Evening Market Update

Stocks Fail to Reach the Green

The equity markets finished to the downside, but off the lowest levels of the day that occurred early in the session, following news of a magnitude 7.1 aftershock in Japan. The knee-jerk reaction was made worse by an initial tsunami warning, which quickly passed and allowed stocks to pare some losses. Domestic economic data was light again today, as jobless claims fell more than expected and consumer borrowing increased for the fifth-straight month. On the international front, the ECB increased its target rate as expected, while the central banks of the UK and Japan kept rates unchanged. US equity news was highlighted by mostly better-than-expected March same-store sales reports from the nation’s retailers, and a solid earnings beat from Bed Bath & Beyond. Treasuries were mixed, while WTI crude oil prices surged to over $110 per barrel on further unrest in the Middle East.

The Dow Jones Industrial Average fell 17 points (0.1%) to 12,409, the S&P 500 Index was 2 points (0.2%) lower at 1,334, and the Nasdaq Composite lost 4 points (0.1%) to 2,796. In moderate volume, 911 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil increased $1.32 to $110.15 per barrel, wholesale gasoline fell $0.01 to $3.18 per gallon, while the Bloomberg gold spot price gained $0.66 to $1,460.41 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies— was flat at 75.57.

The nation’s retailers reported March same-store sales results—sales at stores open at least a year—headlined by Costco Wholesale Corp. (COST $78), which posted a 13% year-over-year (y/y) jump in March same-store sales, including inflation in gasoline prices and strengthening foreign currencies, far above the 7.4% increase that was anticipated by analysts surveyed by Reuters. Excluding the impact of fuel inflation and currency fluctuations, sales were 8% higher. COST traded nicely to the upside.

Meanwhile, Target Corp. (TGT $50) announced a 5.5% decline y/y, compared to the 6.4% drop that analysts had anticipated. TGT said March sales were inline with its expectations, reflecting the change in Easter timing in 2011. Shares were lower.

Department store chain Macy’s Inc. (M $25) achieved 0.9% y/y growth in same-store sales for March, versus the 2.0% decline that analysts had anticipated. The company said it is “optimistic about sales in April,” which should benefit from the Easter shift, as it increased its same-store sales outlook for this month. Elsewhere, J.C. Penney Co Inc. (JCP $38) reported a 0.3% decline in same-store sales, a smaller shortfall than the 3.4% decline that was anticipated, while Kohl’s Corp. (KSS $55) announced that sales fell 6.5%, compared to the drop of 7.9% that was projected. Shares of all three companies finished higher.

Inside the mall, results were mixed, with Gap Inc. (GPS $23) reporting a 10.0% drop in March sales, larger than the 7.0% decline that was anticipated, while Limited Brands Inc. (LTD $36) posted a jump of 14% in sales, compared to the 1.5% increase that was forecasted. LTD was higher, while GPS moved lower.

In earnings news,  Bed Bath & Beyond Inc. (BBBY $55) reported 4Q EPS of $1.12, well above the $0.97 that analysts were expecting, with revenues rising 11.6% y/y to $2.5 billion, above the $2.4 billion that the Street had forecasted. 4Q same-store sales rose 8.5% y/y, and the company issued 1Q EPS guidance that was inline with expectations. BBBY traded sharply higher.

Jobless claims decline, consumer credit up sharply

Weekly initial jobless claims fell by 10,000 to 382,000, versus last week's figure which was upwardly revised by 4,000 to 392,000, below the 385,000 level that economists surveyed by Bloomberg had expected. The four-week moving average, considered a smoother look at the trend in claims, fell by 5,750 to 389,500, while continuing claims declined by 9,000 to 3,723,000, above the forecast of economists, which called for continuing claims to come in at 3,700,000.

Consumer credit was released in the final hour of trading, showing that consumer borrowing rose by $7.6 billion during February, the fifth consecutive monthly increase and well above the $4.6 billion expected by economists surveyed by Bloomberg. January’s figure was revised downward to a $4.5 billion increase from an initially-reported $5.0 billion gain. Revolving debt, which includes credit cards, fell by $2.7 billion, while non-revolving debt, which includes loans for cars and mobile homes, rose $10.3 billion, its seventh-consecutive monthly gain.

Treasuries were mixed after paring losses on the news of the aftershock in Japan, as the yield on the two-year note fell 4 bps to 0.79%, the yield on the 10-year note was flat at 3.55%, and the 30-year bond yield gained 2 bps to 4.61%.

Aftershock in Japan overshadows monetary policy releases from ECB, UK, and Japan

In European economic news, the European Central Bank (ECB) raised its benchmark interest rate 25 basis points to 1.25% and the debt-laden nation of Portugal said it will seek assistance from the euro-zone’s 440 billion euro European Financial Stability Facility (EFSF). The move came as inflationary pressures are growing with price stability being the ECB’s lone mandate, and despite the euro-area’s festering debt crisis. Portugal expectedly announced that it will seek a bailout, joining Greece and Ireland, and will meet with euro-zone officials tomorrow to discuss the rescue plan, estimated to range between 75-90 billion euros.

In the customary press conference following the ECB announcement, President Jean-Claude Trichet noted that monetary policy “remains accommodative,” while liquidity remains ample and may facilitate the accommodation of price pressures. However, during the Q&A session, he cautioned that, “We did not decide today that it was the first of a series of interest rate increases,” reiterating that “We will continue to do in the future as we have done in the past, to take the appropriate decisions for prices stability,” per Dow Jones Newswires.

I llustrated by today’s rate hike by the ECB—fiscal austerity that will continue to weigh on growth and employment, as well as European banks being hampered in their ability to extend credit, the lifeblood of economic growth. However, they point out that the good news if any, is that the debt woes in Spain—a key peripheral euro-area nation that has seen some bailout speculation—may be easing as it has made progress by implementing austerity measures to reduce its fiscal deficit, as well as addressing its bank problems. If Spain avoids a bailout, the current size of the EFSF may be large enough to address needs of weaker countries, potentially staving off systemic risk - where one large failure could result in problems throughout the European banking system.

Meanwhile, the Bank of England (BoE) also concluded its monetary policy meeting and left its benchmark interest rate and asset purchase program unchanged at 0.50% and 200 billion pounds, respectively. In other economic news, Germany’s industrial production rose more than expected, and France’s trade deficit unexpectedly widened.

The Asia/Pacific region was focused on another earthquake in Japan, this one a magnitude 7.1 that hit the Northeast part of the country. There were no immediate reports of any serious injuries or damage, and the operator of the Fukushima nuclear power plant said there were no signs of new problems caused by the aftershock. The quake overshadowed the conclusion of the Bank of Japan’s (BoJ) monetary policy meeting, in which it kept its benchmark interest rate unchanged at near zero. The BoJ did announce that it will introduce a 1 trillion yen ($11.7 billion) loan facility to provide financial institutions in disaster areas with longer-term funds to support future demand for funds for restoration and rebuilding. The BoJ said its economy is likely to remain under strong downward pressure, mainly on the production side, but is expected to return to a moderate recovery path. Elsewhere in the region, Australia’s employment change rose more than expected and its unemployment rate unexpectedly declined from 5.0% to 4.9% in March.

Back in the Americas, Brazil’s inflation accelerated more than economists expected in March, while the increase in Canadian building permits in February failed to match estimates.

The lone report tomorrow’s US economic calendar will be wholesale inventories, expected to increase 1.0% in February, after rising 1.1% in January.

Releases on the international front will include the German trade balance, UK PPI, Canadian housing starts and unemployment rate, and the Japanese trade balance.