rose 7.4% y/y. DG issued full-year 2010 EPS guidance that topped analysts’ forecasts. However, shares traded lower.
Rite Aid Corp. (RAD $2) reported a 4Q loss that was wider than analysts expected, as the company was hurt by lower sales and pressure on pharmacy margins from generic drugs. The quarterly loss totaled $208 million, or $0.24 per share, compared to analysts’ estimates of a $0.19 per share loss. The company also projected a loss for the new fiscal year that was greater than analysts’ estimates and a flat same-store sales reading. Shares of the drug store chain were considerably lower.
Shares of SAIC Inc. (SAI $18) were also lower after the defense contractor, which performs some of the most sensitive and secret security work for the U.S. government, announced fiscal 4Q EPS of $0.31, one cent short of the Street’s estimates and two cents higher than the same quarter last year, but also cut its upcoming fiscal-year guidance, citing a “slower than anticipated pace of new contracts awards, coupled with the tougher government contracting environment”.
Private sector payrolls surprisingly slip and Mid-West manufacturing gauge dips
The first piece of this week’s US labor data came in, as the ADP Employment Change Report was released and showed private sector payrolls unexpectedly fell, declining by 23,000 jobs in March, compared to the forecast of economists surveyed by Bloomberg, which called for a 40,000 increase. February’s figure was left unrevised at a loss of 20,000. The week’s headlining employment report will come on Friday in the form of the Bureau of Labor Statistics’ release of nonfarm payrolls, with the Bloomberg survey of economists forecasting payrolls advanced by 185,000 jobs in March, and that the unemployment rate will remain at 9.7% (economic calendar). However on Friday, the equity markets will be closed in observance of Good Friday. The ADP report does not include government payrolls, which are expected to receive a lift from Census hiring and are part of the reason for the high forecast of job gains in Friday’s report.
Meanwhile, Chicago PMI (chart) fell more than anticipated, declining from 62.6 in February to 58.8 in March, compared to the decrease to 61.0 that was forecasted by economists. However, business activity in the Mid-West continued to expand as a reading of 50 is the demarcation point between expansion and contraction. Also, the employment index managed to increase, ticking higher from 53.0 in February to 53.1 in March, while supplier deliveries fell and new orders and production slumped, but all remained above the 50 mark.
Elsewhere, factory orders (chart) rose 0.6% month-over-month (m/m) in February, just above the 0.5% forecasted rise, marking the sixth-straight monthly increase, while January’s increase was revised nicely higher, from a 1.7% gain to a 2.5% advance. February durable goods orders—reported last week—were revised higher as part of the report to a gain of 0.9% versus the initial report of a 0.5% increase. Nondefense capital goods ex-aircraft, considered a good proxy for business spending, increased 2.0%, from the initial report of a 1.1% increase.
In other economic news, the US MBA Mortgage Application Index advanced 1.3% last week, after the index, which can be quite volatile on a week-to-week basis, declined 4.2% in the previous week. The increase came amid a 6.8% gain in the Purchase Index, which more than offset a 1.3% decline in the Refinance Index. Moreover, the rise in the overall index came despite a 3 basis-point increase in the average 30-year mortgage rate, which moved to 5.04%, and remains above the record low of 4.61% that was reached at the end of March 2009.
Treasuries were higher, as the yield on the 2-year note lost 4 bps to 1.02%, while the 10-year note yield fell 3 bps to 3.83%, and the 30-year bond yield declined 3 bps to 4.71%.
Busy day for international economic reports, employment in focus
Focus returned to the employment situation in the euro-area, as Germany—Europe’s largest economy—announced that its unemployment change unexpectedly fell by 31,000 in March, compared to the increase of 7,000 that was anticipated by economists, and its unemployment rate fell from a downwardly revised 8.1% to 8.0%, versus the expectation that the rate would remain at the pre-revised 8.2% level. Moreover, the euro-zone unemployment rate ticked higher in February, increasing to 10.0% from 9.9% in January, Ireland reported that its unemployment rate in February remained at an upwardly revised 13.4%, while Italy’s unemployment rate unexpectedly decreased to 8.5%, as economists had expected it to rise to 8.7%. Some inflation reports also were reported, with France announcing that its producer prices rose 0.1% m/m in February, matching expectations, while Italy’s consumer prices rose 0.3% m/m in March, exceeding the 0.2% increase that was forecasted.
Ireland’s National Asset Management Agency said it will apply an average discount of 47% on the first wave of loans it will purchase from lenders and the Irish central bank said the nation’s banks need to raise $43 billion in new capital to meet its capital targets to rid toxic assets off of their respective balance sheets. Banks will have 30 days to finalize their plans on how to raise the funds and IRE said it is in talks with banks on “maximizing” the amount of new capital it will raise from investors and that it expects to avoid majority state control as part of the plan, according to Bloomberg News.
In Asia/Pacific news, Japanese housing starts and construction orders fell y/y in February, while industrial production declined m/m and the unemployment rate was unchanged at 4.9%. Australia reported unexpected declines in February retail sales and building approvals, while South Korea showed m/m growth in industrial production for February came in larger than economists had anticipated. In other economic news, manufacturing production in Thailand rose more than anticipated in February, and a larger jump in imports compared to exports resulted in the nation’s trade surplus narrowing in February.
Rounding out the international news was a report out of Canada, showing that its GDP grew more than forecast month-over-month (m/m) in January, expanding by 0.6%, compared to the 0.5% gain that economists had expected, posting the fastest pace of growth in three years, per Bloomberg.
ISM Manufacturing Index highlights tomorrow’s economic calendar
Tomorrow, the ISM Manufacturing Index will be released, and the gauge of national manufacturing activity is expected to improve further above the 50 mark, which is the demarcation point between expansion and contraction, increasing to 57.0 in March from 56.5 in February. The index is expected to depict expansion for the eighth-straight month, illustrating the backdrop of the continued recovery in global economies. Given the week’s added focus on the jobs environment—which remains one of the key components of economic prosperity that has yet to support sentiment—the employment component of the report may garner some added attention. The Employment Index has increased for three straight months and is suggesting that demand, coupled with extremely thin inventories, is prompting the willingness of manufacturers to begin to entertain the idea of hiring more workers, foreshadowing support for the global economic recovery, which eventually could force the Fed into monetary policy action.
Other reports on tomorrow’s US economic calendar include weekly initial jobless claims, which are expected to decrease to 440,000 from a previous reading of 442,000 and monthly construction spending, which economists predict will fall by 1%, after decreasing by 0.6% last month.
Internationally, the economic calendar will provide Japanese vehicle sales, German retail sales, euro-zone and UK PMI manufacturing, and Brazilian industrial production and PMI manufacturing.
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