Evening Market Update

Stocks Begin the Second Quarter on a Positive Note

In the final trading day of the week, markets were higher after reaching early-morning highs on the strength of a strong US ISM Manufacturing Index report and a larger-than-expected decline in weekly initial jobless claims. A decrease in construction spending rounded out the US economic reports, as Treasuries finished to the downside, but off the lowest levels of the day. Auto sales were in focus today, as General Motors reported March sales that beat forecasts, while Ford and Toyota’s sales were higher than last year, but below estimates and Chrysler posted a larger decline than estimated. In other equity news, BlackBerry maker Research in Motion reported disappointing 4Q earnings, while Mosaic Co. also missed expectations on both the top and bottom lines. On a more positive note, Micron Technology and CarMax Inc. both beat analysts’ earnings expectations. Tomorrow will bring the release of nonfarm payrolls, although the equity markets will be closed in observance of Good Friday.

The Dow Jones Industrial Average rose 70 points (0.7%) to close at 10,927, the S&P 500 Index gained 9 points (0.7%) to 1178, and the Nasdaq Composite was 5 points (0.2%) higher at 2,403. In moderately light volume, 928 million shares were traded on the NYSE and 2.3 billion shares were traded on the Nasdaq. Crude oil was $1.25 higher at $85.01 per barrel, wholesale gasoline was $0.02 higher at $2.33 per gallon, and the Bloomberg gold spot price gained $12.40 to $1,125.65 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.5% to 80.70. For the week, the DJIA rose 0.7%, the S&P 500 Index advanced by 1.0%, and the Nasdaq Composite gained 0.3%.

Research in Motion (RIMM $68) reported 4Q EPS of $1.27, one penny shy of the consensus estimate of Wall Street analysts, with revenues increasing 18% year-over-year (y/y) to $4.1 billion, also short of the expectation of the Street, which called for the maker of the BlackBerry smartphone to report revenues of $4.3 billion. RIMM said it shipped approximately 10.5 million devices in 4Q and added about 4.9 million net new BlackBerry subscriber accounts. However, on a conference call with analysts, the company’s co-CEO said its unit shipments were lower than expected due to a change in inventory policy by a customer, stressing the problem was a one-time event and cautioning analysts to not read too much into the revenue miss, per Dow Jones Newswires. RIMM issued 1Q EPS guidance that exceeded analysts’ forecasts but shares finished lower in reaction to the 4Q results.

Micron Technology (MU $10) announced fiscal 2Q EPS of $0.39, above the $0.24 that the Street had expected, with revenues increasing almost 100% y/y to $1.96 billion, compared to the $1.8 billion forecast of analysts. The chip maker said it positioned itself well during the recession and its results are starting to reflect the combination of an improving market, strong operational performance, advanced technology and a broad product portfolio. Sales of DRAM chips—used in PCs and servers—jumped 24% on improving demand by corporations for servers and desktop computers and on a 17% increase in volume coupled with a 7% increase in average selling prices for the chips. However, sales of NAND flash memory chips—used in MP3 players and digital cameras—were down slightly on a modest decrease in average selling prices. Shares were lower.

CarMax Inc. (KMX $26) reported 4Q EPS of $0.26, excluding a favorable $0.07 per share adjustment related to loans originated in previous quarters at its auto finance unit, and compared to the $0.25 that the Street was expecting. Revenues rose 25% y/y to $1.8 billion, roughly inline with analysts’ estimates. The auto seller said 4Q represented its third-consecutive quarter of y/y increases in unit sales and earnings and its 12% y/y increase in same-store sales—sales at facilities open at least a year—reflected equal contributions from improvements in customer traffic and sales execution. Shares traded higher.

General Motors kicked off the auto industry’s March US auto sales reports today, announcing that adjusted sales of its non-discontinued, core brands jumped 37.8%, compared to the 27% increase that analysts had expected per CNBC. Elsewhere, Ford Motor Co. (F $13) announced that its March US adjusted sales rose 34.4%, versus the 38.3% that was expected on the Street. Fellow US automaker Chrysler said it posted an adjusted US sales decline of 11.8%, compared to the 6.2% decline that was anticipated. Toyota Motor Corp (TM $80) rounded out the reports with an adjusted increase of 35.3% in March, compared to an Edmunds.com estimate of a 37% increase, largely due to unprecedented incentives and promotions offered in an effort to attract customers after multiple recall issues. Shares of F and TM moved higher.

Mosaic Co. (MOS $58) shares were lower after the agriculture firm posted fiscal 3Q EPS of $0.50, which was well below the $0.61 that analysts had expected. Also, revenues, although increasing 26% y/y to $1.7 billion, were short of expectations as the Street was looking for sales of $1.8 billion.

US manufacturing activity continues to improve, jobless claims decline

The ISM Manufacturing Index (chart) joined the theme of upbeat global manufacturing reports today, improving from an unrevised 56.5 in February to 59.6 in March, above the consensus forecast of economists surveyed by Bloomberg, which anticipated a slight increase to 57.0. New orders increased from 59.5 to 61.5 and prices paid jumped from 67.0 to 75.0.

The report revealed that US manufacturing activity remained in expansion mode for the eighth-consecutive month—as a reading of 50 is the demarcation point between expansion and contraction—and the index sits at the highest level since July 2004, continuing to suggest that manufacturing is leading the economic recovery. Moreover, diving into the report further, there are some signs emerging that may amplify the recovery sentiment. The employment component of the report, although slipping slightly from 56.1 to 55.1, posted the fourth-straight monthly expansion, while the inventories jumped into expansion territory for the first time since April 2006, increasing from 47.3 to 55.3, which foreshadows a boost to GDP and the potential increase in demand for workers to add some much needed relief to sentiment regarding the employment backdrop. Lastly, the release revealed new export orders posted a solid gain, rising from 56.5 to 61.5, suggesting that the US trade deficit could improve and further support the positive development of the jobs picture.

Elsewhere, weekly initial jobless claims fell by 6,000 to 439,000, versus last week's figure which was upwardly revised by 3,000 to 445,000, and compared to the consensus estimate, which called for claims to decline to 440,000. The four-week moving average, considered a smoother look at the trend in claims, declined by 6,750 to 447,250, and continuing claims dropped by 6,000 to 4,662,000, compared to the 4,618,000 forecast.

In other economic news, construction spending was also released this morning, falling 1.3% in February, more than the expectation of a 1.0% decline, and January’s 0.6% decrease was revised to a 1.4% drop.

Treasuries were lower, as the yield on the 2-year note gained 4 bps to 1.06%, while the 10-year note yield rose 3 bps to 3.86%, and the 30-year bond yield increased 2 bps to 4.73%.

Plenty of manufacturing data to digest on the international front

As March PMI Manufacturing reports out of France and Germany were revised higher and initial March PMI releases in Italy, Spain, and Sweden all showed expansion, the overall euro-zone PMI report was revised higher than previously reported for the month, boosting optimism about the continuation of the economic recovery across the pond. Adding to the enthusiasm, the UK PMI Manufacturing in March increased to 57.2—a reading above 50 depicts expansion—from 56.5 in February, and the highest level since October 1994, per Bloomberg. The plethora of favorable data overshadowed a report out of Germany—Europe’s largest economy, that showed retail sales fell 0.4% in February, after falling 0.5% in the previous month. Economists had predicted that sales would go unchanged for the month. In other news out of Germany, consumer confidence dropped to an eight-month low in March and inflation increased to 1.3%, although the unemployment level unexpectedly fell for the month.

In other international news, Brazil’s industrial output expanded in February by 1.5%, the fastest pace in four months, and higher than the 1.0% economists had predicted. Meanwhile, a separate report showed that inflation rose to 4.83%, higher than the 4.5% target set by the Brazilian central bank, leading to increased expectations of an increase in interest rates when policymakers meet on April 28th. Minutes from the group’s previous meeting on March 16th – 17th said policymakers projected inflation to be “markedly” above their target and comments made yesterday by the central bank suggest the cost of reining in consumer prices back to the target may be “significant”.

Another week of minimal moves, but equities continue nudge forward

Stocks continued to quietly add to their recent rally, with the major markets trading near the best levels of the year, aided by a plethora of global manufacturing data and the expectation that the end of the week’s nonfarm payrolls report, which will be reported tomorrow, would show a meaningful increase in US jobs. However, gains for the week seemed in jeopardy and a stellar 1Q went out on a negative note following a mid-week report, which fostered some skepticism to the validity in the expectations of Friday’s labor report as the ADP Employment Change Report showed an unexpected drop in private sector payrolls.

The early focus on the employment data that was due to be released later in the week seemed to overshadow some other economic reports, adding to early complacency in the equity markets. The S&P/Case-Shiller Home Price Index showed home prices continued to improve, personal spending rose, and the Conference Board’s consumer confidence rose by a larger-than-expected amount, all unsuccessfully prompting any significant moves in the market.

Economic calendar yields jobs data tomorrow, Fed minutes highlight next week

Equity markets will be closed for trading, but bond, currency and futures markets will have a chance to react to tomorrow’s release of nonfarm payrolls, with the Bloomberg survey of economists forecasting payrolls increased by 184,000 in March, while the unemployment rate is estimated to be unchanged at 9.7%. Data on the job market has been volatile lately and the trend has been hard to discern. In recent months, November saw employment gains, only to have declines in the following months. The February data was expected to be affected to the downside by snowstorms, but the Labor Department said they were unable to quantify the impact. Adding to the confusion, temporary Census hiring will distort data in upcoming months. Despite the month-to-month volatility, and slow pace of recovery, the trend in the jobs market has been bullish.

Following the release of the ISM Manufacturing Index today, the companion ISM Non-Manufacturing Index will be released on Monday, and is expected to increase to 53.6 in March from 53.0 in February, which would mark the third-straight reading above the 50 level that separates contraction versus expansion in the economy. The services sector has not bounced back to the same degree that the manufacturing sector has, although manufacturing also plunged to a greater degree during the crisis. Manufacturing has rebounded on the back of export strength, while growth in the services sector has been tempered by constraints on US consumer spending, such as deleveraging and high unemployment.

Traders will be closely monitoring the Federal Reserve’s release of the minutes from the March Federal Open Market Committee (FOMC) meeting mid-day Tuesday. There were little in the way of surprises at the March meeting, as there were no changes to interest rates, or language and the Fed reiterated the March expiration of the mortgage-backed security (MBS) purchase program. Kansas City Fed President Thomas Hoenig dissented for the second-straight meeting, believing that continuing to “pre-commit” to the “exceptionally low” levels of fed funds for an “extended period” was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability.

The Fed has begun normalizing monetary policy, allowing extraordinary credit programs to expire and increasing the discount rate. Traders will be paying close attention to details about the timing of paying interest on excess reserves, and moves to drain reserves by using either term deposits or reverse repurchase agreements, as well as the stance on asset sales.

Other releases on next week’s US economic calendar include pending home sales, MBA Mortgage Applications, initial jobless claims, and wholesale inventories.

The international economic calendar will be heavy next week, including euro-zone and UK PPI and services PMI reports, euro-zone CPI, GDP, and retail sales, and German factory orders. In the Americas, Canada releases building permits and employment.

In the Asia/Pacific region, announcements include Japan’s leading index, machine and machine tool orders, and Australian employment.

Additionally, several central banks will be meeting to discuss monetary policy, including the Bank of Japan, the Bank of England, the European Central Bank, and the Reserve Bank of Australia.