Evening Market Update

Strong Earnings Push Markets Higher

Stocks marched higher today on solid earnings reports from Dow members Intel Corp and JPMorgan Chase & Co, helping to restore optimism for the Q1 earnings season, while lifting the S&P 500 index over the 1,200 mark for the first time since September 2008. The markets were also helped by positive economic data, including a better-than-expected rise in both March retail sales and business inventories, while mortgage applications fell and the consumer price index increased slightly, as expected by economists. The state of the economic recovery was in focus today, as Federal Reserve Chairman Ben Bernanke reiterated the “extended period” language in testimony on Capitol Hill, while the Fed’s Beige Book was also released, showing broadening improvements in economic activity across the country. In other equity news, CSX Corp and Progressive Corp both reported earnings that were higher than analysts expected, while Citigroup announced that it will sell its hedge-fund business to alternative investment firm SkyBridge Capital. Treasuries finished the day mostly lower.

The Dow Jones Industrial Average gained 104 points (0.9%) to close at 11,123, the S&P 500 Index rose 13 points (1.1%) to 1,211, and the Nasdaq Composite was 39 points (1.6%) higher at 2,505. In moderate volume, 1.1 billion shares were traded on the NYSE and 3.0 billion shares were traded on the Nasdaq. Crude oil was $1.88 higher at $85.93 per barrel, wholesale gasoline was $0.02 higher at $2.33 per gallon, and the Bloomberg gold spot price increased $4.30 to $1,154.95 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.4% to 80.18.

Dow member Intel Corp. (INTC $24) reported 1Q EPS of $0.43, five cents above the consensus estimate of Wall Street analysts, with revenues growing 44% year-over-year (y/y) to $10.3 billion, compared to the $9.8 billion that the Street was anticipating. The chipmaker said its PC client group revenue was flat versus 4Q, while it saw record mobile processor revenue as the ramp up of its new mobile products led to better-than-expected average selling prices. Also, INTC said the average selling price for microprocessors was up slightly. However, the company said its data center group revenue was down 8%. The Dow Jones Newswires said the company noted in a conference call with analysts that it sees demand improving in all regions and the demand for high-performance computer chips has been “particularly strong” as corporations begin spending on technology again. The company also added that it plans to add 1,000-2,000 jobs to its workforce this year, the first hiring plan in five years. INTC issued 2Q revenue guidance that exceeded analysts’ forecasts. Shares were higher.

Fellow Dow member JPMorgan Chase & Co. (JPM $48) announced 1Q EPS of $0.74, up 85% y/y, and ten pennies above the forecast of analysts, with revenues growing 5% y/y to $28.2 billion, versus the $26.5 billion that was expected on the Street. JPM’s CEO Jamie Dimon said the results, including $3.3 billion in net income, reflected another strong quarter for the investment bank, particularly in fixed income markets, and continued solid performance across asset management, commercial banking and retail banking.

The company said its 1Q earnings generated additional capital, resulting in a “very strong” Tier 1 capital ratio—a key financial strength industry metric—of 11.5%, as the company charged $7 billion to its provision for credit losses, down 30% y/y, with total firmwide credit reserves more than $39 billion, or 5.6% of total loans. “We continued to see delinquencies stabilize, and in some cases improve, in our credit portfolios,” the company added. Per the Dow Jones Newswires, in a conference call with analysts Dimon said, “There is clear and broad based improvement” in the economy in the US and around the world, possibly resulting in a “strong recovery.” Shares finished nicely higher.

CSX Corp. (CSX $55) was the first railroad firm to report 1Q results, showing EPS of $0.78, compared to the $0.69 that the Street had anticipated, with revenue rising 11% y/y to nearly $2.5 billion, compared to the $2.4 billion that was forecasted by analysts. The company said it drove strong efficiencies in its operations as the economy continued to recover. Also, CSX said its overall volume rose 5% y/y during the quarter amid increases in metals, fertilizers, and automobiles. In a conference call with analysts, the company’s CEO said he is “encouraged” by the improving economy and the company said it expects “strong, double-digit” profit growth. CSX traded higher.

Citigroup Inc. (C $5) announced that it has reached a definitive agreement to sell its hedge-fund business, which has $4.2 billion in assets under management—to alternative investment firm SkyBridge Capital. Financial terms were not disclosed. C traded higher.

Progressive Corp (PGR $21) reported 1Q EPS of $0.44, seven cents higher than analysts’ expected, and 27% higher than the same quarter last year. The y/y increase was partly due to $30.8 million in investment gains, compared to a loss of $73.4 million in investments last year. The home and auto insurer noted that net premiums written increased 7% to $3.78 billion, while premiums earned rose 3% to $3.5 billion. Shares of PGR finished higher.

Retail sales top forecasts, consumer prices tame, business inventories gain

Treasuries were mostly lower amid a plethora of economic reports released throughout the day. The yield on the 2-year note was flat at 1.05%, while the yield on the 10-year note gained 4 bps to 3.86% and the 30-year bond yield rose 5 bps to 4.73%.

Advance retail sales for March rose 1.6% month-over-month (m/m), compared to the Bloomberg forecast of an increase of 1.2%, while February’s 0.3% increase was revised to a 0.5% gain. Sales ex-autos gained 0.6%, versus the expectation of an increase of 0.5%, and February was revised from 1.0% to 0.8%. Excluding autos, gasoline and building materials, used as one input into the government’s calculation of the consumer spending component of GDP, sales increased 0.5% in March after growing 1.2% in February, while the three month figure gained 1.8%. Eleven of thirteen categories rose in the month, led by a 6.7% increase in autos, and building materials gained 3.1%, the most since November 2007.

Meanwhile, the Consumer Price Index showed prices at the consumer level increased 0.1% in March m/m, matching the forecast of economists surveyed by Bloomberg. The core rate, which strips out food and energy, was flat m/m for March, compared to the 0.1% increase that was anticipated. Changes in energy prices had no impact in the month, while a 0.2% increase in food prices accounts for the difference between the two rates. On a year-over-year (y/y) basis, consumer prices were up 2.3% in March, compared to the forecast of 2.4%, and the core CPI was 1.1% higher y/y, compared to the 1.2% forecast and the core rate posted the smallest gain since 2004, demonstrating that inflation is not a current concern.

Also, Federal Reserve Chairman Ben Bernanke testified before the Joint Economic Committee on the economic outlook, noting that incoming data suggest a moderate economic recovery in coming quarters, and the moderation in inflation has been broadly based and inflation expectations are at the lower end of the narrow range that has prevailed for the past few years. Bernanke also commented on the improvement in financial markets over the past year, while noting that policymakers need to set the federal budget on a trajectory toward a sustainable fiscal balance to maintain confidence of the public and financial markets. In the Q&A session, the Fed Chief did reiterate the Fed’s “extended period” language referring to the “exceptionally low” level of the fed funds rate.

Consumers and corporations went into lock-down mode in the crisis, and an easing of concerns about losing jobs has individuals releasing some pent-up demand in the form of spending. However, the economy is still operating below potential and consumers are looking for bargains to compel purchases.

Elsewhere, business inventories rose 0.5% m/m in February, compared to the forecast of a 0.4% gain, and January’s flat reading was revised to an increase of 0.2%. Sales advanced 0.3% m/m, resulting in the inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—remaining at 1.27 months in February.

In other economic news, the MBA Mortgage Application Index declined 9.6% last week, after the index, which can be quite volatile on a week-to-week basis, fell 11.0% in the previous week. The decrease came amid a 9.0% drop in the Refinance Index, while the Purchase Index fell 10.5%. However, the decline in the overall index came despite a 14 basis-point decrease in the average 30-year mortgage rate, which fell to 5.17%, remaining above the record low of 4.61% that was reached at the end of March 2009.

The Federal Reserve Beige Book was released in early afternoon trading, and showed that economic conditions have “increased somewhat” since the last report across 11 of 12 Districts, with St. Louis being the holdout, reporting “softened” economic conditions, while the prior report showed improvement in 10 of 12 Districts. The Beige Book is a compilation of anecdotal pieces of information gathered from the Fed’s various contacts in local businesses, and will be used in the next Federal Open Market Committee (FOMC) meeting on April 27-28 to gauge monetary policy.

In terms of bright spots, improvement was reported in retail and vehicle sales, as well as an increase in tourism spending, but the broader services sector was seen as mixed. Manufacturing activity was on the rebound and many Districts reported increased activity in housing markets from low levels.

While labor markets were seen as generally weak, some hiring activity was evident, particularly for temporary staff. Wage pressures were characterized as minimal or contained. Retail prices generally remained level, but some input prices increased and producers were largely unable to pass on those price increases downstream to selling prices.

On the negative end of the spectrum, commercial real estate activity remained very weak, and activity in the banking and finance sector was mixed, as loan volumes and credit quality decreased.

Euro-zone industrial production rises, bullish news reported out of Asia

In economic news across the pond, euro-zone industrial production rose 0.9% m/m in February, versus the 0.1% gain that was anticipated, taking some of the attention off of the debt uncertainty in Greece. However, the spread between Greek 10-year government bonds and German bonds known as bunds, widened again, causing some uneasiness to resurface. In Asia/Pacific news, Moody’s Investors Service raised South Korea’s sovereign credit rating from A2 to A1, prompted by “Korea’s demonstration of an exceptional level of economic resilience to the global crisis, while containing the government’s budget deficit.” Adding to the sentiment in Korea, a report showed the country’s unemployment rate fell from 4.4% in February to 3.8% in March. Other economic news for the nation included a separate report which showed South Korea’s export and import prices both fell. A report out of Singapore showed GDP increased 32% in the first quarter on a seasonally-adjusted basis, helped by a 139% increase in manufacturing. Both figures were the fastest rates of growth since the data was first collected in 1975. Meanwhile, Australia reported a 1% drop in a reading on consumer confidence for April. Brazil rounded out the international news by reporting a 12.3% y/y increase in retail sales, compared to economists’ estimates of a 10.5% increase, which is the largest jump in two years and gives further support to predictions that the Brazilian central bank will raise interest rates this month.

Another busy day on tap for US and international economic reports

The US economic calendar will be packed with data again tomorrow, highlighted by the release of industrial production, which is expected to have increased 0.7% in March after an increase of 0.1% last month and capacity utilization, also expected to improve to 73.3% from a previous month reading of 72.7%. Traders will also watch for the release of the Empire Manufacturing Index, a measure of manufacturing in the New York region, which economists are predicting will increase to a level of 24.00, up from a March reading of 22.86, and the Philly Fed Manufacturing Index, also expected to have risen in April, to a level of 20.0 from a previous reading of 18.9. Both reports should be well above the level of 0 that suggests conditions are neither contracting nor expanding. Rounding out the US economic reports are weekly initial jobless claims, which increased unexpectedly last week to 460,000, but are expected to fall to 440,000 this week, and the NAHB’s Housing Market Index, a gauge of homebuilder confidence that fell from 17 to 15 last month, but is expected to have climbed back up to 16 in April.

The international economic calendar will also be active tomorrow, with the release of industrial production and capacity utilization in Japan, as well as multiple reports from China, including PPI, CPI, retail sales, industrial production, and the first report globally on 1Q GDP, forecast to show an expansion of 11.7% y/y.