Evening Market Update

Lackluster Action Ahead of FOMC Meeting

The markets started the week in tepid fashion, finishing mixed and mostly rangebound as traders grappled with uncertainty surrounding Greece, while playing their cards close to the vest ahead of the two-day Federal Open Market Committee meeting which begins tomorrow. The Dow Jones Industrials Index was only able to eke out a small gain following an upbeat outlook and commentary from Caterpillar Inc. In other earnings news, Humana Inc missed estimates but increased its full-year outlook, Whirlpool Corp beat analysts’ forecasts and boosted its full-year guidance, and Hertz Global Holdings posted earnings that matched expectations and announced that it has agreed to acquire Dollar Thrifty Automotive Group for roughly $1.3 billion. Treasuries were mostly higher amid an empty US economic calendar.

The Dow Jones Industrial Average gained 1 point (0.01%) to close at 11,205, while the S&P 500 Index fell 5 points (0.4%) to 1,212, and the Nasdaq Composite declined 7 points (0.3%) to 2,523. In moderate volume, 1.2 billion shares were traded on the NYSE and 2.4 billion shares were traded on the Nasdaq. Crude oil was $0.92 lower at $84.20 per barrel, wholesale gasoline was $0.01 lower at $2.34 per gallon, and the Bloomberg gold spot price fell $5.40 to $1,152.20 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.04% to 81.38.

Dow member Caterpillar Inc. (CAT $72 ¹) reported 1Q EPS, excluding a $90 million tax charge related to the recently signed US health care legislation, of $0.50, compared to the $0.39 that Wall Street analysts had expected. Including the health care charge, the machinery firm posted EPS of $0.36, but it was unclear whether analysts’ forecasts factored in the health care impact. Revenues fell about 11% year-over-year (y/y) to $8.2 billion, below the $8.8 billion that the Street was forecasting. CAT raised its full-year guidance and said, “Economic conditions are definitely improving, particularly in the world’s developing economies,” and industry activity and orders are significantly higher than last year. Shares were nicely higher.

Car rental firm Hertz Global Holdings (HTZ $15) made headlines on two fronts, as the company announced that it has signed a definitive agreement to acquire Dollar Thrifty Automotive Group (DTG $43) for $41.00 per share in a mix of cash and HTZ common stock, for a total value of about $1.3 billion. Meanwhile, HTZ reported a 1Q adjusted net loss of $0.12 per share, inline with the Street’s expectations, with revenue rising 6.1% y/y to $1.7 billion above the $1.6 billion that analysts were anticipating. HTZ also raised its full-year guidance. HTZ and DTG were both sharply higher.

Humana Inc. (HUM $44) reported 1Q EPS ex-items of $1.11, below the $1.15 that the Street was looking for, with revenues increasing 9.5% y/y to $8.4 billion above the $8.3 billion that analysts were expecting. The health benefit firm said its total premium and administrative services fees were up 9.2% y/y, reflecting a 19% increase in average membership for its Medicare Advantage plans and continued pricing discipline across all of the company’s lines of business. HUM also increased its full-year EPS guidance but shares gave up an early gain and finished lower.

Whirlpool Corp. (WHR $112) reported 1Q earnings of $2.13 per share, above the $1.30 that analysts had expected, with revenues increasing 20% y/y to $4.3 billion, besting the $3.8 billion forecast of analysts. The appliance maker said it is encouraged with an 18% increase in its global unit volumes during the quarter. WHR was sharply higher on the results and after it boosted its full-year EPS outlook from a range of $6.50-7.00 to $8.00-8.50, compared to the $6.98 that the Street was anticipating.

Economic docket loaded with key reports

Treasuries finished the day mostly higher as there were no major economic releases on today’s economic calendar to influence trading in the bond market. The yield on the 2-year note was down 2 bps to 1.05%, the yield on the 10-year note lost 1 bp to 3.81%, while the 30-year bond yield was flat at 4.67%.

However, there will be plenty of data throughout the week that should grab the attention of traders, starting with the two-day Federal Open Market Committee (FOMC) meeting, which will begin tomorrow and conclude with the release of the statement mid-day Wednesday. No changes are expected to interest rate policy at the meeting. While some attention has been paid to when the Fed would change the “extended period” language as to the timing of keeping rates at an exceptionally low rate, market participants are also watching for other moves the Fed may take to begin tightening using measures such as raising the interest rate paid on funds deposited at the Fed, term deposits, which are analogous to certificates of deposit, as well as reverse purchase agreements that temporarily drain cash from the system. Additionally, there have been increased rumblings about when the Fed would begin to contemplate selling assets from their balance sheet.

Perhaps the biggest report will be Friday’s first reading of Gross Domestic Product (GDP) for 1Q, considered a proxy for corporate profits. Economists are expecting overall economic growth slowed to a q/q annualized rate of 3.4%, down from the 5.6% pace reported in 4Q, while forecasting an increase in the rate of personal consumption to 3.1% from 1.6%. The GDP Price Index is anticipated to accelerate to 0.9%, prices at the core PCE (personal consumption expenditures) level slowed to 0.5% from 1.8%. GDP in 4Q was boosted by a slower pace of inventory consolidation, which added 3.9% to GDP, as well as capital spending on equipment and software, net exports and consumer spending.

Mixed sentiment toward Greece

In the attempt to soothe concerns about a possible default in Greece, the nation’s finance minister said the country expects to take control of at least a portion of the 45 billion euro financial aid package from the EU and IMF in time to cover maturing debt payments on May 19th, avoiding a default. He also said that the funds would be available “rather soon” and warned investors betting on a Greek default that “they will lose their shirts.” Approval to gain access to the financial aid package largely rests with the blessing from Germany, Europe’s largest economy, which is demanding that Greece accepts “harsh measures for several years,” referring to further deficit-reduction measures, and talks continue between all parties involved. The reaction appeared mixed as yields on Greek bonds surged to all-time highs, which makes it more costly for the nation to raise capital on its own, exacerbating concerns about whether Greece can meet obligations on a longer-term basis even after the 45 billion euros have been deployed.

Tomorrow’s economic calendar will yield the S&P/CaseShiller Home Price Index, which is expected to show home prices in the 20-city composite index rose 1.3% y/y in February, which would mark the first rise since December 2006. Housing remains a concern at the Fed as further additions to the already “very large” inventory of vacant homes pose downside risks to home prices, which have contributed to the massive destruction in household net worth, amplifying consumer spending reluctance and bogging down the economy. Although the report lags sales data by a month, the forecasted increase could add to the optimism that the housing market—one of the few sectors in the economy that has yet to meaningfully contribute to the recovery—continues to stabilize as it will compliment the better-than-expected new and existing home sales reports in the last two weeks to possibly catch the attention of Fed policy makers as they begin their two-day meeting tomorrow.

The only other item on the US economic calendar tomorrow will be consumer confidence. Internationally, reports will include a consumer confidence measure in Germany, CPI in Australia, and Japan will report retail sales and its trade balance.