Weekend Market Summary

Another Week in the Green

Stocks reacted favorably to a dramatic increase in new home sales and some positive components of the durable goods orders report, to close the eighth-straight week of gains on the Dow Jones and Nasdaq. Greece was also in focus today, as it officially requested to tap the EU and IMF's 45 billion euro bailout fund. Meanwhile, investors continued to absorb a number of earnings reports, which continued a theme of generally better-than-expected profits, although some companies have been hurt by issuing lower full-year guidance. Microsoft, Amazon.com, and Honeywell International all reported earnings that topped the Street's expectations, while Travelers Companies missed and lowered its full-year outlook. American Express and Xerox both helped to lift the market by topping analysts’ forecasts, and Capital One Financial Corp also reported strong results for the quarter. The strong performance in equities and generally positive economic data sent Treasuries lower.

The Dow Jones Industrial Average gained 70 points (0.6%) to close at 11,204, the S&P 500 Index rose 9 points (0.7%) to 1,217, and the Nasdaq Composite increased 11 points (0.4%) to 2,530. 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 $1.41 higher at $85.11 per barrel, wholesale gasoline was $0.05 higher at $2.35 per gallon, and the Bloomberg gold spot price rose $14.48 to $1,155.97 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was down 0.2% to 81.42. For the week, the DJIA rose 1.68%, while the S&P 500 Index gained 2.11%, and the Nasdaq Composite gained 1.97%.

Dow member Microsoft Corp. (MSFT $31) reported fiscal 3Q EPS of $0.45, three cents above the consensus estimate of Wall Street analysts, with revenues increasing 6% year-over-year (y/y) to $14.5 billion, roughly inline with the Street’s forecasts. The software firm said its Windows 7 "continues to be a growth engine," but it also saw strong growth in areas like Bing search, Xbox Live, and its emerging cloud services. Despite the results, shares finished lower.

Also, Travelers Companies Inc. (TRV $53) reported 1Q EPS ex-items of $1.22, compared to the $1.38 that the Street had expected, and net written premiums at the property casualty insurance firm rose 1% y/y to $5.3 billion. The company said, "It was an unusually significant catastrophe quarter," primarily due to several severe winter storms in the eastern US as well as the Chilean earthquake, but the impact of these catastrophes was largely offset by favorable prior year reserve development. Moreover, the Dow member issued full-year EPS guidance that missed the Street's forecast and its shares traded lower as the results and outlook are overshadowing the announcement that it raised its regular quarterly dividend by 9% to $0.36 per share.

Fellow Dow component American Express Co. (AXP $48) reported 1Q earnings of $0.73 per share, above the $0.64 that analysts were anticipating, with revenues increasing 11% y/y to $6.6 billion, also topping the Street’s expectations, which called for the company to post revenues of $6.4 billion. The company said cardmember spending was up 16% y/y, while credit metrics also continued the improvement that began in the second half of 2009. AXP added that the biggest turnarounds in spending came from corporate cardmembers, while consumer and small business volumes also rose in part because of strength in travel, entertainment and other discretionary categories. Shares were higher.

Capital One Financial Corp. (COF $47) reported 1Q EPS of $1.40 per share as revenue increased 29% to $4.29 billion, compared to analysts' estimates of $0.58 EPS and revenue of $4.13 billion. Loan-loss provisions for the quarter were $1.48 billion, down 31% y/y and down 20% from the previous quarter. The company also noted that its net charge-off rate climbed to 6.01% from 5.41% y/y, while delinquencies of at least 30 days were 4.22%, up from 4.10% last year, although both figures have improved from last quarter. Shares finished higher.

Amazon.com Inc. (AMZN $144) announced 1Q EPS of $0.66, six cents above the consensus Wall Street forecast, with revenues jumping 46% y/y to $7.1 billion, above the $6.9 billion that analysts’ were anticipating. However, shares were lower after the online retailer issued 2Q operating earnings guidance that came in below expectations.

Honeywell International Inc. (HON $48) reported 1Q EPS of $0.50, including a non-cash pension expense, two cents above analysts' expectations, while excluding the charge, earnings at the manufacturing conglomerate were $0.68 per share. Revenues rose 3% y/y to $7.8 billion, above the $7.6 billion that the Street was forecasting. HON raised its full-year EPS guidance but shares traded higher.

Xerox Corp. (XRX $11) posted 1Q EPS ex-items of $0.18, compared to the $0.13 that analysts had anticipated, with revenues increasing 33% y/y to $4.7 billion, above the $4.6 billion that the Street forecasted. The company said its results reflect improving demand for its document technology in developing markets and from small and mid-size businesses. XRX issued 2Q EPS guidance that exceeded estimates and said its full-year profits are expected to be at the high end of its prior guidance. Shares finished solidly higher.

Durable goods mixed, new home sales on the horizon

Durable goods orders unexpectedly fell, dropping 1.3% month-over-month (m/m) in March, versus the 0.2% gain that was forecast, while February was upwardly revised to a 1.1% advance from 0.5%, snapping a three-month winning streak for the headline reading. However, ex-transportation, orders rose 2.8%, better than the 0.7% increase that was expected, and February's 0.9% advance was revised to a 1.7% gain. As illustrated by the aforementioned data, monthly orders data of goods intended to last at least three years can be very volatile as large orders for items such as airplanes and military equipment have a tendency to distort the data.

Additionally, non-defense capital goods excluding aircraft, considered a good proxy for business spending rose 4.0%, gaining ground for the second-straight month. Although the report at the headline level disappointed, after stripping out the more volatile and less-consumer focused components of the release, the data showed that demand continues to gain steam, improving the outlook for employment and the overall economic recovery. Given that inventories were cut to the bone during the recession and demand has showed signs of relative strength, the manufacturing sector has led the recovery and further demand for goods will likely prompt manufacturers to continue to ramp up production, which may eventually increase the need to hire more workers. As the employment picture improves, the consumer's-which accounts for the lion's share of the economy-propensity to spend will also rise as the shackles around the purse strings loosen, providing more sustenance to a positive feedback loop of increased demand, to higher manufacturing activity, to increasing need for workers, which bodes well for the continuation of the recovery. Also, with wage pressures tame and capacity utilization below normal levels, inflation should remain off the Fed's radar at least in the near-term and pressure to hike rates seems likely to continue to be small, favoring the outlook for GDP growth.

The headline number for the March report at 59.6 showed continued expansion in the manufacturing arena-for the eighth straight month-and was the highest reading since July 2004. The employment component of the report fell slightly from 56.1 to 55.1 but remained in expansionary territory for the fourth straight month, which bodes well for continued job gains.

As the employment picture seems close to beginning to contribute to our economic prosperity, the housing market, another major headwind that has stymied the consumer and the economy received some favorable news in the form of today's new home sales, which bounced off a record low, with sales jumping 26.9% m/m in March to an annual rate of 411,000 units. Economists forecasted new home sales would increase 5.5% m/m to an annual rate of 325,000 units. February’s results were upwardly revised to an annual rate of 324,000 units versus the 308,000 annual rate previously reported. The median price of a new home increased 4.3% year-over-year (y/y) to $214,000, while inventory fell from 8.6 to 6.7 months of supply at the current sales rate. The housing data today compliments yesterday's better-than-expected increase in existing home sales, which makes up the bulk of total home sales, to add further support the outlook for the consumer that has seen its net worth tumble amid the destruction of the housing market in the past several years. However, some of the jump in sales may have been attributed to homebuyers trying to take advantage of the previously-extended government tax credit before its scheduled expiration at the end of April, since new home sales are based on contracts signed as opposed to closings as is the case with existing homes.

Treasuries finished the day lower, as the yield on the 2-year note was up 4 bps to 1.07%, while the yield on the 10-year note gained 4 bps to 3.81% and the 30-year bond yield rose 3 bps to 4.66%.

A "new Odyssey" for Greece

Greece requested permission to access the 45 billion euro financial aid package from the EU and International Monetary Fund (IMF). Details on the request have not been disseminated, which curbed some of the enthusiasm as it is unknown what changes Greece may have to make or how long the approval process will take for it to gain control of the funds. The process needs to be approved at several levels and could take several weeks, and concerns are high that it will not receive the funds before the May 19th maturity of a bond that will require 8 billion euros to be paid out to Greek bondholders. Reuters reported that Greece's Finance Minister said, "We expect to have funds from the mechanism before May 19." Meanwhile, Bloomberg quoted the Greek Prime Minister as saying, "It is a matter of national need to ask officially" for the activation of the rescue package. He added that turning over economic policy to EU and IMF oversight was "a new Odyssey for Greece". Yields on Greek bonds dipped on the news of the request, but the spread of Greek 10-year debt over German bunds has risen nearly 200 bps since the start of last week, and climbed as high as 590 bps today. The EU has said that it is prepared to lend Greece three-year funds this year, at an interest rate of around 5%, but has declined to say what support it would provide beyond one year. More than half of the funding for this support will come from Germany and France, who will contribute 8.4 billion and 6.3 billion euros, respectively, according to an EU document obtained by Bloomberg News.

The European economic calendar also provided some support to sentiment across the pond, highlighted by a reading of business confidence in Germany-Europe's largest economy—and a separate report on euro-zone industrial new orders. The German Ifo Business Climate Index rose from 98.2 in March to 101.6 in April, and above the 98.7 that economists had expected. Moreover, euro-zone industrial new orders rose 1.5% m/m in February, above the 1.0% m/m forecast. The upbeat data and Greece action are helping overshadow a report that showed advance UK 1Q GDP expanded by a smaller amount than expected, as output in Britain rose 0.2% quarter-over-quarter (q/q), versus the anticipation of a 0.4% rise. In other economic news, French consumer spending rose more than forecasted, Spain's producer prices increased by a larger amount than expected, while Italian retail sales increased by a smaller amount than was anticipated.

In Asia/Pacific news, Taiwan reported that its industrial production rose 39.2% y/y in March, from a 35.2% y/y gain in February, and roughly matching the estimate of economists. On a related note, China also reported that its industrial output gap, which measures actual production against potential production, increased 3.06% in March. Meanwhile, Australia said its 1Q Import Price Index unexpectedly rose q/q, and the Reserve Bank of Australia's Governor Glenn Stevens said interest rates are "close to normal" after the RBA has increased its benchmark rate five times out of the past six monetary policy meetings.

Goldman cloud dissipates to help rally reiterate

After last Friday's decline on fears in the financial sector as the Securities Exchange Commission (SEC) levied a fraud charge on Goldman Sachs Group Inc. (GS $157), tarnishing last week's advance, stocks moved higher this week as 1Q earnings season ramped up and the bulls were treated to some better-than-expected economic news.

The economic calendar got started on the right foot with the twelfth-straight monthly increase in the Index of Leading Economic Indicators, but the back-end loaded docket for the week was highlighted by better-than-expected housing data, which more than offset a larger-than-forecasted increase in the Producer Price Index and a smaller-than-expected drop in weekly initial jobless claims, helping preserve the optimism for the continuation of the economic recovery.

A plethora of earnings reports hit the Street, with Citigroup Inc. (C $5), Morgan Stanley (MS $32), and Goldman Sachs Group Inc posting much better-than-anticipated profits, which helped the financial sector repair some of last week's losses. Several Dow members reported results that were mostly above the Street's forecasts, while Apple Inc. (AAPL $271) trounced results and moved to another all-time high. However, although most reports have exceeded what the Street was expecting, the market’s reaction were relatively subdued.

Federal Reserve meeting and 1Q gross domestic product next in the spotlight

Economic releases next week start 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 1.1% year-over-year (y/y) in February, which would be the first y/y increase since January 2007.

All eyes will be on the two-day Federal Open Market Committee (FOMC) meeting that concludes 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.

Friday brings the 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 3.5%, 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 next week's US economic calendar include 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.

Economic releases in Asia/Pacific next week include Japan retail trade, unemployment, CPI, industrial production, and vehicle production and Australia will announce CPI and PPI, new home sales, as well as the leading index.

In Europe, releases include euro-zone CPI, unemployment and consumer confidence, French and Italian PPI, as well as UK consumer confidence.

Releases elsewhere in the Americas include Brazil employment and the Canadian house prices, and February GDP. Additionally, the central bank of Brazil will meet to discuss monetary policy.