Evening Market Update

Stocks Up As End of Quarter Nears  

US equities finished higher today on the strength of a positive ADP private sector payroll report, which showed growth of over 200,000 jobs and sparked some optimism for a similar increase in Friday’s Labor Report. A solid rebound in the Japanese market also helped lift domestic and global sentiment, as reports are suggesting that companies are nearing the resumption of production at facilities that were damaged by the massive earthquake and tsunami that hit the region earlier this month. Treasuries moved higher on the day, as the only other report on the economic front was a decrease in the volatile MBA Mortgage Application Index. In equity news, Canada’s Valeant Pharmaceuticals International made a hostile bid to acquire US-based drug maker Cephalon for approximately $5.7 billion, Family Dollar Stores beat the Street’s earnings expectations, and shares of Visa and Mastercard rose on news of a delay in debit-card swipe fee rules. 

The Dow Jones Industrial Average rose 72 points (0.6%) to 12,351, the S&P 500 Index gained 9 points (0.7%) to 1,328, and the Nasdaq Composite advanced 20 points (0.7%) to 2,777. In moderately light volume, 917 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil fell $0.53 to $104.26 per barrel, wholesale gasoline gained $0.02 to $3.06 per gallon, while the Bloomberg gold spot price increased $3.78 to $1,422.28 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies— was flat at 76.09.

Canada’s Valeant Pharmaceuticals International Inc. (VRX $50) announced that it has made an unsolicited proposal to acquire US-based drug maker  Cephalon Inc. (CEPH $75) for $73.00 per share in cash, valued at about $5.7 billion. VRX said it has made several private approaches to CEPH’s management, but has been disappointed by CEPH’s unwillingness to engage in discussions in a timely manner. CEPH confirmed that it received the proposal from VRX, which it is reviewing, and will respond in due course. VRX was solidly higher, while CEPH traded more than 25% to the upside.

Family Dollar Stores Inc . (FDO $52) reported fiscal 2Q EPS of $0.98, one penny above the consensus estimate of analysts surveyed by Reuters, with revenues increasing 8.3% year-over-year (y/y) to $2.3 billion, inline with expectations. Same-store sales—sales at stores open at least a year—grew 5.1% y/y, on increased customer traffic and a modest rise in the value of the average customer transaction. The discount retailer raised the low end of its full-year 2011 EPS outlook, which came in above expectations. Shares gave up early gains to finish lower.

Shares of Visa (V $74) and Mastercard Inc. (MA $254) moved higher after Fed Chairman Ben Bernanke warned lawmakers yesterday that the Fed won’t be able to meet an April 21st deadline for issuing news rules that would cap debit-card transaction fees that banks change merchants. The delay has raised speculation that the Fed may be revising the regulations, which are due to be implemented by July 21st. 

Private sector payrolls rise over 200,000, mortgage applications decline 

The ADP Employment Change Report showed private sector payrolls rose by 201,000 jobs in March, slightly below the forecast of economists surveyed by Bloomberg, which called for a 208,000 increase, and February’s 217,000 job gain was revised to 208,000 jobs. The release does not include government hiring and firing and comes ahead of Friday’s broader nonfarm payrolls report, where economists expect an increase of 190,000 jobs in March, after posting a 192,000 increase in February. Excluding government hiring, March private sector payrolls are expected to increase by 210,000, after expanding by 222,000 in February.

In other economic news, the MBA Mortgage Application Index decreased by 7.5% last week, after the index that can be quite volatile on a week-to-week basis, rose by 2.7% in the previous week. The decrease came as the Refinance Index fell 10.1% and the Purchase Index posted a 1.7% decline, while the average 30-year mortgage rate increased by 12 basis points (bps) to 4.92%, above the record low of 4.21% on October 8, 2010.

Finally, Kansas City Fed President Thomas Hoenig offered some strong comments on the Fed’s highly accommodative monetary policy in a speech today in London, saying the policy is partly to blame for the rapid increase in global commodity prices. Hoenig, who is retiring on October 1st, added that “policy should acknowledge the improving economic trends and begin to withdraw some degree of accommodation.” The comments came on the heels of statements from other Fed policy makers this week, including St. Louis Fed President James Bullard, who said the current $600 billion asset purchase program could be cut by about $100 billion, if economic growth continues at a strong pace.

Treasuries moved modestly higher after overcoming slight losses on the employment data, as the yield on the 2-year note fell 2 bps to 0.79%, the yield on the 10-year note lost 4 bps to 3.45%, and the 30-year bond declined 4 bps to 4.51%.

Japanese rebound helps lift global markets

Sentiment in Europe improved modestly amid optimism that the global economy is healthy enough to continue to strengthen in the face of the tragedy in Japan, Middle East turmoil, and the euro-area debt crisis. Financials in the region managed to rebound as well, although Irish banks were under pressure ahead of the release of the troubled-nation’s stress tests of its banking sector that are due out tomorrow. Meanwhile, The Dow Jones Newswires reported that an ECB board member said that euro-zone interest rates will be raised in a gradual way, prompting speculation that the highly-anticipated 25 basis point interest rate hike to 1.25%—according to economists surveyed by Bloomberg—at next week’s ECB meeting may not be a one-time event. In light economic news across the pond, euro-zone economic confidence was roughly inline with economists’ forecasts, while a reading on UK service-sector activity rose month-over-month in January, and on a three-month average activity declined by a smaller amount than forecast.

The Asia/Pacific markets rebounded as well, despite continued concerns regarding radiation leaks at the earthquake and tsunami-damaged nuclear facility north of Tokyo. Solid weakness in the Japanese yen, on growing expectations of a rate hike in Europe next week and following some hawkish comments from a US Federal Reserve official yesterday, helped boost export issues. Meanwhile, optimism regarding the resumption of production from Japanese companies that had halted output following the natural disaster also helped contribute to the improvement in sentiment. On the economic front, a report showed Japan’s industrial production unexpectedly rose in the month preceding March’s tragedy, South Korea’s 4Q GDP was unrevised quarter-over-quarter (q/q) and China’s Leading Index was nearly unchanged.

Back in the Americas, Brazil’s IGP price index showed that inflation slowed to 0.62% in March, down from 1.0% in February, and slightly lower than the 0.69% increase forecasted by economists.

Releases on the US economic calendar tomorrow include weekly initial jobless claims, expected to tick slightly lower to 380,000 from 382,000 last week, ahead of Friday’s critical labor report. The Chicago Purchasing Manager’s Index will also be released, expected to fall to 69.6 in March from a February reading of 71.2, while factory orders are forecasted to increase 0.5% in February, down from a 3.1% advance in January.

Reports on the international front will include Japanese housing starts, German retail sales, UK house prices, the German unemployment rate, and euro-zone CPI.