Evening Market Update

Bears Hit the Brakes on Market Rally

Stocks finished the day lower, stalling a rally that nearly brought the Dow to the 11,000 level in recent days, as a strong auction of 10-year notes could not stop continuing concerns about Greek debt from souring sentiment. Both economic reports released today were disappointing, with mortgage applications and consumer credit both falling. Treasuries saw strong gains on the heels of the notes auction and as investors showed an increased demand for the safest fixed-income assets. In earnings news, Family Dollar Stores Inc beat the Street’s earnings expectations and announced strong same-store sales, while Monsanto missed estimates and lowered full-year guidance. In other equity reports, Tractor Supply Co. issued a better-than-expected Q1 and full-year outlook, and both Delta and Southwest Airlines reported increased passenger traffic in March.

The Dow Jones Industrial Average fell 72 points (0.7%) to close at 10,898, while the S&P 500 Index lost 7 points (0.6%) to 1,182, and the Nasdaq Composite was 6 points (0.2%) lower at 2,431. In moderate volume, 1.2 billion shares were traded on the NYSE and 2.9 billion shares were traded on the Nasdaq. Crude oil was $1.13 lower at $85.71 per barrel, wholesale gasoline was $0.04 lower at $2.31 per gallon, and the Bloomberg gold spot price gained $14.70 to $1,149.00 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.2% to 81.55.

Family Dollar Stores Inc. (FDO $39) reported fiscal 2Q EPS of $0.81, three cents above the consensus estimate of Wall Street analysts, with previously reported revenues rising 4.9% year-over-year (y/y) to $2.1 billion, which was expected. FDO said its same-store sales—sales at stores open at least a year—rose 3.6% y/y as a result of higher customer traffic and an increase in the value of the average customer transaction. Shares are higher after the discount retailer also issued 3Q and full-year EPS guidance that exceeded forecasts. Shares are higher.

Monsanto Co. (MON $68) announced fiscal 2Q EPS ex-items of $1.70, three pennies below the Street’s forecast, with revenues falling 3.6% y/y to $3.9 billion, roughly inline with the forecasts of analysts. The agriculture firm saw its sales of corn seeds increase 8%, offset by sales in its Roundup and other herbicides unit, which dropped 40% y/y. Additionally, MON said it expects full-year EPS to come in at the low end of its previously reported range of between $3.10-3.30. The Street is expecting the company to report full-year EPS of $3.28. Shares of MON traded lower.

Tractor Supply Co. (TSCO $67) reported that it anticipates 1Q EPS will be between $0.22-0.24 on sales forecasted to rise 9.3% y/y to $710.9 million. Analysts are expecting the farm and ranch retailer to post 1Q EPS of $0.01 and sales of $690.5 million. The company said an increase in traffic led a growth in transactions and weather conditions were favorable throughout the quarter. Consequently, TSCO boosted its full-year outlook, raising its EPS range from $3.30-3.42 to $3.48-3.60, and increasing its sales guidance from $3.42-3.48 billion to $3.44-3.50 billion. Analysts are expecting the company to report full-year EPS of $3.39 and revenues of $3.5 billion. Shares finished nicely higher.

Delta Air Lines (DAL $14) and Southwest Airlines (LUV $13) both reported that passenger traffic increased in March. Delta said its system-wide traffic increased 3% y/y, snapping a streak of monthly declines for the world’s biggest carrier by revenue, as U.S. traffic increased by 2.8%, while international traffic rose by 3.3%. Meanwhile, Southwest saw a 0.4% increase in revenue passenger miles for the month and a 22% increase in average passenger revenue y/y, following a gain of 17% last month. Shares of both airlines were lower despite the news.

Mortgage apps fall, consumer credit decreases sharply

The lone economic report this morning was the release of the US MBA Mortgage Application Index, which declined 11.0% last week, after the index, which can be quite volatile on a week-to-week basis, rose 1.3% in the previous week. The decrease came amid a 16.9% drop in the Refinance Index, more than offsetting a modest 0.2% gain in the Purchase Index. Moreover, the decline in the overall index came amid a 27 basis-point increase in the average 30-year mortgage rate, which moved to 5.31%, and remains above the record low of 4.61% that was reached at the end of March 2009.

Late in the day, a report from the Federal Reserve showed that US borrowers decreased consumer credit in February by $11.5 billion, the largest decline in three months, following a revised increase of $10.6 billion in January and compared to the $700 million drop that economists expected. Within the report, revolving debt, such as credit cards, fell $9.4 billion, while non-revolving debt such as auto and mobile-home loans dropped by $2.1 billion. The Fed’s report doesn’t cover lending secured by residential real estate

Meanwhile, Treasuries were higher following a successful $21 billion 10-year Treasury auction. Demand for the notes was the highest in 16 years, as the bid-to-cover ratio was 3.72, while the yield on the offering was 3.90%, compared to expectations of 3.948%. Treasuries also seemed to react favorably to Federal Reserve Chairman Ben Bernanke’s afternoon speech in Dallas today, where he reiterated that joblessness, home foreclosures and weak lending to small businesses continue to pose challenges to the economic recovery. The Chairman went on to say that “we can hardly be satisfied when one out of every ten U.S. workers is unemployed and family finances remain under great stress”. The yield on the 2-year note down 8 bps to 1.06%, the 10-year note yield was 9 bps lower at 3.87%, and the 30-year bond yield decreased 8 bps to 4.75%. .

Yesterday, the minutes from the March 16 Federal Open Market Committee (FOMC) meeting were released and the report showed the Participants tried to clarify its “extended period” language, saying, “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.” The report also revealed that the Fed’s forecast for GDP growth was adjusted modestly downward as some Committee members were concerned about weaker housing activity and high unemployment.

Euro-zone GDP revised, Greece worries linger

In international news, Greek uneasiness moved back into focus, courtesy of reports yesterday that the debt-ridden nation is looking to renegotiate the financial aid package that euro-area members, along with the IMF, had agreed to provide if Greece fails to raise capital on its own. However, the Greek government has denied these reports. In related news, Greece revised its 2009 deficit higher, to at least 12.9% of its GDP, compared to the official government estimate of 12.7%. The increased figure was due to a revision to the nation’s GDP, which showed a larger-than-initially forecasted contraction in Greece’s last year output. Further concern in Europe came after a downward revision to the euro-zone’s 4Q GDP, which was changed to a flat reading, compared to the 0.1% expansion that was previously reported and was expected to remain by economists surveyed by Bloomberg. Other economic data was mixed, with Services PMI’s in Italy, France, Germany, and the euro-zone all exceeding economists’ forecasts, while the Services PMI in the UK came in below expectations. Elsewhere, German factory orders came in flat month-over-month (m/m) in February, compared to the decline of 0.5% that was expected, and euro-zone producer prices rose less than forecast. News out of Canada was also disappointing, as monthly building permits fell by 0.5%, compared to an increase of 2.1% that was expected and following last month’s decrease of 4.9%.

The only item on the US economic calendar for tomorrow is weekly initial jobless claims, which are expected to decrease to 435,000 from a previous reading of 439,000.

The international calendar will be busy again tomorrow, highlighted by monetary policy announcements from the Bank of England and the European Central Bank, which are expected to keep their respective benchmark interest rates unchanged at 0.5% and 1.0%, respectively. Other releases include UK industrial and manufacturing production, euro-zone retail sales, Australian unemployment rate, and Japanese machine orders.