Morning Market Update

Bulls Try to Keep Momentum Going

The major equity markets are nearly unchanged in morning trading following another week of gains, with some major economic data looming on the horizon and amid more earnings reports from the corporate sector. Dow member Caterpillar Inc. is headlining today’s earnings calendar, posting earnings that far exceeded the Street’s profit projections excluding a charge related to the recent health care legislation and the machinery firm boosted its full-year outlook. Elsewhere, Humana Inc also increased its full-year EPS outlook, while Hertz Global Holdings is busy on multiple fronts, announcing that it has agreed to acquire Dollar Thrifty Automotive Group for about $1.3 billion and posting earnings that matched estimates. Treasuries are higher in early action, ahead of the Federal Open Market Committee meeting and the first look at 1Q GDP that are set to come out later in the week. Overseas, Asia move higher, while Europe is enjoying nice gains as Greece remains in focus.

As of 8:51 a.m. ET, the June S&P 500 Index Globex future is 1 point below fair value, the Nasdaq 100 Index is 1 point below fair value, while the DJIA is 10 points above fair value. Crude oil is up $0.37 at $85.49 per barrel, and the Bloomberg gold spot price is down $0.95 at $1,156.65 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.1% to 81.47.

Dow member Caterpillar Inc. (CAT $69 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 are nicely higher.

Car rental firm Hertz Global Holdings (HTZ $13) is making headlines on two fronts, as the company announced that it has signed a definitive agreement to acquire Dollar Thrifty Automotive Group (DTG $39) for $41.00 per share in a mix of cash and HTX 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 are higher.

Humana Inc. (HUM $46) 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. HUM also increased its full-year EPS guidance and shares are higher.

Economic docket loaded with key reports

Treasuries are higher in morning action as there are no major economic releases on today’s economic calendar, but there should be plenty of data throughout the week that should grab the attention of traders, starting with Tuesday’s release of the S&P/CaseShiller Home Price Index, which lags the sales data by a month, expected to show prices rose 1.3% year-over-year (y/y) in February, which would be the first y/y increase since January 2007.

However, as traders digest Tuesday’s housing data, the two-day Federal Open Market Committee (FOMC) meeting will begin, concluding 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.

Other reports on this week’s economic calendar include consumer confidence, the Richmond Fed Manufacturing Index, the Chicago Fed National Activity Index, the MBA Mortgage Applications Index, initial jobless claims, and the University of Michigan consumer sentiment survey.

Europe higher on mixed sentiment toward Greece

Stocks in Europe are higher in afternoon action, led by industrials and materials following some favorable earnings news across the pond, while financials are also contributing to the advance after Greece tried to soothe concerns about a possible default. The Greek 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. The reaction appears mixed as stocks in Greece are solidly lower and yields on Greek bonds have moved higher, which makes it more costly for the nation to raise capital on its own.

With the economic front lighter than usual, earnings data is dominating the headlines on the corporate front. Shares of mining equipment firm Weir Group (WEIGF $14) are solidly higher after it said it performed better than expected in 1Q and after it raised its full-year profit outlook. Also, navigation device maker TomTom (TMOAF $8) is moving nicely higher after posting an unexpected profit in 1Q. However, shares of Bank of Ireland (IRE $10) are under pressure after it announced that it will raise 3.4 billion euros to boost capital to conform to government requirements amid rising losses in the real estate markets.

The UK’s FTSE 100 Index is 0.7% higher, France’s CAC-40 Index is up 1.2%, Germany’s DAX Index is rising 1.0%, Ireland’s Irish Overall Index is advancing 0.1%, while Greece’s Athex Composite Index is declining 2.4%.

Japan jumps to lead Asia higher

Following another weekly advance in the US, stocks in Asia were mostly higher, with Japan’s Nikkei 225 Index posting a strong 2.3% gain to pace the move to the upside in the region. The Japanese markets were buoyed by some weakness in the yen versus the dollar, which helped support export issues on optimism about the outlook for revenues of companies that rely heavily on sales in the US. Also, shares of Toyota Motor Corp (TM $78) moved solidly higher to help the equity markets advance after a Japanese newspaper reported that the world’s largest automaker that has been hamstrung by recall woes will post an unexpected annual operating profit even after the company had forecasted an operating loss for the period, which ended March 31st. TM said the media reports are not based on any official announcements made by the company. However, stocks in China were mixed, with Hong Kong’s Hang Seng Index gaining 1.6%, while the Shanghai Composite Index declined 0.5%. The economic news was light in Asia and markets in Australia were closed for a holiday. Rounding out the day, Taiwan’s Taiex Index rose 1.9%, South Korea’s Kospi Index increased 0.9%, and India’s BSE Sensex 30 Index advanced 0.3%.