Evening Market Update

Fed-Induced Rise Loses Steam

Stocks turned higher after the release of the minutes from the Federal Open Market Committee’s March monetary policy meeting gave investors confidence that the Fed continued to be in no hurry to raise interest rates in the near future. However, those gains faded late in the day and the markets finished mixed and closed near where they began the day. Treasuries were higher as there were no other major economic releases to influence trading in the bond markets. In equity news, Massey Energy Co. confirmed twenty-five fatalities after a tragic explosion in one of its West Virginia mines, CA Inc. said it will cut jobs as part of restructuring efforts, Bally Technologies lowered earnings guidance, while AutoNation Inc. upped its 1Q EPS outlook.

The Dow Jones Industrial Average fell 4 points (0.03%) to close at 10,970, while the S&P 500 Index gained 2 points (0.2%) to 1,189, and the Nasdaq Composite was 7 points (0.3%) higher at 2,437. In moderately light volume, 941 million shares were traded on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil was $0.12 higher at $86.84 per barrel, wholesale gasoline was flat at $2.35 per gallon, and the Bloomberg gold spot price gained $2.45 to $1,134.35 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.3% to 81.34.

Massey Energy Co. (MEE $48) confirmed twenty-five fatalities at its Upper Big Branch Mine in West Virginia, as a result of a “tragic explosion.” The company also said four miners are still missing at this time and rescue efforts are currently suspended due to conditions underground. MEE added that rescue efforts will resume as soon as conditions allow. Shares finished more than 11% lower.

CA Inc. (CA $23) announced that it will reduce its workforce by 1,000 or 7.6%, as part of its fiscal 2010 restructuring plan aimed at better aligning the company’s cost structure with its long-term strategy. As a result of charges related to the plan, it expects full-year EPS will be at the low end of its previously issued guidance of between $1.60-1.71. Analysts are expecting the technology firm to post full-year EPS of $1.69. Shares were lower.

AutoNation Inc. (AN $19) increased its 1Q EPS outlook from a range of $0.29-0.32 to between $0.32-0.35, while the auto retailer said its prior estimates for 1Q revenue, new vehicle unit sales and used vehicle unit sales remain. Analysts are expecting the company to post 1Q EPS of $0.31. Shares were modestly higher.

Shares of Bally Technologies (BYI $41) were down over 4% after the gaming technology firm lowered its full-year EPS outlook from $2.30-2.55 to a new range of $2.15-2.25. BYI said the revised guidance reflects slower-than-expected deployment of capital by customers thus far in calendar 2010, the interruption of gaming in Alabama, and lower-than-anticipated “win per unit in gaming operations” in 3Q.

Fed report notes activity strengthened but housing and employment remain concerns

The minutes from the March 16 Federal Open Market Committee (FOMC) meeting were released in the afternoon, wherein the Fed expressed that economic activity continued to strengthen and that the labor market appeared to be stabilizing. However, the release showed the Staff did make modest downward adjustments to its projections for real GDP growth in response to unfavorable news in housing activity, unexpectedly weak government spending, and an expected substantial reduction in the estimated level of household income. On inflation, the FOMC said it saw recent inflation readings as suggesting slightly greater decelerations in consumer prices that had been expected and in light of stable longer-term inflation expectations and the likely continuation of substantial resource slack, it anticipates that inflation would be subdued for some time.

Also, the report showed that the Committee agreed that financial market conditions remained supportive of economic growth, and were reassured by the absence of any signs of renewed strains in the financial market functioning as a consequence of the Fed’s winding down of its special liquidity facilities.

However, the report noted factors that would likely restrain the overall pace of recovery, especially as fiscal stimulus effects waned. Committee members pointed out that “household spending going forward was likely to remain constrained by weak labor market conditions, lower housing wealth, tight credit, and modest income growth.” Also, the report showed the participants were concerned about the scarcity of job openings and the elevated level of unemployment and a number of participants pointed out that the economic recovery “could not be sustained over time without a substantial pickup in job creation,” which they still anticipated but noted had not yet become evident in the data. Activity in the housing sector also concerned Committee members, which they noted has appeared to be leveling off, and that the pace of foreclosures was likely to remain quite high, and recent data pointed to the possibility that the foreclosure rate could move higher. Moreover, the Committee added that the prospect of further additions to the already very large inventory of vacant homes posed a downside risk to home prices.

On the lone dissenting vote by Kansas City Fed President Thomas Hoenig, the report noted that Hoenig believed that it would be more appropriate for the Committee to express its anticipation that economic conditions were likely to warrant “a low level of the federal funds rate for some time.” Also, the report showed the Participants tried to clarify its “extended period” language, as it said, “A number of members noted that the Committee’s expectation for policy was explicitly contingent on the evolution of the economy rather than on the passage of any fixed amount of calendar time.” Moreover, the release said, “consequently, such forward guidance would not limit the Committee’s ability to commence monetary policy tightening promptly if evidence suggested that economic activity was accelerating markedly or underlying inflation was rising notably; conversely, the duration of the extended period prior to policy firming might last for quite some time and could even increase if the economic outlook worsened appreciably or if trend inflation appeared to be declining further.”

On the balance sheet, the Staff discussed the possibility of redeeming all of its maturing Treasury holdings, which would “significantly reduce the size of the Federal Reserve’s balance sheet over coming years and hence could be helpful in limiting the need to use other reserve draining tools such as reverse repurchase agreements and term deposits.”

Treasuries were higher on the day with the yield on the 2-year note down 3 bps to 1.14%, the 10-year note yield was 3 bps lower at 3.96%, and the 30-year bond yield decreased 1 bp to 4.83%.

Greek debt concerns resurface

Anxiety toward Greece again reared its ugly head amid reports that the debt-ridden nation was looking to circumvent International Monetary Fund (IMF) participation in the financial aid package that was agreed upon in March by euro-zone members, along with the IMF, because the terms of the agreement would be too inflexible with its involvement. However, Bloomberg reported that a top Greek finance ministry official denied the claim through an e-mailed statement saying that, “There has never been any move on the part of our country to change the conditions of the recent agreement of the European Council on the support mechanism.” Nevertheless, the yield on the country’s benchmark 10-year bond jumped to its highest level in two months on the news.

The uneasiness limited early enthusiasm following a report that showed that euro-zone investor confidence unexpectedly rose to a 2.5 reading for April, versus the forecast of -5.2 by economists surveyed by Bloomberg, as well as UK Construction PMI rising into expansionary territory for the first time in more than a year to 53.1, compared to the 48.7 level expected by economists. In other economic news, Spain’s unemployment rose by a larger amount than was forecasted for March, but well below the February reading, while Switzerland’s consumer prices increased 0.1% m/m during March, matching expectations.

In political news, British Prime Minister Gordon Brown announced that on May 6th the nation will hold its Parliamentary election, and Queen Elizabeth accepted dissolution of Parliament, kicking off what will likely be a highly competitive month-long campaign. Uncertainty and uneasiness have ramped up recently regarding what polls are showing an increasing possibility that a “hung Parliament” could result—where no party holds a majority control—making policy making more difficult. Gordon Brown’s Labour Party has been in control for 13 years and the opposition Conservatives hold a slight lead in opinion polls.

In the Asia/Pacific region, the Japanese Leading Index for February rose to 97.6 from 96.7 in January, mostly inline with expectations, and the Bank of Japan began its monetary policy meeting, where it is expected to keep its benchmark lending rate unchanged at 0.1%. Elsewhere, the Reserve Bank of Australia increased its benchmark interest rate by 25 basis points to 4.25%, as expected, marking the fifth rate hike in six meetings. The RBA said in its statement accompanying the decision that it judges that with growth likely to be around trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average, and the decision is a further step in that process. Rounding out the region, consumer prices in Taiwan increased by a smaller amount than forecasted and producer prices rose by an amount that exceeded expectations.

The only items on the US economic calendar for the tomorrow are consumer credit, expected to fall $0.7 billion in February, and the MBA Mortgage Application Index.

The international economic calendar, however, will be chock full of reports including retail sales in Germany and Switzerland, final 4Q GDP in the euro-zone as well as PPI numbers for the region, factory orders in Germany, and PMI figures from France, Italy, Germany, the UK, and the euro-zone. Australia will disclose employment figures, Japan will release machinery orders and its trade balance, and the Bank of Japan will conclude its monetary policy meeting.