Evening Market Update

German Trading Restrictions Strip Stocks

Late afternoon news from across the pond sapped any strength the equity markets were attempting to muster in early trading and stocks finished lower on the day. Continued weakness in the euro, coupled with mixed housing data limited any enthusiasm that came from better-than-expected earnings reports from Dow members Wal-Mart Stores and Home Depot. However, the late-day announcement that Germany will ban naked short-selling, effective midnight, pulled the plug on sentiment. Treasuries were higher following a subdued wholesale inflation report, but accelerated to the upside on the announcement out of Europe’s largest economy. In other equity news, Dow member Boeing announced mixed news regarding its aircraft, fellow Dow component Pfizer revealed reorganization plans, while TJX Companies posted better-than-expected profits but provided disappointing guidance. Elsewhere, Abercrombie & Fitch reported a loss that matched expectations, while Dick’s Sporting Goods and Saks both posted earnings that exceeded analysts’ estimates.

The Dow Jones Industrial Average fell 115 points (1.1%) to close at 10,511, the S&P 500 Index lost 16 points (1.4%) to 1,121, and the Nasdaq Composite was 37 points (1.6%) lower at 2,317. In moderate volume, 1.5 billion shares were traded on the NYSE and 2.4 billion shares were traded on the Nasdaq. Crude oil fell $0.67 to $69.41 per barrel, wholesale gasoline was flat at $2.04 per gallon, and the Bloomberg gold spot price declined $1.92 to $1,220.53 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 1.1% to 87.12.

Dow member Wal-Mart Stores Inc. (WMT $54) posted 1Q EPS of $0.88, four pennies above the consensus estimate of Wall Street analysts, with revenues rising 6% year-over-year (y/y) to $99.1 billion, above the $97.8 billion that the Street had forecasted. US same-store sales—sales at stores open at least a year—declined 1.1% y/y excluding fuel. The company said its US unit posted a “significant” contribution to operating income, while its international segment remains the fastest-growing unit, with net sales up more than 21% y/y to more than $25 billion. The company said its customers, particularly in the US, are still concerned about their personal finances and unemployment, as well as higher fuel prices. WMT issued 2Q EPS guidance where the midpoint of the range was below analysts’ expectations.

WMT added that its commitment to reducing prices and managing expenses positions it well across the retail landscape, and separately, the company announced “deep rollbacks” of prices on groceries, which could result in $700 million in savings this summer for American families. Shares were higher

Fellow Dow component Home Depot Inc. (HD $35) reported 1Q EPS ex-items of $0.45, five cents above the Street’s forecast, with revenues increasing 4.3% y/y to $16.9 billion, above the $16.4 billion that analysts were anticipating. Total same-store sales rose 4.8% y/y, with US sales increasing 3.3%, and the world’s largest home improvement retailer said its “solid” start to the year was driven by “great” performance in seasonal categories and strong growth in customer transactions. HD raised its full-year guidance. Shares gave up an early gain and were lower.

Meanwhile, Dow member Boeing Co. (BA $68 ¹) said it will increase production rates on its 737 jet program to 34 airplanes per month in early 2012, aimed at satisfying continued strong demand for the 737 aircraft. Also, BA said it continues to study further potential 737 rate increases, given continued customer demand. However, shares relinquished an early advance and finished lower after the company said a design flaw will require a repair of almost all the 787 Dreamliners that it has already built, but the rework will not delay the scheduled first delivery later this year.

In other news regarding the Dow, Pfizer Inc. (PFE $16) announced plans to reconfigure its worldwide plant network to align manufacturing and supply organization from its acquisition of Wyeth. PFE said it expects to reduce its workforce by 6,000 jobs over the next several years and will cease operations at eight manufacturing sites in Ireland, Puerto Rico, and the US by the end of 2015, as well as reduce operations at six other plants in Germany, Ireland, Puerto Rico, the UK, and US. Shares were lower. .

In equity news outside the Dow, TJX Companies Inc. (TJX $44) reported 1Q EPS of $0.80, above the $0.78 that the Street was anticipating, with revenues rising 15% y/y to $5.0 billion, roughly inline with analysts’ estimates. The off-price retailer of apparel and home fashions said its results were driven by continued increases in customer traffic, but going forward, it will run its business conservatively, with lean inventories and a focus on cost reduction. TJX issued 2Q EPS that came in below analysts’ expectations, but increased its full-year EPS outlook. Shares were under pressure.

Elsewhere on the earnings front, Abercrombie & Fitch Co. (ANF $39) reported a 1Q loss of $0.13 per share, which matched the Street’s estimate, Dick’s Sporting Goods Inc. (DKS $27) posted 1Q profits of $0.22 per share, eight cents above the expectation and analysts, while Saks Inc. (SKS $9) announced 1Q EPS ex-items of $0.12, which was seven cents above analysts’ forecasts. Shares of all three firms were lower.

Producer prices mixed, housing starts jump, and building permits fall

The Producer Price Index showed prices at the wholesale level dipped 0.1% month-over-month (m/m) in April, after increasing 0.7% in March, and the decline for April is in contrast to the forecast of a 0.1% rise in prices. The decline is attributed to a 0.8% fall in energy prices and a 0.2% decrease in food prices. Meanwhile, the core rate, which excludes food and energy, rose 0.2% m/m, more than the forecast of economists, which called for the core rate to increase 0.1%. On a year-over-year basis, headline producer prices were 5.5% higher, and the core rate was up 1.0%.

Elsewhere, housing starts for April were reported, showing starts increased 5.8% m/m to an annual rate of 672,000 units, from an upwardly revised 635,000 in March, and compared to economists’ expectations, which called for starts to come in at 650,000. However, building permits, a gauge of future activity and a component in the Index of Leading Indicators tracked by the Conference Board, fell 11.5% m/m to an annual rate of 606,000 from March’s unrevised 685,000. The expectation was for permits to be 680,000 units.

The economy is moving from recovery to expansion, but pricing pressures remain at bay due to the large the amount of unused supply in the system, represented by factory utilization at 73.7%, still 6.9% below the historical average, and the lack of wage pressure with unemployment at 9.9%. The 2008 crisis centered on the housing market and financial institutions, and the stabilization of the housing market and recapitalization of banks has improved the outlook for the US economy, with the most recent Federal Reserve survey of loan officers showing an easing in lending standards, but continued subdued demand for loans.

Treasuries finished higher as the equity markets lost ground. The yield on the 2-year note was down 6 bps to 0.74%, the yield on the 10-year note lost 12 bps to 3.37%, and the 30-year bond yield was 11 bps lower at 4.25%.

Economic and regulatory news overshadows Euro-area debt relief

Euro-zone debt worries lessened as Greece received the first installment of the near $1 trillion euro-area bailout package in time to payout debt obligations that come due tomorrow. However, a report showed investor confidence in Germany deteriorated by a larger amount than expected, and the nation’s government announced that it will set new restrictions on trading, putting the notion of any return to normalcy near the back of the line. The German ZEW Survey of Economic Sentiment fell from 53.0 in April to 45.8 in May, lower than the level of 47.0 that economists had expected, as the financial crisis in the euro-area rocked the financial markets and fanned concerns about the future of the euro.

As well, Bloomberg is reporting that Germany said it will instill a temporary ban on naked short-selling—a trading practice of short selling a financial instrument that has not been positively determined to exist—effective midnight, of 10 banks and insurers, as well as euro-area government bonds and credit-default swaps, adding that German Chancellor Angela Merkel will reveal the plan in a speech Wednesday. Earlier in the day, Merkel said that Germany would support a tax on the financial market sector aimed at defraying costs associated with the euro-area rescue plan. Despite paring its recent losses and rebounding off of a four-year low against the US dollar, the euro slipped again in late-day trading following the announcements. Other economic reports in the region included larger-than-expected increases in consumer prices for both the UK and euro-zone, while a separate report showed the euro-zone trade surplus widened, but to a smaller amount than economists had forecasted, and French nonfarm payrolls declined 0.1% quarter-over-quarter (q/q) in 1Q.

In the Asia/Pacific region, economic news in Japan was mixed, as separate reports showed Japanese consumer confidence improved, while the nation’s department store sales fell more than expected y/y in April. Also, the final look at Japanese machine tool orders showed orders were revised slightly higher. Meanwhile, Hong Kong’s unemployment rate unexpectedly remained at 4.4%—which is a fifteen month low, South Korea’s department store sales rose much more than forecasted, while discount store sales in the nation increased by an amount that was below economists’ estimates. Elsewhere, the Reserve Bank of Australia released the minutes from its most recent monetary policy meeting, where it raised its benchmark interest rate for the sixth time in seven meetings, showing that policymakers viewed the interest rate actions as “timely” but with signs that the actions were “beginning to affect behavior,” suggesting the central bank may be on hold unless inflationary pressures heat up.

Inflation data and FOMC minutes set for release tomorrow

Tomorrow, the economic calendar will yield the compliment to today’s Producer Price Index (PPI) report in the form of the release of the Consumer Price Index (CPI), which is expected to tick higher by 0.1% on both the headline rate and the core reading, which excludes food and energy. The CPI provides a look at pricing pressures that are facing the consumer, which make up the lion’s share of the economy. However, tomorrow’s report will likely not provoke any market moving sentiment as the aforementioned low wage pressures and below average capacity utilization continue to keep inflation fears subdued.

With inflation on the backburner, the Federal Reserve can devote its attention during meetings to implementing their plan to try to return its extremely easy, crisis-induced, monetary policy to normalcy. At the Fed’s last policy meeting, the Federal Open Market Committee (FOMC) kept the fed funds rate unchanged at a range of 0-0.25%, made no changes to the language with regard to the “extended period” for keeping rates at an exceptionally low rate, and upgraded the status of the labor market, from “stabilizing” to “beginning to improve.” Tomorrow, we will get a glimpse into the discussions that took place among FOMC policymakers at this meeting as the minutes will be released in afternoon trading. The FOMC’s inflation discussions are not likely to dominate headlines and the focus on the Street will probably be centered on details discussed pertaining to how the Fed will try to condition the financial markets—through tweaks to the financial system such as raising interest rates on funds deposited by banks to soak up excess reserves and keep inflation pressures from flaring up—for when it begins to tighten policy further as it moves to normal financial conditions. Also, the discussion about the language in the policy statement will be scrutinized as a change to the “extended period” language is seen by some as the first step in further policy tightening. Moreover, the amount of time given to the euro-zone debt crisis by the FOMC will likely catch the eye of economists, as its exacerbated state has caused some concerns that this could prolong the extremely loose policy stance at the Fed.

Internationally, Spain will report final 1Q GDP figures, the Bank of England will release the minutes from its latest monetary policy meeting, and Japan will report industrial production, as well as 1Q GDP.