Morning Market Update

Europe Fears Cause Stocks to Fall, Leading Bulls Into the Stall

Stocks remain solidly lower in afternoon action as exacerbated fears regarding the euro-area debt crisis and the implications on the future of the euro-zone and the global economic recovery continue to stymie sentiment. The concerns toward Europe are more than offsetting a larger-than-expected increase in April retail sales, which also showed March’s solid increase revised higher. Treasuries remain higher amid the uneasiness, and following a larger-than-expected increase in industrial production. In other economic news, business inventories rose by an amount that was anticipated, while the preliminary University of Michigan’s consumer sentiment survey improved to a level slightly below economists’ forecasts. The focus on the retail sector is also dominating the earnings front, with JC Penney Co Inc matching analysts’ profit and revenue estimates, but providing disappointing guidance, and Nordstrom Inc falling short of the Street’s earnings expectations, while Dillard’s Inc blew away profit projections. In other equity news, CA Inc reported profits that came up short of expectations and credit card firms are under pressure after a Senate vote on regulating debit card “swipe fees.” Elsewhere, NVIDIA Corp provided a disappointing outlook and is sharply lower, exacerbated by a report that showed videogame sales tumbled in April. Overseas, European markets fell sharply.

At 1:04 p.m. ET, the Dow Jones Industrial Average is down 1.5%, the S&P 500 Index is 1.9% lower, while the Nasdaq Composite is declining 2.3%. Crude oil is down $2.71 at $71.69 per barrel, wholesale gasoline is off $0.06 at $2.14 per gallon, and the Bloomberg gold spot price is down by $5.95 at $1,226.75 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.6% at 85.99.

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 are 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 is lower.

However, fellow department store Dillard’s Inc.(DDS $29) is sharply 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 $20) 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 are down solidly.

Credit card transaction firms, such as Visa Inc. (V $77) and MasterCard Inc. (MA $211) are 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 $42) and Discover Financial Services (DFS $14), are also under pressure.

NVIDIA Corp. (NVDA $13) is 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 be also finding pressure from a report from NPD Group that showed videogame sales fell 26% y/y in April, the fourth worst decline per CNBC, which is pressuring 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 (chart) 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.

For a brief moment following the report the equity markets came off of the lows of the morning, as the better-than-expected headline figure and upwardly revised solid gain in March supported the outlook for the consumer and the US economy. Moreover, after stripping out the volatile component of autos, sales have not declined m/m since July 2009, which probably helped the initial boost that accompanied the report. However, today’s report and the outlook for the continued retail prosperity have a few issues working against them. The growing uneasiness toward the euro-zone debt crisis, and the recent surge in volatility in the financial markets—exacerbated last week’s intra-day 1,000 tumble in the Dow—have probably reopened some of the wounds of the previous financial crisis in the US that had begun to heal, which could hamper the outlook of consumers’ propensity to consume. Also, digging into today retail report, a 6.9% surge in sales of building material and supplies led all categories and may have been inflated by the rush to the end of 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 luke-warm 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 are solidly higher in afternoon action as global equity markets slide amid some flight-to-safety buying on the growing concerns about the debt crisis in the euro-area.

Europe pares some of the weekly advance

Stocks in Europe finished sharply lower —but still higher for the week—as concerns about the possibility that the euro-zone debt crisis could spread dampened sentiment across the pond, ending the strong week of gains on a sour note. Also, uncertainty about whether tough austerity measures, which have been announced recently by Greece, Portugal, and Spain, can be successfully implemented, along with what the impact of these measures will be on the continuation of euro-area economic prosperity—and the global economic recovery—exacerbated sentiment in Europe. Stocks extended losses in late-day action as the aforementioned fears prompted some speculation that the 16 nation euro-zone coalition could be in jeopardy. Financials and materials issues led the decline.

The economic calendar 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 on the European economic calendar. Meanwhile, equity news was also a bit lighter than usual, as Wolseley Plc. (WOSCY $2), the world’s largest supplier of heating and plumbing products, per Bloomberg, moved nicely higher after it forecasted full-year profits to exceed analysts’ estimates.

The UK FTSE 100 Index descended 3.1%, France’s CAC-40 Index dropped 4.6%, Germany’s DAX Index declined 3.1%, Spain’s IBEX 35 Index tumbled 6.6%, Portugal’s PSI 20 Index decreased 4.3%, and Greece’s Athex Composite Index slid 3.4%.