Evening Market Update

Dow Approaching 11,000

Equity traders returned from the long holiday weekend in a fairly good mood following Friday’s solid gain in jobs to nonfarm payrolls and today’s unexpected jump in pending home sales and larger-than-expected improvement in the ISM Non-Manufacturing Index. The upbeat reports for the economy pushed Treasuries lower with the 10-year note briefly moving above the 4% mark intra-day. Equity news was light with Apple Inc. announcing that it sold over 300,000 units of its new iPad device in its debut weekend, SandRidge Energy Inc will acquire rival Arena Resources Inc for about $1.6 billion, Walgreen Co reported same-store sales, Brush Engineered Materials upped guidance, and US regulators are reportedly set to fine Toyota Motor Co.

The Dow Jones Industrial Average rose 47 points (0.4%) to close at 10,974, the S&P 500 Index gained 9 points (0.8%) to 1,187, and the Nasdaq Composite was 27 points (1.1%) higher at 2,430. In moderately light volume, 906 million shares were traded on the NYSE and 2.0 billion shares were traded on the Nasdaq. Crude oil was $1.75 higher at $86.62 per barrel, wholesale gasoline was $0.03 higher at $2.35 per gallon, and the Bloomberg gold spot price gained $12.30 to $1,132.10 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.2% to 81.14.

Apple Inc. (AAPL $238) announced that it sold over 300,000 iPads in the US as of midnight on April 3rd, including deliveries of pre-ordered devices, deliveries to channel partners, and sales at AAPL retail stores. The company also reported that iPad users downloaded over one million apps from its app store and over 250,000 ebooks from its online bookstore. Shares were higher despite the sales number coming in below some analysts’ estimates, one of which called for between 600,000-700,000 devices to be sold.

In M&A news, SandRidge Energy Inc. (SD $8) announced that it is acquiring rival Arena Resources Inc. (ARD $37) for about $1.6 billion. The two oil and natural gas firms announced that they have entered into a definitive merger agreement under which ARD shareholders will receive stock and cash consideration valued at $40 per ARD share they own, representing a 17% premium based on the April 1st closing price. SD will be the surviving company and the deal will create a combined enterprise value of approximately $6.2 billion. SD was lower, while ARD was solidly higher.

Walgreen Co. (WAG $38) reported March same-store sales—sales at stores open at least a year—increased 2.3% year-over-year (y/y), with an earlier Easter holiday versus last year aiding comparable store sales by 0.7 percentage points. WAG said its pharmacy sales, which accounted for 66.4% of total sales for the month, rose 2.4% y/y, but were negatively impacted by 2.6 percentage points due to generic drug introductions in the last 12 months and a lower incidence of flu compared with the same month last year. Shares were modestly higher.

Shares of Brush Engineered Materials (BW $26) jumped over 15% after it upped 1Q sales guidance to a range of $300 - 310 million and EPS of $0.25, from a previous range of $275 - 295 million, and said it expects full-year revenues to be between $1.2 – 1.3 billion from initial expectations for sales of $1.1 – 1.2 billion. Additionally, the precious-metals product manufacturer raised its full-year earnings estimate to $1.15 – 1.20 per share from $0.75 - 1.00, citing strength across its key markets as well as its efforts to focus on new technologies, products and geographies.

Dow Jones Newswires reported that U.S. regulators will announce Monday their plans to fine Toyota Motor Co. (TM $81) the maximum penalty allowed under law—$16.4 million—for not disclosing, in a timely fashion, issues with its accelerator pedals that sparked a massive recall of the 2.3 million of the company’s vehicles. Transportation Secretary Ray LaHood said, “We now have proof that Toyota failed to live up to its legal obligations” adding that the automaker “knowingly hid a dangerous defect for months from U.S. officials and did not take action to protect millions of drivers and their families.” Shares fell on the news, but were able to close slightly higher.

Equity markets show favorable reaction to labor report and service sector reading

While the equity markets were closed in observance of Good Friday last week, the US Department of Labor released its labor report (chart), showing nonfarm payroll employment increased by 162,000 in March, compared to the forecast of economists surveyed by Bloomberg, which called for an increase of 184,000. Also, the report revealed that the unemployment rate remained at 9.7% for the third-straight month, as expected, while average hourly earnings declined 0.1% month-over-month (m/m) in March, compared to the 0.2% increase that economists had forecasted, and the average workweek increased by 0.1 hour to 34.0 hours. Moreover, January’s 26,000 decline in nonfarm employment was revised to a gain of 14,000, and February’s loss of 36,000 jobs was revised to a decline of 14,000. The increase in jobs in March was aided by the hiring of 48,000 workers from the federal government for Census 2010.

Other aspects of the report showed the number of long-term unemployed—those jobless for 27 weeks and over—increased by 414,000 over the month to 6.5 million, and the number of persons working part time for economic reasons—individuals working part time because their hours had been cut back or because they were unable to find a full-time job—rose to 9.1 million in March.

The ISM Non-Manufacturing Index increased by a larger-than-expected amount, rising from 53.0 in February to 55.4 in March, versus the 54.0 that economists surveyed by Bloomberg had anticipated the gauge of service sector activity to reach. A reading of 50 is the separation point between expansion and contraction and the overall index has remained in expansion mode for the third-straight month. New orders rose solidly, increasing from 55.0 to 62.3, and the business activity component advanced to 60.0, reflecting growth for the fourth-consecutive month. The employment component of the report came in just shy of the 50 mark, increasing from 48.6 to 49.8. However, prices rose from 60.4 to 62.9 and have increased for the eighth-consecutive month.

The report suggests that expansion in the service sector, which accounts for the lion’s share of the economy, is heating up and may be poised to lend some much needed support to the employment arena. Also, the non-manufacturing release compliments last week’s eighth-consecutive month of expansion in the ISM Manufacturing Index, which boosts optimism that the economic recovery has more fuel left in the tank. Moreover, the jump in new orders to the highest level since August 2005 and business activity expanding at the biggest pace since April 2006 point to the possibility that demand for workers may be moving higher and one of the remaining pistons of the economy that has yet to fire is being primed. The non-manufacturing report is more domestically–focused, and the improving trend in activity bodes well for the backdrop of the US economy.

In other economic news, pending home sales unexpectedly jumped, rising 8.2% m/m in February, compared to the flat reading that economists had expected. However, January’s 7.6% decline in the gauge of the pipeline of existing home sales was revised to drop of 7.8%.

Treasuries were lower on the upbeat reports, as the yield on the 2-year note gained 8 bps to 1.18%, the 10-year note yield rose 5 bps to 3.99%, and the 30-year bond yield increased 4 bps to 4.84%.

Holiday continues overseas, news sparse

Most markets in Europe remained closed for holidays, with only a sprinkling of economic reports to come out of the region. Spain reported that consumer confidence improved to 72.7 in March from 71.1 in February, Russia’s PMI rose from 51.0 in February to 53.6 in March, and separate reports showed Turkey’s producer prices rose more than expected in March while the nation’s consumer prices rose by an amount that matched the expectations of economists.

FOMC minutes to take center stage

Traders will be closely monitoring the Federal Reserve’s release of the minutes from the March Federal Open Market Committee (FOMC) meeting mid-day tomorrow. The last couple of meetings by the Fed have come and gone with no major surprises, with the FOMC maintaining its language that, "Economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

Other areas that will likely garner some attention will be 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.

Internationally, the economic calendar will yield construction PMI from the UK, Japan’s leading index, and CPI figures for China. As well, the Reserve Bank of Australia will meet to discuss monetary policy.