Evening Market Update

Stocks Slide Amid Continued Euro-Zone Concerns

Stocks were solidly lower on Friday as traders continue to grapple with the spending cuts required in the euro-zone to reduce deficits, weighing on the growth outlook for both Europe as well as the global recovery. The euro fell to the lowest level versus the dollar since October 2008, which could lower the earnings for companies doing business in Europe after being translated back to dollars. Treasuries were higher in a flight to safety despite a better-than-expected reading for US retail sales and larger increase in industrial production. In other economic news, business inventories increased inline with forecasts and the preliminary reading on consumer sentiment from the University of Michigan was slightly below estimates. Several retailers reported earnings, with JC Penney issuing disappointing guidance, Nordstrom Inc missing and Dillard's Inc beating estimates. In other equity news, CA Inc and NVIDIA earnings reports were below forecasts, and credit card firms were under pressure after a Senate vote regulated the fee the firms can charge for debit card transactions. Elsewhere, videogame manufacturers fell after a report showing sales fell in April.

The Dow Jones Industrial Average fell 163 points (1.5%) to close at 10,620, while the S&P 500 Index lost 22 points (1.9%) to 1,136, and the Nasdaq Composite was 48 points (2.0%) lower at 2,347. In moderately heavy volume, 1.5 billion shares were traded on the NYSE and 2.6 billion shares were traded on the Nasdaq. Crude oil fell $2.19 to $71.61 per barrel, wholesale gasoline lost $0.07 to $2.13 per gallon, while the Bloomberg gold spot price declined $2.05 to $1,230.65 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was up 0.8% to 86.14. For the week, the DJIA gained 2.3%, the S&P 500 Index added 2.2%, and the Nasdaq Composite advanced 3.6%.

JC Penney Co. Inc.(JCP $28) reported 1Q EPS of $0.25, matching the consensus estimate of Wall Street analysts, with revenues rising 1.2% year-over-year (y/y) to $3.9 billion, also inline with the Street’s forecast. Same-store sales-sales at stores open at least a year-rose 1.3%, with strongest results in men's, shoes and handbags, and children's. JCP added that although its customers remain concerned about their budgets, they respond well to merchandise that is new and trend-right at compelling prices. The company issued 2Q and full-year EPS guidance that missed analysts' estimates. Shares were lower.

In related industry news, Nordstrom Inc.(JWN $40) announced 1Q EPS of $0.52, three cents below the Street's forecast, with revenues increasing 16.7% y/y to $1.99 billion, roughly inline with analysts' expectations. Same-store sales increased 12.0% y/y, with jewelry, dresses and women's shoes being the top performing merchandise categories. JWN raised its full-year EPS outlook. JWN was lower.

However, fellow department store Dillard's Inc.(DDS $28) was nicely higher after it posted 1Q EPS ex-items of $0.70, well above the $0.51 that analysts were expecting, but revenues dipped 1.4% y/y to $1.5 billion, roughly matching the Street's forecast. Inventory management and cost controls led to the better-than-expected EPS performance.

CA Inc.(CA $21) reported fiscal 4Q EPS ex-items of $0.34, two pennies below analysts' expectations, with revenues increasing 7% y/y to $1.1 billion, roughly matching the Street's forecast. The IT management software firm issued annual EPS guidance for its next fiscal year that exceeded analysts' forecasts. Shares were down.

Credit card transaction firms, such as Visa Inc. (V $77) and MasterCard Inc. (MA $212) were under solid pressure after a Senate vote approved a proposal that would bring two changes to the credit card industry. Part of the proposal would allow the government to regulate fees on debit card transactions, which could result in lower fees for debit card transactions and margins of card companies. Also, the proposal would give merchants authority to give incentives, such as discounts, to customers who pay with cash, check, or debit cards. The proposal still needs to be approved by the House. Other credit card firms such as Dow member American Express Co. (AXP $41), Capital One Financial Corp. (COF $43) and Discover Financial Services (DFS $14) also came under pressure.

NVIDIA Corp. (NVDA $13) was sharply lower after the graphics chip maker issued a 2Q revenue forecast that came in below what analysts were anticipating, saying it expects revenues to decline between 3-5% from $1.0 billion in 1Q-which it reported today and topped the $987 million Street forecast-versus the $991 million that analysts were expecting. NVDA also reported 1Q EPS of $0.23, two cents above the consensus estimate of analysts.

NVDA may have also found pressure from a report from NPD Group that showed videogame sales fell 26% y/y in April, the fourth worst decline per CNBC, which pressured videogame publishers such as Electronic Arts Inc. (ERTS $17) and Activision Blizzard Inc. (ATVI $11).

Retail sales top expectations, industrial production continues to rise

Advance retail sales for April increased 0.4%, compared to the Bloomberg forecast of economists that called for an increase of 0.2%, and March's solid 1.6% gain was revised to a 2.1% advance. Sales ex-autos rose 0.4%, matching expectations. Sales ex-autos and gas gained 0.4%, versus the 0.3% rise that was anticipated.

After stripping out the volatile component of autos, sales have not declined m/m since July 2009, which probably helped the initial boost to equity markets that accompanied the report. Digging into today's retail report, a 6.9% surge in sales of building materials and supplies led all categories and may have been inflated by the rush to the end of the home buyer tax credit, while sales in the clothing category and the sporting goods, hobby, book & music component fell 1.0% and 1.9%, respectively, but sales may have been pulled into March from the early Easter Holiday that retailers have cited. Moreover, department stores sales fell 1.5%-possibly explaining the recent bout of cautious commentary and mixed guidance we have seen this week from 1Q earnings reports from the nation's largest retailers-which may explain some of the lukewarm reception the report was greeted with this morning.

Meanwhile, the economic data continues to pour in with industrial production rising 0.8% in April, compared to the 0.7% increase that economists were expecting. The larger-than-forecasted rise came as the output for business equipment, construction, and materials all posted solid increases, while utilities-which dropped sharply to lead to last month's disappointing reading-fell 1.3% for the month. Meanwhile, capacity utilization ticked higher from a downwardly revised 73.1% in March to 73.7% in April, as a slump in utilities was offset by gains in mining and manufacturing utilization. The report, also being overshadowed by today's fears in Europe continues to suggest manufacturing is leading the recovery and helps the outlook for the beginning stages of growth in the job market, while the capacity utilization, which sits 6.9 percentage points below its historical average, should help keep inflation fears under control.

Elsewhere, the University of Michigan's consumer sentiment survey increased by a smaller amount than expected, rising from 72.2 in April to 73.3 in May, compared to the increase to 73.5 that economists had expected. The current economic conditions component of the report ticked higher from 81.0 from 81.1, and the index of expectations six months from now increased to 68.3 from 66.5.

In other economic news, business inventories rose 0.4% m/m in March, matching economists' expectations, and February’s 0.5% increase was left unchanged. Sales advanced 2.3% m/m, resulting in the inventory-to-sales ratio-the amount of time it would take to deplete inventories at the current sales pace-dropping from 1.27 to 1.24 months in March.

Treasuries were solidly higher as global equity markets slide amid some flight-to-safety buying on the growing concerns about the debt crisis in the euro-area. The yield on the 2-year note was down 3 bps to 0.79%, the yield on the 10-year note lost 7 bps to 3.46%, and the 30-year bond yield was 9 bps lower at 4.34%.

European debt in focus internationally, euro continues fall

The fresh declines in the euro continued to garner the spotlight, touching the lowest level versus the dollar since October 2008 amid festering fears about the euro-zone debt crisis. Also, uncertainty about whether tough austerity measures, which have been announced recently by Greece, Portugal, and Spain, can be successfully implemented, along with the impact these measures could have on euro-area and hence global growth contributed to negative sentiment in markets globally. Speculation that the 16-nation euro-zone coalition could be in jeopardy was highlighted by comments from former Federal Reserve Chairman and Senior Economic Advisor to US President Obama, Paul Volker, who said "You have the great problem of a potential disintegration of the euro," adding, "The essential element of discipline in economic policy and in fiscal policy that was hoped for" has "so far not been rewarded in some countries."

The economic calendar in Europe was relatively light, with a report showing Spain's consumer prices rose 1.1% month-over-month (m/m) in April, matching economists' forecasts, being the lone major release.

In Asia/Pacific economic news, China's foreign direct investment rose more than economists expected y/y in April, and Hong Kong's 1Q GDP rose 2.4% quarter-over-quarter (q/q), compared to the 2.0% increase that was anticipated, while y/y, GDP was 8.2% higher versus the 8.3% that was expected. South Korea reported that its export prices declined, while import prices rose for the month of April.

Europe aid enthusiasm dissipates but stocks finish with gains

Following the previous week's steep losses on uncertainty regarding if, or in what capacity, the European Central Bank (ECB) would lend support to combat contagion of euro-area debt issues , global stocks rallied furiously to begin this week on a new bailout package for the euro-zone. Over the weekend, The European Union (EU) agreed to a 720 billion euro ($893 billion) rescue package, on top of the 110 billion euro bailout of Greece, aimed at stabilizing the euro-zone financial system and preventing contagion in the region. Even the ECB joined the rescue effort, committing to buying euro-zone government bonds in order to provide further stability to the financial system in the region.

Also, European sentiment received some early support as the post-election political picture in the UK gained some clarity as Prime Minister Gordon Brown resigned, which ended a thirteen year run for the Labour Party. Conservative Party leader David Cameron took over as Prime Minister and said he planned on forming a coalition government with the Liberal Democratic Party. The coalition would end the ung Parliament that resulted from last week's election, allowing the new government to focus on repairing the country's fiscal situation. Adding to the sharp gains in the first half of the week in Europe, which spilled over to carry the US markets higher, Spain and Portugal-nations along with Greece that have elevated debt levels-announced austerity measures to try to tackle their debt issues to move to sustainable fiscal policy.

However, as the week wore on, and the US equity and economic data were put on the back burner, the euro-area enthusiasm was replaced by concerns. Fears centered around what impact the austerity measures announced could have on growth in the euro-zone, the global economic recovery, as well as lingering contagion fears, and speculation that the structure of the euro could be in jeopardy. Global equity markets pared a sizeable portion of the week's gains-but remained nicely higher on the week on the aforementioned early rally-and the euro fell sharply versus most major currencies, touching the lowest level versus the US dollar since October 2008.

Next week highlights include inflation reading and Fed minutes, as well as euro trend

Tuesday's release of the Producer Price Index (PPI) is expected to show prices at the wholesale level were up 0.1% month-over-month (m/m) in April, on the heels of a 0.7% increase in March, while the core rate, which excludes food and energy, is also expected to rise a mere 0.1% after increasing 0.1% the prior month. On a year-over-year (y/y) basis, the PPI is expected to show a 5.6% increase on a headline basis, but only a 0.9% increase at the core level. The release precedes the Wednesday report on the Consumer Price Index (CPI), forecasted to show a 0.1% m/m and 2.4% y/y increase, while ex-food and energy, it is expected to rise 0.1% m/m and 1.0% y/y.

Tuesday also yields the release of housing starts for April, expected to show an increase of 3.8% m/m to an annual rate of 650,000 units, after increasing 1.6% in March, while building permits, one of the leading indicators tracked by the Conference Board, are forecasted to be flat m/m in April after rising a surprising 7.5% in March. This report has been volatile in recent months, distorted by the initial expiration of the buyer tax credit, as well as seasonality and weather.

Traders will be closely monitoring the Federal Reserve's release of the minutes from the April Federal Open Market Committee (FOMC) meeting mid-day Wednesday. There were no changes made at the April meeting, while some believed there was the potential for the Fed to modify the extended period for the exceptionally low levels of fed funds. Kansas City Fed President Thomas Hoenig dissented for the third-straight meeting, adding that he believed the pre-commitment language limits the Fed's flexibility to begin to raise rates modestly.

Other releases on the US economic calendar include the Empire Manufacturing Index, the NAHB Housing Market Index, MBA Mortgage Applications, initial jobless claims, the Philadelphia Fed's Business Activity Index, and the Conference Board's Index of Leading Indicators.

The international economic calendar in Europe includes euro-zone services and manufacturing PMI readings, as well as CPI, the German ZEW and IFO surveys, German PPI and 1Q GDP, UK CPI, housing prices, retail sales and business investment. In the Americas, Canada is scheduled to report wholesale sales, leading indicators, CPI and retail sales.

Economic releases in Asia/Pacific next week include Japanese machine orders, industrial production, 1Q GDP and leading indicators index, while Australia will announce consumer confidence.

In central bank action, the Bank of England and Reserve Bank of Australia will release minutes from their most recent meetings, and the Bank of Japan has a monetary policy meeting.