Evening Market Update

Markets Squeeze Out Another Day of Gains

After a choppy day of trading, stocks finished slightly higher as traders digested numerous economic announcements both domestically and abroad, as well as multiple earnings reports. An unexpected increase in weekly jobless claims for the second-straight week and a smaller-than-expected rise in industrial production created early negative momentum, but sentiment changed after positive readings out of the New York and Philadelphia manufacturing indexes and an impressive jump in the NAHB Housing Market Index. Equity news was also positive as UPS couldn’t wait to announce 1Q earnings that beat the Street’s estimates, while Yum! Brands also reported results that beat analysts’ forecasts. In M&A news, Apache Corp announced plans to acquire Mariner Energy Inc. for approximately $2.7 billion, and New Hope Corp and Peabody Energy Corp continue to battle to acquire Australian mining firm MacArthur Coal. Treasuries finished the day higher.

The Dow Jones Industrial Average gained 21 points (0.2%) to close at 11,145, the S&P 500 Index rose 1 point (0.1%) to 1,212, and the Nasdaq Composite was 11 points (0.4%) higher at 2,516. In moderate volume, 1.2 billion shares were traded on the NYSE and 2.7 billion shares were traded on the Nasdaq. Crude oil was $0.34 lower at $85.50 per barrel, wholesale gasoline was $0.01 lower at $2.32 per gallon, and the Bloomberg gold spot price increased $4.85 to $1,160.20 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.4% to 80.49.

United Parcel Service Inc. (UPS $69 ¹) preannounced 1Q results, reporting that adjusted earnings totaled $0.71 per share, compared to the $0.57 per share that Wall Street analysts had expected. UPS said the results were powered by “a significant acceleration” in the international package and supply chain businesses and improved operating margins across all three segments. Also, due to the strong results in 1Q, the package delivery firm increased its full-year adjusted EPS forecast to a range of $3.05-3.30, compared to the previous range of $2.70-3.05. The Street was expecting the company to report full-year EPS of $2.93. Shares were solidly higher.

Yum Brands (YUM $43) reported 1Q EPS ex-items of $0.59, above the Street’s forecast of $0.53, with revenues growing about 6% year-over-year (y/y) to $2.3 billion, roughly inline with the expectations of analysts. The parent of Taco Bell, KFC, and Pizza Hut said it is particularly pleased with its business in China, which posted profit growth of 37%, while in the US, it has seen “significant sales improvement” since 4Q. Shares of YUM traded higher.

In M&A news, Apache Corp. (APA $107), which earlier this week bought the Gulf of Mexico assets of Devon Energy Corp. (DVN $67), announced that it has entered into a merger agreement with Mariner Energy Inc. (ME $26). Under the agreement, ME shareholders will receive, in aggregate, 0.17043 of a share of APA and $7.80 in cash for each share of ME they own, for a transaction value of about $2.7 billion. Shares of APA and DVN were down, while ME was up over 40%.

Additionally, the M&A saga in the Australian mining sector continues as MacArthur Coal (MACDF $14) rejected a sweetened cash takeover bid of A$14.50 per share of the company from New Hope Corp. (NHPEF $5), while after the close of trading in Asia, Peabody Energy Corp. (BTU $48) announced that it has raised its takeover offer for MacArthur to A$16 per share, or A$4.1 billion. MacArthur said it will hold a meeting on Friday to consider the new proposal and urged shareholders to take no action on Peabody’s bid. MacArthur added that it has been informed that the sweetened offer will lapse if it holds a shareholder vote on its proposed takeover of Gloucester Coal Ltd. (GCRLF $11).

Major credit card companies are reporting key monthly domestic credit card measures, with Dow member American Express Co. (AXP $46) reporting that its loan charge-off rate—the rate of loans it does not expect to collect—increased slightly from 7.4% in February to 7.5% in March, while its 30-day delinquency rate—a gauge of future charge-offs—declined from 3.6% in February to 3.3% in March. Elsewhere, Capital One Financial Corp. (COF $45) announced that its charge-off rate was 10.87% in March, up from 10.19% in February, and its delinquency rate was 5.3%, down from 5.51%. Discover Financial Services (DFS $16) said charge-offs in March totaled 8.51%, compared to 9.11% last month, while the delinquency rate fell from 5.50% to 5.39%. Rounding out the credit card data was Bank of America Corp (BAC $19 ¹), who reported a charge-off rate of 12.54% in March, down from 13.51% last month and a delinquency rate of 7.07%, down from 7.23%. JPMorgan Chase & Co. (JPM $48) reported their figures along with their 1Q earnings report yesterday, reflecting a 10.54% charge-off rate for the quarter, up from 8.64% in 4Q and a delinquency rate that decreased from 5.52% to 4.99% q/q. Shares of COF were lower, while AXP, DFS, BAC and JPM were all higher.

Jobless claims unexpectedly jump, regional manufacturing activity expands

Weekly initial jobless claims rose by 24,000 to 484,000, versus last week's figure which was an unrevised 460,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to decline to 440,000. The four-week moving average, considered a smoother look at the trend in claims, rose by 7,500 to 457,750, and continuing claims increased by 73,000 to 4,639,000, compared to the 4,580,000 forecast. However, the reaction to the surprising jump in claims was muted by some upbeat regional manufacturing reports and as labor department officials have been quoted saying that administrative factors around Easter rather than economic factors were more to blame for the increase.

The Empire Manufacturing Index, a measure of manufacturing in the New York region, rose in April to a level of 31.86, further above the level of zero that suggests conditions are neither contracting nor expanding. Economists surveyed by Bloomberg expected an increase to 24.00, following the previous month’s level of 22.86. A complimentary report in the Philly Fed Manufacturing Index (chart) was also released this morning, showing an increase in business activity in the mid-Atlantic region. The index improved from 18.9 in March to 20.2 in April and a reading of zero is also the demarcation point between expansion and contraction. The two regional reports are the first major pieces of data depicting conditions in the manufacturing sector for April and continue to support arguments that the recovery continues to unfold.

Taking some of the luster off of the optimism in the manufacturing sector, industrial production rose 0.1%, compared to the 0.7% increase that economists were expecting, and the smaller-than-forecasted rise came as the output for consumer goods declined 0.2% in March, while utilities production fell 6.4% for the month. Meanwhile, capacity utilization ticked higher from an upwardly revised 73.0% in February to 73.2% in March, as a slump in utilities was offset by gains in mining and manufacturing utilization.

The reaction was negative, mainly due to the industrial production aspect of the report as it has posted modest gains in the last two months, slowing from the solid 1.0% gain that was posted in January. However, digging into the report may soothe some of the initial concerns about the health of the manufacturing sector as the report showed manufacturing rose a respectable 0.9% in March, along with gains of 1.4% and 2.3% for business equipment and construction, respectively. Moreover, the modest gain in industrial production came from a large drop in utilities, which is a volatile component, on the heels of a cold-snap in February and as temperatures increased in March, diminishing the demand for heat. Finally, the gain in capacity utilization improved for the ninth-straight month, and remains 7.4 percentage points below its average from 1972-2009, per the Federal Reserve, suggesting we continue to move toward normal levels but the threat of inflationary pressures remains subdued.

The NAHB Housing Market Index, a gauge of homebuilder sentiment, increased to a level of 19 in April, up from a reading of 15 last month, and compared to economists’ estimates of 16. Any reading below a level of 50 indicates more respondents feel conditions were poor. The survey, which is now at its highest level in two years, was helped by a rush of homebuyers looking to sign deals to take advantage of tax credits before they expire on April 30th.

Treasuries were higher, as the yield on the 2-year note fell 3 bps to 1.02%, while the yield on the 10-year note lost 2 bps to 3.84% and the 30-year bond yield declined 1 bp to 4.72%.

Sentiment low in the UK, growth solid in China

In international economic news, continuing uncertainty in Greece was illustrated by early movements in the bond markets, with the 10-year Greek bond falling and the spread between German bonds known as bunds—a measure of risk of holding debt out of Greece—jumping above 400 basis points for the first time since the EU announced the 45 billion euro financial aid plan—with support from the IMF—which would be available to be tapped into if Greece could not raise funds in the open market. However, amid speculation that Greece may be set to tap into the EU financial backstop, as the Greek Prime Minister has requested a meeting with the EU and IMF next week, yields on Greece’s bonds came down and its equity markets erased early losses and finished solidly higher. According to an emailed statement obtained by Bloomberg, the Greek Prime Minister said that the meeting did not automatically mean Greece will seek aid, and “whether we activate or don’t activate the mechanism we’ll see in due course.” In other European economic news, a measure of consumer confidence in the UK unexpectedly deteriorated in March, falling to the lowest level since July of 2008. The sentiment index fell 9 points to a level of 72, while a separate survey showed expectations for the economy in the next six months fell 11 points to 105. The sour reading on sentiment comes just weeks before Parliamentary elections in the UK, where polls indicate that neither political party has managed to convince voters that they will be able to better pull the country through the worst recession on record. Meanwhile, a report out of Spain showed that consumer prices in March rose by an amount that matched the expectations of economists surveyed by Bloomberg, and Italy’s trade balance narrowed in February.

In Asia/Pacific news, a report showed China’s GDP grew more than forecast. The Chinese economy expanded 11.9% y/y in 1Q, compared to the 10.7% growth in 4Q and the expectations of economists surveyed by Bloomberg, which called for the nation’s output to increase by 11.7%. The gain is the largest since the second quarter of 2007, according to the statics bureau. Meanwhile, separate reports showed that Chinese consumer and producer prices rose at a rate below forecasts, while industrial production climbed 18.1% and retail sales increased 18%, both inline with forecasts. The larger-than-expected 1Q GDP growth and smaller-than-forecasted inflation data increased uncertainty as to whether the Chinese government will deploy further measures to cool down the economy or if the data will lead to an appreciation of the country’s yuan currency. In other economic news, Japan’s Industrial production was revised to a smaller-than-initially forecasted decline in February.

New home construction data expected tomorrow

Tomorrow’s economic calendar yields housing starts for March, expected to show an increase of 6.1% month-over-month (m/m) to an annual rate of 610,000 units, after falling 5.9% in February, while building permits, a leading indicators of future activity are forecasted to decline 1.9% m/m, which would make the third straight monthly decline in permits.

Homebuilder confidence has increased from the bottom, as order, cancellation and traffic trends have improved from the bottom, catalyzed by the homebuyer tax incentive. However, from the trough, sales of new homes have lagged existing homes, posting only five positive m/m increases in the past 12 months, versus seven positive m/m increases for existing homes, as foreclosures have pressured prices of existing homes, increasing their attractiveness. After the initial tax credit passed, there was a lull in housing market activity, complicated by seasonal and weather factors. However, the pending home sales release for the month of February was the first bullish piece of housing data after the renewal of the tax credit, indicating a pickup in contracts signed, which can turn into existing home sales in one to two months, subject to complications surrounding closings.

The future of the housing market is questioned as buyers have until April 30 to enter contracts before the expiration of the credit, and the threat of future foreclosures is on the horizon. Today, RealtyTrac said that foreclosures surged 19% in March m/m, as typical seasonally, but noted that bank repossessions (REOs) – properties foreclosed and repurchased by a bank - were the highest quarterly total ever seen in their report, indicating banks are starting to make a dent in the distressed inventory that has been built up over the past year. Additionally, first time foreclosure auctions jumped to the highest quarterly total in the history of the report, which dates back to January 2006.

The other economic release in the US tomorrow is the preliminary April reading of the University of Michigan Sentiment Index, expected to rise to 75.0 from 73.6.

It is anticipated to be a light day in international economic releases, consisting of euro-zone CPI, as well as Canadian manufacturing and auto sales.