Evening Market Update

Traders Fret Over Bleak Data and Earnings Season Start

Disappointing economic data, a lackluster start to earnings season, and heightened concerns over the Japanese nuclear crisis conspired to rattle investor sentiment today, pushing stocks lower. On the economic front, US import prices were hotter than expected, the trade deficit narrowed by a smaller-than-expected amount, and small business confidence unexpectedly deteriorated. Meanwhile, the unofficial start to earnings season began with a whimper after Dow member Alcoa posted softer-than-expected revenues and cited higher energy and materials costs, and Japan upgraded its nuclear crisis to the highest severity level, while also warning that the March 11 disaster may have more of an impact on the economy than initially thought. Elsewhere on the equity front, Dow member Chevron said it sees higher 1Q earnings, fellow Dow component Procter & Gamble upped its quarterly dividend by 9%, and Dow member Cisco Systems announced the restructuring of its consumer unit. Treasuries ended higher on the disappointing economic data and amid the weakness in the equity markets, while commodities came under pressure, particularly crude oil, which lost over 3%.

The Dow Jones Industrial Average fell 118 points (1.0%) to 12,264, the S&P 500 Index shed 10 points (0.8%) to 1,314, and the Nasdaq Composite declined 27 points (1.0%) to 2,745. In modest volume, 949 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil dropped $3.67 to $106.25 per barrel, wholesale gasoline lost $0.04 to $3.16 per gallon, and the Bloomberg gold spot price fell $10.29 to $1,452.86 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies— was 0.2% lower at 74.89.

Dow member Alcoa Inc. (AA $17) reported 1Q EPS ex-items of $0.28, one penny above the consensus estimate of analysts surveyed by Reuters, but despite a 22% year-over-year (y/y) increase, the company’s revenues of $5.96 billion were a bit short of the $6.04 billion that the Street had expected. The aluminum maker said its results were driven by higher realized prices for alumina and aluminum and growing demand for its products in major end markets, offset somewhat by a weaker US dollar, along with higher energy and materials costs. AA also reaffirmed its 2011 global aluminum demand growth projection of 12%. Shares were solidly lower.

Meanwhile, Chevron Corp. (CVX $104) announced that 1Q earnings are expected to be higher than in 4Q, with upstream—exploration and production—results projected to improve quarter-over-quarter (q/q), benefitting from higher crude oil prices. Also, the Dow component said downstream—refining—earnings during 1Q are expected to be slightly lower, reflecting reduced asset sales gains, largely offset by higher US margins. CVX will report 1Q results on April 29. CVX was lower.

Elsewhere, Dow member  Procter & Gamble Co. (PG $63) reported that its Board of Directors approved a 9% increase in its quarterly dividend to $0.525 per share. The dividend will be payable to shareholders of record at the close of business on April 29, 2011. PG traded higher.

Finally, Cisco Systems Inc. (CSCO $17) announced that it will exit aspects of its consumer business and realign the remaining consumer business, as it aligns operations to support its network-centric platform strategy. The Dow member said the move will result in a reduction of approximately 550 employees and restructuring charges are not expected to exceed $300 million. Shares were modestly lower.

Import prices rise, trade deficit wider than expected, small business confidence falls

The Import Price Index rose 2.7% month-over-month (m/m) for March, compared to the expectation of economists surveyed by Bloomberg, which called for the index to increase by 2.1%. Year-over-year, import prices are higher by 9.7%, versus the 8.6% forecast of economists. The increase in prices was driven by a 9% m/m jump in fuel prices as petroleum surged 10.5%, while nonfuel prices increased 0.6%, on rising prices for industrial supplies and materials, along with foods, feeds, and beverages.

Moreover, the trade deficit narrowed by a smaller amount than anticipated, declining from an unfavorably revised $47.0 billion in January to $45.8 billion in February, versus the estimate of economists, which called for the deficit to narrow to $44.0 billion. Exports declined by $2.4 billion to $165.1 billion, led by automotive goods, and imports fell by $3.6 billion to $210.9 billion, paced by decreases in automotive and capital goods. The price of crude oil increased from $84.34 per barrel in January to $87.17 per barrel, but the quantity of oil imported fell from 2.91 million barrels to 2.42 million barrels.

In other economic news, the NFIB Small Business Optimism Index unexpectedly deteriorated, declining from 94.5 in February to 91.9 in March, compared to the expectation of economists, which called for the index to improve to 95.0. The decrease came as the number of firms reporting expectations of higher sales declined, along with plans to hire, while those expecting a better economy fell into negative territory. The deterioration in the above components offset increases in expectations of higher selling prices, inventories, and capital spending.

Treasuries finished higher following the data and as the equity markets came under pressure. The yield on the 2-year note was down 10 bps at 0.74%, the yield on the 10-year note was 9 bps lower at 3.50%, while 30-year bond yield declined 8 bps to 4.58%.

Sentiment no better overseas

The negative sentiment overseas was exacerbated by some unfavorable reports from the economic calendar across the pond. Consumer prices in Germany—Europe’s largest economy—was unexpectedly revised higher for March, while the German ZEW Survey of Economic Sentiment fell more than forecasted. The index of German investor confidence dropped from 14.1 in March to 7.6 in April, compared to the decline to 11.3 that economists forecasted, illustrating growing uneasiness toward higher inflation, last week’s interest rate hike by the European Central Bank (ECB), and the festering euro-area debt crisis. In other economic news, the ZEW Survey of Economic Sentiment in the euro-zone also fell solidly in April, more than offsetting favorable UK data, which showed a slight improvement in a reading of home prices, cooler-than-forecasted consumer prices, and a narrowing of the nation’s trade deficit.

In the Asia/Pacific region, nuclear concerns in Japan weighed sentiment following an upgrade to the severity rating of the nation’s nuclear crisis to a level matching the 1986 Chernobyl disaster, while Japan’s Economic and Fiscal Policy Minister Yosano warned that the economic impact of the March 11 earthquake and tsunami may be bigger than initially expected. Elsewhere, the Bank of Korea left its benchmark interest rate unchanged at 3.00%.

In news out of our neighbor to the North, the Bank of Canada concluded its monetary policy meeting, retaining its benchmark overnight rate at 1.00%, as widely expected, but noted that the “persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting downward pressure on inflation.”

US retail sales and Fed assessment of economy due up tomorrow

Major US economic releases tomorrow include advance retail sales, forecasted to rise 0.5% month-over-month (m/m) in March, after gaining 1.0% in February, while sales ex-autos are estimated to grow 0.7%, the same pace as the prior month. The retail sales report includes spending at supermarkets and gas stations.

March same-store sales results—sales at stores open at least a year—reported by retailers last week were generally better than expected, despite the negative effects of the Easter shift and higher gasoline prices. Consumers have been bolstered by an improving job market, and the payroll tax cut that took effect this year has offset higher energy costs. However, consumers continue to be mindful of spending, looking for the best price and value when making purchasing decisions.

Later Wednesday, the Federal Reserve Beige Book will be released, wherein Fed staffers summarize anecdotal economic data from all twelve Federal Reserve districts in preparation for the next Federal Open Market Committee (FOMC) meeting scheduled for April 26-27. In the minutes from the March meeting, the Fed upgraded its view on the economy, saying it was on a “firmer footing” and labor conditions showed “gradual improvement,” and inflation due to commodity price increases was expected to be “transitory.”  Rate hikes are not yet on the table and the Fed will likely change its “extended period” language well before raising rates. However, the Fed is mindful of bubbles, with talk of a commodity bubble this time, making it possible the Fed moves more swiftly and with larger hikes when the time comes.

Other releases on the US economic calendar tomorrow include business inventories, expected to increase 0.8% in February after advancing 0.9% in January, as well as MBA Mortgage Applications.

International releases tomorrow include euro-zone industrial production, French CPI, the German wholesale price index, Australian consumer confidence, and China is scheduled to release money supply and new yuan loans sometime this week.