Evening Market Update

Markets Jump Amid Plethora of Events

The equity markets rallied to start the week amid news of a bailout agreement for Greece, and following another month of expansion in the ISM Manufacturing Index, increases in personal income and spending, and an unexpected rise in construction spending. M&A activity aided sentiment, with UAL Corp, the parent of United Airlines, and Continental Airlines Inc agreeing to a $3 billion merger-of-equals, while Avis Budget Group Inc. said it would like to make a “substantially higher offer” to acquire the car rental company Dollar Thrifty Automotive Group Inc. Elsewhere, US auto sales for April were reported, with Ford Motor Co., General Motors, Chrysler, Toyota Motor, and Hyundai Motor all posting impressive sales increases, while Clorox reported profits that exceeded estimates. Also, oil firm BP provided an update on its oil spill. Treasuries finished lower on the day.

The Dow Jones Industrial Average jumped 143 points (1.3%) to close at 11,152, while the S&P 500 Index gained 16 points (1.3%) to 1,202, and the Nasdaq Composite added 38 points (1.5%) to 2,499. In moderate volume, 1.2 billion shares were traded on the NYSE and 2.3 billion shares were traded on the Nasdaq. Crude oil rose $0.04 to $86.19 per barrel, wholesale gasoline was $0.04 higher at $2.44 per gallon, and the Bloomberg gold spot price gained $2.70 to $1,181.90 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.6% to 82.35.

UAL Corp. (UAUA $22), the parent of United Airlines, and Continental Airlines Inc. (CAL $23) announced that they have reached a definitive all-stock merger-of-equals agreement, in which CAL shareholders will receive 1.05 shares of UAUA for each share owned. The deal, which will form the world’s largest airline, is valued at about $3 billion and UAUA shareholders will own 55% of the equity of the combined company and CAL shareholders will own about 45%. Shares of both firms were higher.

In other M&A news, Avis Budget Group Inc. (CAR $15) sent a letter to Dollar Thrifty Automotive Group Inc. (DTG $51), saying it would like to make a “substantially higher offer” to acquire the car rental company compared to the $41 per share or $1.3 billion agreement it reached last week to be acquired by Hertz Global Holdings Inc. (HTZ $14). In a letter to DTG’s chairman and CEO, Avis said it was “very surprised” by its agreement with HTZ as it has on several occasions in the past expressed interest in entering into a transaction with DTG. DTG was sharply higher, while CAR and HTZ were lower.

Ford Motor Co. (F $13) was higher after it reported adjusted April US auto sales rose 25% year-over-year (y/y), compared to the 28% that analysts were anticipating, saying it gained retail market share for the 18th time in the last 19 months. Meanwhile, General Motors reported that adjusted US sales grew 20% y/y in April, compared to the gain of 7% that analysts were anticipating, and Chrysler reported a 25% increase in vehicle sales during the same month. Foreign automakers fared just as well, with Toyota Motor Co. (TM $78) posting a y/y increase of 24% in April, aided by incentives to spur demand following its recall debacle, while Hyundai Motor (HYMTF $22) saw a 30% y/y increase. Shares of TM and HYMTF were higher.

Clorox Co. (CLX $64) reported fiscal 3Q EPS ex-items of $1.23, well above the $1.08 consensus estimate of Wall Street analysts, with revenues rising about 1% y/y to $1.4 billion, matching the Street’s estimation. The consumer product firm said earnings were driven by higher volumes, which grew 3% due to several major brands, including its disinfecting wipes, Hidden Valley salad dressings, Fresh Step cat litter, and Kingsford charcoal. CLX raised the low end of its full-year EPS range and issued an outlook for earnings next year, which the midpoint of its range was below analysts’ forecasts. Shares were lower.

The massive oil spill in the Gulf of Mexico remained in the headlines and energy firm BP Plc (BP $50), whose oil rig is at the cause of the oil pollution, vowed to pay “all necessary and appropriate clean-up costs” from the disaster. BP said it began drilling a relief well Sunday evening in the hopes of halting the leakage, after having to wait until inclement weather had cleared in order to start the procedure, which could take months to complete. Shares of BP were lower in US trading.

Manufacturing improves again, personal income and spending rise as expected

Headlining today’s economic calendar, the ISM Manufacturing Index (chart) improved from an unrevised 59.6 in March to 60.4 in April, just above the consensus forecast of economists surveyed by Bloomberg, which anticipated an increase to 60.0. New orders posted another solid gain, rising from 61.5 in March to 65.7 but prices paid also rose, improving from 75.0 to 78.0—the tenth-straight month of increasing prices.

The manufacturing sector has expanded for the ninth-consecutive month in April and reached above the 60 mark for the first time since June 2004, suggesting manufacturing activity continues to lead the economic recovery. However, the employment component of the report is likely to garner the most optimism, given the Fed’s modest upgrade to the employment outlook—from "stabilizing" to "beginning to improve"—and ahead of this week’s labor report, which is forecasted to show 188,000 jobs were added to nonfarm payrolls. The employment component improved from 55.1 in March to 58.5 in April, and has depicted expanding conditions for the five months in a row.

Kicking off the economic week, personal income kicked off the economic week, rising 0.3% in March, matching economists’ consensus estimate, and February’s flat reading was revised to a 0.1% increase. Personal spending rose 0.6% in March, also inline with expectations, and February’s 0.3% increase was upwardly revised to a 0.5% gain. The savings rate declined to 2.7% in March, after a slightly downwardly revised 3.0% reading for February.

Also, the PCE Price Index, which is released with the income and spending data, increased 2.0% year-over-year (y/y) in March, matching the consensus forecast, and February’s 1.8% rise was left unchanged. The core PCE Price Index, which excludes food and energy, was 0.1% higher month-over-month (m/m), inline with expectations. Year-over-year, core prices moved 1.3% higher, also inline with the consensus of economists surveyed. Treasuries remain lower, extending losses after the income and spending data.

In other economic news, construction spending was also released this morning and unexpectedly rose, increasing by 0.2% in March, compared to the expectation of a 0.5% decline, but February’s 1.3% decrease was revised to a 2.1% drop.

Treasuries finished lower on strength in the equity markets. The yield on the 2-year note was up 4 bps to 1.00%, the yield on the 10-year note gained 4 bps to 3.70%, and the 30-year bond yield was 1 bp higher at 4.53%.

Europe and IMF agree on Greece package

European Union (EU) and International Monetary Fund (IMF) officials agreed upon a 110 billion euro ($147 billion) financial rescue package for the debt-ridden nation of Greece. However, uneasiness lingered regarding other highly indebted nations in the region such as Portugal and Spain, and how Greece will deal with the demands of the agreement. As part of the deal, Greece agreed to austerity measures in which it will be required to cut wages, increase taxes, and cut pension payments and raise retirement ages for some public-sector workers. Euro-zone nations and officials must provide approval for Greece to take control of the funds and it is expected to receive the first installment before some of the nation’s debt obligations mature on May 19th, avoiding default and debt restructuring.

In international economic news, euro-zone Manufacturing PMI for April was revised slightly higher, after Germany’s Manufacturing PMI was revised to a level above economists had originally forecasted. In Asia, retail sales in Hong Kong posted a smaller-than-expected year-over-year increase for March. Concerns continue about the impact of the Chinese government’s actions to further rein in excess liquidity by raising the reserve requirement that banks needed to maintain for the third time this year. China ordered banks to increase the amount that they need to keep in reserve at the nation’s central bank by another 50 basis points to 17% for the country’s biggest lenders as it tries to avoid the formation of asset bubbles and cool down its economy. Also, South Korea’s Manufacturing PMI showed an improvement, while the nation’s consumer prices rose more than economists had expected in April, and Taiwan’s Manufacturing PMI deteriorated for the second-straight month, although it remained at a level depicting expansion.

Tomorrow’s US economic calendar will yield factory orders, expected to fall 0.1% during March after rising 0.6% the month prior, and pending home sales, with the pipeline of existing home sales anticipated to rise 5.0% in March after gaining 8.2% in February.

Internationally, economic reports include retail sales in Germany, mortgage approvals in the UK, the PPI for the euro-zone, while the Reserve Bank of Australia meets to discuss monetary policy.