Evening Market Update

Bulls Lose Footing Following FOMC Minutes

After a shaky start, US equities managed to move higher for most of the day, only to lose steam following the release of the FOMC minutes that offered few surprises, to finish near the flatline. A rate hike out of China and the familiar themes of debt concerns in Europe, continued uneasiness toward the Japanese tragedy, and persistent inflation worries set the tone early, but a couple of major M&A deals helped to temper some of the uneasiness. Texas Instruments inked a deal to acquire National Semiconductor for $6.5 billion, while Dow member Procter & Gamble said it will merge its Pringles unit into Diamond Foods in a transaction valued at $2.35 billion. Treasuries finished lower, shrugging off a larger-than-forecasted decline in the ISM Non-manufacturing Index. Elsewhere on the equity front, AMR Corp and Expedia reinstated a prior business agreement and Walgreen Co reported upbeat same-store sales, but KB Home posted a loss that far exceeded forecasts. 

The Dow Jones Industrial Average lost 6 points (0.1%) to 12,394, the S&P 500 Index was flat at 1,333, and the Nasdaq Composite gained 2 points (0.1%) to 2,791. In moderately light volume, 831 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq. WTI crude oil lost $0.13 to $108.34 per barrel, wholesale gasoline gained $0.03 to $3.20 per gallon, while the Bloomberg gold spot price jumped $22.38 to $1,456.40 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies— was flat at 75.88.

Texas Instruments Inc. (TXN $35) announced a definitive agreement to acquire National Semiconductor (NSM $24) for $25 per share in an all-cash offer, funded by TXN’s existing cash balances and debt, of about $6.5 billion, more than a 75% premium to NSM’s closing price. The boards of directors of both companies have unanimously approved the transaction and TXN said the deal will increase its profitability and earnings per share. Shares of TXN were higher, while NSM was up over 70%.

In other deal news, Dow member  Procter & Gamble Co. (PG $62) announced that it has reached an agreement to merge its Pringles unit into Diamond Foods Inc. (DMND $61) in a transaction valued at $2.35 billion. PG was modestly lower, while DMND was solidly higher.

Moreover, American Airlines (AA) parent AMR Corp. (AMR $6) announced that it reached an agreement with online travel booking site Expedia Inc. (EXPE $23) to restore a business agreement in which EXPE and its Hotwire site will be able access to AA’s fares and schedule information. AMR was modestly lower, while EXPE gained ground

In earnings news, KB Home (KBH $12) reported a fiscal 1Q loss of $1.49 per share, a much larger shortfall than the $0.27 per share loss that analysts surveyed by Reuters had forecasted, with revenues falling 25% year-over-year (y/y) to $197 million, below the $227 million that the Street had expected. Net orders for the quarter fell 32% y/y and the backlog of homes at the end of 1Q was down 38% y/y. KBH was lower.

Finally, Walgreen Co. (WAG $41) reported that its March same-store sales—sales at stores open at least a year—rose 3.0% y/y, despite a negative impact from a later Easter holiday this year. The pharmacy chain said prescriptions filled on a same-store basis rose 3.5% and pharmacy sales increased 3.7%, while increased customer traffic and “basket size” helped the company’s front-end same-store sales rise 1.6%. Shares of WAG finished higher.

Service sector grows at a smaller pace than expected, Fed minutes offer few surprises

The ISM Non-Manufacturing Index showed expansion in service sector activity slowed more than expected, declining from 59.7 in February to 57.3 for March, compared to the slight decline to 59.5 that economists surveyed by Bloomberg forecasted. A reading of 50 separates expansion from contraction. However, the gauge, along with last week’s companion ISM Manufacturing Index, which remained near the highest rate of expansion since May 2004.  New orders ticked modestly lower from 64.4 to 64.1, new export orders rose 2.5 points to 59.0, and backlog of orders increased 4.0 points to 56.0. However, the business activity component declined from 66.9 to 59.7 and employment decreased from 55.6 to 53.7—but continued to denote expansion. Finally, the inflation component, prices paid, moved lower from 73.3 to 72.1, which may have been a relatively pleasant surprise, given the increasing concerns about higher prices having a broader impact on the consumer.

Meanwhile, the minutes from the Federal Reserve’s March 15 policy meeting revealed few surprises, due to the flood of Fedspeak we have had since the meeting, with policymakers agreeing that the economic recovery continued to proceed at a moderate pace and is on a “firmer footing,” and labor conditions showing further “gradual improvement.” Also, the Committee acknowledged the recent spike in commodity prices, but the increase was expected to be mostly “transitory.” This sentiment was echoed in last night’s speech by Fed Chairman Ben Bernanke, in which he also noted, “we have to monitor inflation and inflation expectations extremely closely because if my assumptions prove not to be correct, then we would certainly have to respond to that and ensure that we maintain price stability.” Also, participants noted that expectations for the continued slack in resource utilization would restrain increases in labor costs and prices.

The discussion among policymakers illustrated some of the growing divergence of opinions in regard to its current bond purchase program, known as QE2, with a few Committee Members noting that economic conditions might warrant a move toward less-accommodative monetary policy this year. However, a few other Members noted that exceptional policy accommodation could be appropriate beyond 2011.
Treasuries finished lower, showing little reaction to the ISM report or the Fed minutes. The yield on the 2-year note was up 5 bps to 0.82%, the yield on the 10-year note gained 6 bps to 3.48%, and the 30-year bond yield rose 2 bps to 4.50%.

Expected rate hike, debt concerns temper oversea markets

Anxiety surrounding Thursday’s highly-anticipated interest rate hike from the European Central Bank (ECB) and its impact on debt-laden peripheral euro-zone nations stymied sentiment across the pond. Meanwhile, a sovereign debt downgrade of Portugal by Moody’s Investors Service—the second time in less than a month—exacerbated the uneasiness. Meanwhile, the economic calendar for the region painted a mixed picture amid a plethora of Services PMI reports for March, with favorable revisions to gauges in Italy and the euro-zone and an unrevised read out of Germany, while France’s activity report was revised lower. Also, the initial March UK PMI Services report showed activity was much higher than economists had expected. Finally, a separate report showed euro-zone retail sales unexpectedly fell month-over-month (m/m) in February.

In Asia, economic news was in short supply, as markets in China, Hong Kong, and Taiwan were closed for holidays. However, even though markets were closed, China increased its benchmark 1-year lending rate and its 1-year deposit rate by 25 basis points to 6.31% and 3.25%, respectively. This was the fourth interest rate increase in less than a year as it tries to combat rising inflation and the formation of asset bubbles. In other central bank action, the Reserve Bank of Australia kept its benchmark interest rate unchanged at 4.75%.

The only item on tomorrow’s US economic calendar is the MBA Mortgage Applications. However, the international docket will offer a number of reports for investors to digest, including housing prices and industrial production from the UK, CPI from Switzerland, euro-zone 4Q GDP, and factory orders from Germany. Further east, Taiwan will report CPI while Japan will release its leading index. Back in the Americas, Canada will provide its Ivey Purchasing Managers Index.