Evening Market Update

Fed Leaves Rates and Language Unchanged, Markets Advance

Stocks finished the day higher, overcoming early adversity on euro-zone debt concerns, as traders reacted positively to the Federal Reserve’s decision to leave the fed funds rate unchanged at a range of 0-0.25%. Focus was again on the Fed’s language, as it reiterated that economic conditions “are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” The decision, as well as a report showing that mortgage applications declined last week, moved Treasuries to the downside, after substantial gains were seen yesterday. Earnings continued to dominate equity news, highlighted by positive reports from Dow Chemical Co, Comcast Corp, Broadcom Corp and Corning Inc, while Sprint Nextel Corp reported a loss that matched expectations, but noted a smaller-than-expected decline in post-paid customers. After the close, Hewlett-Packard Co. announced that it will acquire Palm Inc. in a deal valued at approximately $1.2 billion.

The Dow Jones Industrial Average gained 53 points (0.5%) to close at 11,045, while the S&P 500 Index rose 8 points (0.6%) to 1,191, and the Nasdaq Composite was flat at 2,472. In moderately heavy volume, 1.4 billion shares were traded on the NYSE and 2.7 billion shares were traded on the Nasdaq. Crude oil rose $0.78 to $83.22 per barrel, wholesale gasoline was flat at $2.33 per gallon, and the Bloomberg gold spot price fell $0.45 to $1,167.40 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.1% to 82.30.

Dow Chemical Co. (DOW $32 ¹) reported 1Q EPS ex-items of $0.43, well above the $0.30 that Wall Street analysts were anticipating, with revenues jumping 48% year-over-year (y/y) to $13.4 billion, above the $13.0 billion that the Street was looking for. The company said its robust sales growth was driven by “significant” volume and price increases in all geographic areas, with notable improvements in North America and Europe. Shares were nicely higher.

Comcast Corp. (CMCSA $19) announced 1Q EPS of $0.31, one penny above analysts’ forecasts, as revenues rose 3.8% y/y to $9.2 billion, roughly inline with the Street’s estimates. The company said it added 590,000 net video, high-speed internet, and Comcast digital voice customers during the quarter. CMCSA added that its results were driven by “robust customer growth,” a rebound in advertising, momentum in business services and its continued focus on expense and capital management. Shares finished higher.

Sprint Nextel Corp. (S $4) posted an adjusted 1Q net loss of $0.17 per share, matching the consensus estimate of analysts, with revenues declining 1.5% to $8.1 billion, roughly inline with the Street’s forecast. The company said it lost a total of 75,000 net subscribers, but shares traded higher after the company shed 578,000 post-paid customers—the more profitable industry coveted clients—compared to the estimate of analysts surveyed by Reuters, which called for a loss of over 600,000 customers.

Broadcom Corp. (BRCM $35) shares were solidly higher after the semiconductor firm reported 1Q EPS ex-items of $0.67, above the $0.48 that analysts were anticipating, with revenues surging 71.3% y/y to $1.5 billion, above the $1.4 billion that the Street forecasted. BRCM issued 2Q revenue guidance that exceeded estimates.

Corning Inc. (GLW $20) reported 1Q profits surged 420% y/y to $0.52 per share, ten cents above the consensus estimate, and revenues increased 57% y/y to $1.6 billion, above the $1.5 billion that was anticipated on the Street. The maker of glass display screens for TVs, handheld and other electronic devices, said it experienced excellent results across nearly all its major business units, and it was particularly pleased with the performance in its display technologies, where it was “essentially sold out.” GLW also said that higher-than-expected demand for LCD TVs, laptops, and desktop computers in 1Q, along with an improved outlook for these consumer electronics products through the remainder of the year, have led it to raise expectations for annual growth of the LCD glass market. Shares finished lower after relinquishing an early advance.

In M&A activity, Hewlett-Packard Co (HPQ $53) announced after the market close that it will acquire Palm Inc. (PALM $5), at a price of $5.70 per share of Palm common stock in cash, or an enterprise value of approximately $1.2 billion.

Fed leaves rates unchanged, extended period language maintained

The Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting by making no changes to the language with regard to the “extended period” for keeping rates at an exceptionally low rate and no changes to the fed funds target rate of a level between 0-0.25%.

On the overall economy, the Fed said information received since it last met in March suggests that economic activity has continued to strengthen, while upgrading the status of the labor market, from “stabilizing” to “beginning to improve,” and noting that housing starts have edged up, while remaining at a depressed level. There was no change to the Fed’s assessment of inflation, with the Fed saying that substantial resource slack is continuing to restrain cost pressures, and with longer-term inflation expectations stable, inflation is likely to be subdued for some time. Thomas M. Hoenig was the lone dissenter for the third-straight meeting, continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the build-up of future imbalances and increase risks to longer-run macroeconomic and financial stability. Hoenig’s dissent added further clarification that the “pre-commitment” language of exceptionally low for an extended period limits the Fed’s flexibility to begin to raise rates modestly.

Treasuries finished lower following the announcement, as the yield on the 2-year note was up 3 bps to 1.02%, the yield on the 10-year note gained 7 bps to 3.76%, and the 30-year bond yield was 5 bps higher at 4.62%.

In other economic news, the US MBA Mortgage Application Index, which declined 2.9% last week, after the index that can be quite volatile on a week-to-week basis, rose 13.6% in the previous week. The decrease came amid an 8.8% drop in the Refinance Index, offsetting a 7.4% gain in the Purchase Index. Moreover, the decline in the overall index came on a 4 basis-point increase in the average 30-year mortgage rate, which rose to 5.08%, remaining above the record low of 4.61% that was reached at the end of March 2009.

S&P downgrades Spain, talks continue on Greek bailout

Wounds from yesterday’s Standard & Poor’s downgrades of the sovereign credit ratings of Greece—to “junk status”—and Portugal were reopened after S&P downgraded its rating on Spain. An S&P analyst said that it now believes that the “Spanish economy’s shift away from credit-fuelled economic growth is likely to result in a more protracted period of sluggish activity than we previously assumed.” Stocks had pared a majority of losses prior to the downgrade on speculation that the 45 billion euro financial aid package approved by EU and International Monetary Fund (IMF) for Greece could be received soon.

EU and IMF officials continue to talk about granting Greece the approval to tap into the 45 billion euro financial rescue package in time to meet obligations that are maturing in mid-May, and some reports have suggested this amount could be ratcheted up sharply, possibly to 120 billion euros over a three year period. Reports out of the debt-ridden nation suggest it could receive approval to use the funds by this weekend or next week. The approval seems to hinge on the decision from Germany—Europe’s largest economy—which has warned that Greece will have to make further austerity measures to combat its deficit problems and ensure long-term fiscal sustainability, and Germany’s Finance Minister said a decision on aid could come as soon as May 7th. Yields on Greek bonds surged again, with Bloomberg noting that the rate on its two-year note moved above 26% before falling back to around 17% on the funding optimism, while the ten-year bond yield jumped to 800 basis points above the rate for a comparable German bond, known as a bund. The extremely high yields make it prohibitively costly for the nation the raise capital on its own in the open markets, which is also exacerbating the problem the Greek nation faces.

Meanwhile, there were some other news across the pond that deserved a mention, as Spanish retail sales rose 3.5% y/y in March, Italian business confidence improved by a larger amount than expected in April, and Sweden’s unemployment rate unexpectedly fell in March. Moreover, Germany reported that its CPI unexpectedly fell month-over-month (m/m) in April, bringing the y/y rate to 1.0%, compared to the 1.2% forecast.

In Asia/Pacific news, Japanese retail sales climbed 4.7% y/y in March, the largest increase in 13 years. The positive report, as well as recent readings showing unemployment at an 11-month low, could weigh on discussions by the Bank of Japan, when it meets later this week to set target rates and decide on whether to expand emergency loan programs. Meanwhile, a report showed Australian consumer prices rose more than forecasted in 1Q, which exacerbated sentiment that the nation’s economy could face headwinds as it supported economists’ expectations that the central bank will raise its benchmark interest rate for the sixth time in seven meetings next week. The Chinese government reaffirmed a “moderately loose” monetary policy, as the euro-zone debt woes were a concern, saying that “The world economy may stage a recovery in 2010, yet the foundation is still fragile,” according to Bloomberg News. Also, Reuters reported that China will place a moratorium on capital-raising by real estate companies. Additionally, New Zealand’s gauge of business confidence improved to the highest level in 11 years in April, ahead of the nation’s central bank monetary policy announcement later today, where it is expected to keep its benchmark interest rate unchanged at 2.5%.

Tomorrow’s US economic calendar will include the Chicago Fed National Activity Index, which is expected to have declined by 0.2, after falling by 0.64 in February, as well as weekly initial jobless claims, which economists are expecting to fall to 445,000 from a previous reading of 456,000.

On the international front, euro-zone consumer confidence will released, as well as Australia’s leading index, and Brazil’s monthly unemployment reading.