Evening Market Update

Markets Mixed as Curtain Closes on Best Q1 Since 1998   

Stocks were mixed in an uninspiring session to close out the first quarter, as traders balked at a larger-than-expected increase in US weekly jobless claims and an unexpected drop in factory orders, instead focusing on the upbeat expectations for tomorrow’s U.S. payrolls report. Treasuries were mostly lower, as the only other release on the domestic economic front was a smaller-than-anticipated deceleration in Midwest business activity. Meanwhile, crude oil surged to its highest level since 2008 on news that pro-Gadhafi forces have pushed back rebels from key areas in eastern Libya. In equity news, Berkshire Hathaway executive David Sokol announced his resignation amid questionable circumstances, Hershey raised its prices across the board, and the Federal Reserve rejected AIG’s proposal to buy back assets that were sold off during the financial crisis. 

The Dow Jones Industrial Average fell 31 points (0.3%) to 12,320, the S&P 500 Index lost 2 points (0.2%) to 1,326, while the Nasdaq Composite advanced 4 points (0.2%) to 2,781. In moderate volume, 1.1 billion shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil soared $2.31 to $106.58 per barrel, wholesale gasoline gained $0.05 to $3.11 per gallon, while the Bloomberg gold spot price increased $12.00 to $1,435.03 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies— was 0.3% lower at 75.90.

Berkshire Hathaway Inc . (BRK/B $84) announced that David Sokol, Chairman of several Berkshire subsidiaries, resigned from the company. Sokol, who had been considered a likely candidate to replace Chairman and CEO Warren Buffett, said he wanted to utilize the time remaining in his career to invest his family's resources and fund his philanthropic interests. The resignation also follows Sokol’s purchase of shares of  Lubrizol (LZ $134) before he suggested to Warren Buffett the acquisition of the company. However, Warren Buffett said the resignation came as a surprise as he did not ask for David to step down and, “Neither Dave nor I feel his Lubrizol purchases were in any way unlawful.” Shares BRK/B were lower.

Hershey Co . (HSY $54) announced an increase in wholesale prices across the majority of its US, Puerto Rico and export portfolio, with a weighted average price increase of 9.7% effective today. The company said these changes will help offset part of the “significant increases in Hershey’s input costs, including raw materials, packaging, fuel, utilities and transportation.” HSY also reaffirmed its 2011 outlook. HSY traded modestly lower.

American International Group Inc . (AIG $35) said it was “highly disappointed” by the announcement that the Federal Reserve Bank of New York rejected the company’s offer to buy back $15.7 billion in Maiden Lane II assets that were purchased by the Fed during the financial crisis. The Fed said, after careful review, it has judged that the public interest would be better served by an alternative approach to realizing value that is also more consistent with normal market practice. AIG finished solidly lower.

Jobless claims decline, Midwest activity decelerates, and factory orders surprisingly slip 

Weekly initial jobless claims declined by 6,000 to 388,000, versus last week's figure which was upwardly revised by 12,000 to 394,000, but came in above the 380,000 level that economists surveyed by Bloomberg had expected. The four-week moving average, considered a smoother look at the trend in claims, increased by 3,250 to 394,250, while continuing claims fell by 51,000 to 3,714,000, above the forecast of economists, which called for continuing claims to come in at 3,705,000. The markets took the jobless claims data relatively well as the four-week moving average has remained under the 400,000 mark since February 25—the first time breaching that level since July 2008, which was just before the financial crisis.

Meanwhile, we received a look at regional business activity, with the Chicago Purchasing Managers Index declining by a smaller amount than forecasted, falling from an unrevised 71.2 in February—the highest since July 1988—to 70.6 in March, compared to the deterioration to 69.9 that economists had expected. Order backlogs and inventories increased to limit the deterioration, but prices paid moved further above 80, while new orders and production declined, but remained well above the expansion mark of 50. Meanwhile, the employment component of the report moved solidly higher, rising from 59.8 to 65.6—the highest level since 1983. March regional manufacturing reports have continued to depict solid expansion in activity and tomorrow, the ISM Manufacturing Index will be released, forecasted to show a slight decline from 61.4 in February to 61.0 in March (economic calendar). Activity is expected to remain near the May 2004 high—a level not eclipsed since 1983—while the employment component sits at 38-year high.

In other economic news, factory orders unexpectedly fell, declining 0.1% month-over-month (m/m) in February, compared to the increase of 0.5% that economists expected, but January’s 3.1% increase was revised to a 3.3% gain. February durable goods orders—reported last week—were favorably revised from a 0.9% decline to a 0.6% decrease.

Treasuries were mostly lower, as the yield on the two-year note gained 3 bps to 0.81%, the yield on the 10-year note increased 3 bps to 3.46%, while the yield on the 30-year bond was flat at 4.51%.

European focus on Irish banking sector stress test results 

Sentiment in Europe fell on the release of the results from the Irish government’s stress tests of its banking sector, which showed the Irish banking sector will require an additional 24 billion euros ($34 billion)—on top of the 46.3 billion euros that have already been deployed—to recapitalize its banks to provide for future loan losses over the course of three years, per Ireland’s central bank. According to Bloomberg, economists had forecasted that 27.5 billion euros would be needed as a result of the test, and Ireland had set aside 35 billion euros ahead of the results. Additional weakness in the region came from increased euro-area debt concerns after Portugal announced a larger-than-forecasted budget deficit as a percentage of its GDP. Meanwhile, the economic calendar showed a larger-than-forecasted drop in German unemployment and UK consumer confidence that was above economists’ forecasts. However, the euro-zone estimate for consumer prices unexpectedly rose to 2.6% year-over-year (y/y) for March, compared to forecasts for the figure to remain at a 2.4% increase that was reported in February, which is solidifying expectations that the European Central Bank will raise rates at its policy meeting next week.

In Asia/Pacific, Australia’s retail sales grew more than forecasted, helping offset a separate report that showed building approvals unexpectedly declined, while Taiwan’s central bank increased its benchmark interest rate from 1.625% to 1.750% after the close of today’s trading session in Asia.

In addition to the aforementioned ISM Manufacturing Index and US nonfarm payroll report, tomorrow’s US economic calendar  will include construction spending, expected to decline 0.2% in February, after falling 0.7% in the prior month.

Releases on the international front will include Brazilian industrial production, PMI manufacturing reports from most of the euro-zone and China, as well as the Italian and euro-zone unemployment rates.