A mixture of downbeat data and investor caution tilted indices to the downside in the first half of the week, with the DJIA testing back below 8000 on Tuesday and Wednesday. Fear of deflation lurked after the US March CPI figure posted its first y/y decline since August 1955. Lower than expected housing starts data midweek dampened hopes for any signs of improvement in the key housing sector. Financial sector earnings reports were vital to the week's action. Goldman Sachs blew out earnings on Monday, but a $5B secondary offering priced at $123/share took the shine off the report, and garnered Goldman downgrades from JP Morgan and Sandler O'Neill analysts. But JP Morgan, Citigroup and GE scattered the naysayers late in the week as all three firms reported strong results on Thursday and Friday, reigniting the six week old stock market rally. For the week, the S&P 500 rose 1.5%, the DJIA gained 0.6%, while the Nasdaq Composite was up 1.1%. The VIX volatility index, a measure of fear in the stock market, closed out the week at fresh six-month lows just below 34. Commodities failed to participate in the weeks' rally, with gold sagging on Friday to end the week down 1.6% at around $869 in the spot market, and crude oil dropping 3.8% but managing to close above $50.
The week saw some waffling by the Obama Administration has over the disclosure of bank stress tests. Administration officials had earlier insisted that test results would not be made public, out of concerns of fallout for failing banks. But sustained criticism of the testing, from various critics (including FDIC Chairwoman Bair) seems to have hit home. Midweek there were several press reports that the Treasury was considering a couple of strategies for publicizing the results in such a way that would minimize the damage to the laggard banks, including aggregating the data for a broad snapshot of the industry's health or some sort of "concept paper" to explain how to interpret the results of the stress tests. The White House later confirmed that it would disclose the “assumptions” of the stress tests on 4/24 and the full results on 5/4, while leaving many questions unanswered. Nikkei filled in some of the blank spots on Thursday, reporting that the government may classify the 19 banks undergoing testing into four categories ranging from A to D, with banks labeled as A being the most healthy and D denoting banks that are unable to stay in business on their own.
Three of the top US financial institutions-Goldman Sachs, JP Morgan and Citigroup-reported first-quarter results this week. All three beat consensus EPS and revenue estimates by wide margins, seeming to justify the flurry of comments from banking CEOs back in early March that got the current financials-driven rally underway in the first place. Citigroup still managed to lose money, and even though the loss was half the expected amount, it still colored CEO Pandit's comment from early March that the bank was “profitable” in the first two months of the year. Shares of nearly every tier-one bank have continued to rise during the week, extending the bullish gains seen over the last five weeks. One difference among these three firms has been their position on TARP, with pointed comments from Goldman and JP Morgan executives expressing their desire to return Federal TARP funds as soon as possible, with Goldman's Blankfein calling the return a “duty” and JP Morgan's Dimon saying the program has become a "scarlet letter" for banks. Citi, whose position is much more tenuous, hardly mentioned the program at all. Watch for results from Bank of America and Morgan Stanley next week to see if financial firms can continue to fuel the rally.
Other major earnings reports came from General Electric, Johnson & Johnson, Intel and Google. GE missed revenue targets but managed to beat earnings estimates, reporting net income that was down more than 30% over last quarter's results. In line with quarterly results from other leading financial firms, GE Capital made a profit in the quarter, and GE executives affirmed expectation that the division would be profitable for the full year 2009. CEO Immelt estimates that in-house stress tests indicate GE doesn't need more capital, and also said he does not see GE Capital being subjected to government stress testing. J&J reported earnings just a hair ahead of the consensus views while missing revenue targets by a bit, and reaffirmed its 2009 forecast. Intel made a mockery of consensus analyst estimates, reporting first-quarter EPS of $0.11 versus expectations of $0.03, and beating on the top line as well. Intel's forecast for the next quarter was murky however, noting that conditions in Q2 would mirror those in Q1, while Q1 gross margins are down both q/q and y/y. Intel's CEO said he believes PC sales bottomed out and the industry is returning to normal seasonal patterns. Google reported its first q/q revenue decline in revenue since the company went public five years ago, coming in a hair below estimates, and made some cautious remarks about seasonality, but earnings still beat estimates handily. Google's CEO optimistically insisted that the company is well-placed to take advantage of the eventual economic recovery.
Three high-profile bankruptcies reminded investors that the fallout from the credit crisis is continuing and will likely continue hurting firms for years to come. General Growth Properties sought the protection of Chapter 11 after it was unable to wring any more concessions out of creditors in long-running negotiations. As one of the largest commercial real-estate REITs in the US, the firm had gone on a mall buying binge throughout the boom years in the middle of this decade, racking up $27B in debt just as the market peaked and crashed. Newsprint supplier AbitibiBowter went belly up after its own efforts to restructure $9.9B in debt collapsed; the firm has been pressured by declining demand for newsprint and, of course, the credit crisis. Auto-parts supplier Noble International declared bankruptcy thanks to the troubles in the auto sector, with a total of $473M in liabilities.
For most of the week, US Treasury markets saw prices rise and yields drift lower despite increasing appetite for equities throughout the week, before yields rebounded sharply to their best levels on Friday. Similar to what was seen between equity and currencies last week, the risk appetite dynamic between bonds and stocks lost some strength. The positive momentum from the Wells Fargo pre-announcement just before the Easter break was amplified results from Goldman and JP Morgan. But with the Dow moving back above 8000 and the S&P bringing 900 into view, the benchmark 10-year note yield still declined from 2.9% back below 2.8% by mid-week. Also buoying Treasury prices were another three rounds of Fed purchases and the absence of any offsetting supply. But the rebound in yields on Friday brought the 10-year back to near 2.95%. Looking ahead to next week the calendar remains light with only a 5-year TIPS auction set for Monday followed by a 2- and 5-year note announcement on Thursday, when the Treasury is expected to announce another $75B+ in supply.
The private sector even saw a few more “glimmers of hope” that the crisis in credit markets is continuing to wane. Higher-yield paper continue to rally, with junk bond prices up nearly 10% on the year. The week saw more than $2.5B HCA and Crown Castle paper trade in two of the biggest deals in months. Late Wednesday more than $1B in non-TALF debt backed by auto loans sold at 165 basis points above swaps providing fresh hope consumer credit markets are on the mend. Finally convertible bond deals from Micron Technologies and Ingersoll-Rand saw robust demand. Despite these encouraging signs it remains clear the all clear alarm is far from sounding, given that the yield on the one-month US Treasury has slipped back near 0%, indicating investors remain concerned enough to chose the ultimate safety and liquidity of USTs over any returns .
Currency traders spent the week reading the tea leaves in economic data from around the world, but chiefly China, for data that might confirm that the worst of the crisis has passed. Data released over the weekend showed strong loan growth in China, whetting appetites for Chinese GDP stability later in the week, but cautious comments from PBoC advisor Fan Gang deflated some of that momentum, noting that it might years to complete the country's economic adjustment. Echoing past comments and other British political figures, BoE Governor Blanchflower shined the spotlight on jobs, reiterating that employment is biggest issue moving forward (unlike US obsessions with home values and financials). Vague chatter of a second Chinese stimulus package made the rounds but participants were sorely disappointed when China only announced only outline of a stimulus plan for the electronics sector, with the measures expected to contribute a paltry 0.7% to GDP over three years. Chinese PM Wen cautioned about holding "blind optimism" in regards to any economic recovery and that the government should not underestimate duration of crisis. Chinese Q1 GDP growth was reported at 6.1%, one-tenth below consensus and shy of the 8% annual rate Chinese leaders have touted.
The EUR/USD price action for the week saw the pair test its best levels in thin trading on Monday as the Easter Monday holiday in Europe prompted a “stop hunt” for weak shorts. The pair eventually moved lower aided by comments by ECB's Weber that the ECB would announce non-conventional measures at its May policy meeting and would be valid for remainder of 2009 and 2010 period. On Friday the dealers were analyzing comments from ECB's Trichet, with their overall assessment that Trichet probably wants a weaker euro. One dealer noted that the EUR/USD was around 2% below its 200-week (or four-year average), noting that the currency could hardly be seen as weak. Overall dealers continued to view the outlook for the euro as negative, highlighted by Fed Governor Fisher's comment on Thursday that the challenges faced by the Euro Zone exceed those in the US. By the end of the week, EUR/USD was testing below the 1.3070 level, its lowest point since March 18th, before the Fed announced quantitative easing.
USD/JPY headed back below parity as dealer chatter circulated that EUR/JPY cross was weighed down by Eurobond redemptions of around €45B maturing later this week. Also aiding the yen was talk that Japan's Kampo Life was not planning to purchase non-JPY bonds in 2009. GBP/USD tested the 1.50 handle for the first time since January 12th, meeting with some stiff speculative selling as medium-term longs used the 1.5000 handle to book profits. Sterling was softer following comments from the UK trade minister, who said he was not concerned about further declines in GBP and added that export competitiveness would help the UK move out of recession. GBP/USD tested below 1.48 on Friday. CHF was softer as SNB Governor Roth reiterated his view that currency intervention had become necessary since the rise in the CHF threatened to offset rate cuts.
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