Evening Update

Chinese Inflation Concerns Can’t Keep Stocks Down

Markets managed to climb slightly higher for the third-straight day, as a lack of conviction among traders led to low volume and a narrow trading range. Stocks did manage to finish at their highs of the day, after paring modest early losses due to concerns of inflation out of China and disappointing reports on US weekly initial jobless claims and the trade deficit. In equity news, Devon Energy announced that it would sell deepwater assets to BP Plc for $7.0 billion as part of a strategic repositioning. On the earnings front, Smithfield Foods and Men’s Wearhouse both reported better-than-expected earnings, but failed to meet the Street’s revenue targets. Furthermore, Citigroup completed a $2 billion sale of trust preferred securities in an effort to raise capital and repay the US Government. Treasuries were mixed as the yield curve flattened after high demand for long-term Treasuries.

The Dow Jones Industrial Average rose 45 points (0.4%) to close at 10,612, the S&P 500 Index gained 5 points (0.4%) to close at 1,150, and the Nasdaq Composite increased 10 points (0.4%) to 2,368. In relatively light volume, 983 million shares were traded on the NYSE and 2.2 billion shares were traded on the Nasdaq. Crude oil was $0.12 higher at $82.21 per barrel, wholesale gasoline was flat at $2.28 per gallon, and the Bloomberg gold spot price gained $0.39 to $1,108.80 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.2% to 80.29.

In M&A news, Devon Energy (DVN $72) announced that it has entered into agreements to sell all of its assets in the deepwater Gulf of Mexico, Brazil and Azerbaijan to BP Plc (BP $57) for $7.0 billion. DVN said the sale, combined with its previously announced divestitures of $1.3 billion of deepwater Gulf of Mexico assets, put it well on the way to completing its strategic repositioning. Additionally, the two companies announced that they will form a heavy oil joint venture to develop BP’s Kirby oil sands leases in Alberta, Canada. Shares of both companies were higher.

Smithfield Foods (SFD $19) reported fiscal 3Q EPS of $0.22, above the consensus estimate of Wall Street analysts, which called for the company to report EPS of $0.19. However, the meat producer said its revenues fell by 12% year-over-year (y/y) to $2.9 billion, below the $3.3 billion that analysts were expecting, as restructuring at its pork unit hampered volumes. SFD said its biggest obstacle in the last two years has been the lack of profitability in its hog production segment, and as of 3Q, those losses have substantially diminished and the futures markets are trending favorably for the company. Shares finished higher.

Men’s Wearhouse (MW $24) reported a 4Q adjusted loss of $0.11 per share, narrower than the $0.15 per share loss that the Street had expected, with revenues declining 4% y/y to $457.2 million, compared to the $468.5 million that analysts were anticipating. The company said a more than 6% decline in US same-store sales—sales at stores open at least a year—due to a reduction in store traffic and a lower domestic average ticket sale, led to a 4.1% drop in clothing product sales, which represented 85.3% of 4Q total net sales. Shares ended solidly lower, despite the company issuing 1Q EPS guidance that exceeded expectations.

Shares of Citigroup (C $4) were higher today and have gained 17% in the past five days, as the company completed a sale of $2 billion in trust preferred securities yesterday. The long-term securities, which pay regular interest payments, were priced with an 8.50% yield, lower than the initially expected 8.875%, as strong investor demand bid up prices. The sale, along with a $20.5 billion common stock offering last December, is part of Citigroup’s efforts to raise capital in order to pay back $45 billion in funds received from the US Government under the Treasury Asset Relief Program (TARP).

Jobless claims mixed, trade deficit narrows

Weekly initial jobless claims fell by 6,000 to 462,000, versus last week's figure which was revised slightly downward by 1,000 to 468,000, and compared to the consensus, which called for claims to decline to 460,000. The four-week moving average, considered a smoother look at the trend in claims, rose by 5,000 to 475,500, and continuing claims increased by 37,000 to 4,558,000, compared to the 4,500,000 forecast.

The trade deficit narrowed from a smaller-than-initially reported $39.9 billion in December to $37.3 billion in January, versus the Bloomberg estimate calling for the deficit to widen to $41.0 billion. Exports decreased 0.3% to $142.7 billion as goods consumed overseas fell, offsetting a modest rise in services, while imports fell 1.7% to $180.0 billion, with goods entering the country falling 2.1%, while services rose slightly. Imports of crude oil fell by 31.8 million barrels, offsetting a jump in the price of crude oil by $0.69 per barrel to $73.89, which led to the overall bill for crude falling by $2.2 billion to $18.12 billion. Although the headline trade deficit narrowed, the report may have disappointed economists as the decline in exports may negatively impact GDP, while the drop in imports suggests a pullback in the nation’s consumption.

Treasuries were mixed as the short end of the curve moved lower, while the long end gained ground on the heels of solid demand in today’s $13 billion 30-year bond auction. The yield on the 2-year note was 5 bps higher at 0.95%, the yield on the 10-year note was flat at 3.72%, and the 30-year bond yield was 3 bps lower at 4.66%.

Multiple reports out of China suggest need for further tightening

China’s inflation rate reached a 16-month high, as the country’s consumer price index rose 2.7% in February, according to the National Bureau of Statistics, higher than the 2.5% reading expected by economists. Producer-price inflation climbed to 5.4% from 4.3% between January and February. The greater-than-expected increases may have been partially due to the seasonal factors created by the weeklong New Year’s holiday. Another report showed that production rose 20.7% in the first two months of the year, the largest increase in more than five years. The Chinese Central Bank has aimed to hold inflation around 3% for the year, as concern continues that the economy may be overheating. Chinese banks issued 700 billion yuan in new loans in February, down from 1.39 trillion yuan extended in February, after the government told banks to limit credit growth and raised reserve requirements. Rounding out the flood of data out of China was a report on retail sales, which increased 22.1% in February and 17.9% in the first two months of the year. These reports follow yesterday’s announcement that exports had rebounded faster than expected and lead many to believe that the country will be forced to further pare back stimulus measures. Other reports out of the Asia/Pacific region showed that Australia’s unemployment rate remained steady at 5.3%, as expected by economists, while aggregate hours worked increased 2.4% in February. Japan reported its quarterly GDP reading, which came in at 0.9%, slightly lower than the 1.0% expected and also down from the 1.1% reported last quarter.

A report out of Brazil showed that retail sales rose 10.4% y/y in January, the largest increase in 18 months. Economists were looking for an 8.7% increase, after last month’s reading came in at a much more modest 2.7%.

The euro-area economic front was relatively light today, as France’s 4Q non-farm payrolls declined 0.1% quarter-over-quarter (q/q), versus the 0.4% drop that was initially reported and expected to remain by economists. Moreover, Sweden reported that consumer prices rose more than anticipated in February, and retail sales grew in January.

Consumer spending data on the docket tomorrow

Advance retail sales for February will be released tomorrow, forecasted to fall 0.2% month-over-month (m/m), after growing 0.5% in January, while sales ex-autos are estimated to increase 0.1%, on the heels of a rise of 0.6% in January. On a month-to-month basis the data can be volatile, but on a 3-month basis, retail sales comparisons have been positive since July.

Consumer confidence remains near a record low, as the job outlook remains murky, but American consumers have a hard time resisting the lure of shopping, and have been enticed by either discounts or new product offerings that address changing consumer preference for low-priced goods. Contrary to popular belief, typical recoveries from recessions have not been led by job growth, but instead led by consumer spending, which feeds into demand for goods, an increase in manufacturing, and an increase in hiring and incomes, propelling a positive feedback cycle.

Other releases on tomorrow’s US economic calendar are the preliminary March reading of the University of Michigan Sentiment Index, expected to rise to 74.0 from 73.6, while business inventories are forecasted to rise 0.1% in January after posting a 0.2% decrease in December.

International economic releases tomorrow include Japanese, Indian and euro-zone industrial production, German wholesale prices, and the Canadian employment change.