Whether world events or rising costs impact corporate profits this quarter has yet to be seen, but stocks are likely to be hypersensitive to the possibility.
There's not much expected in the way of earnings news Tuesday, but already traders are on the look out for warnings and comments on how the tragedy in Japan, upheaval in the Middle East and any other factors are impacting earnings.
"Earnings and cost pressures.That's going to be the major focus in the next few weeks. There's going to be a lot of talk about margins peaking.. but deceleration is not the same thing as decline," said Barry Knapp, head of equities portfolio strategy at Barclays Capital. Knapp said some margin growth may slow but industries, like financials, energy and the industrials should see margins continue to expand.
"All this stuff happens in a business cycle, but it's second derivatives phase. People were getting so excited looking for positive signals..Now they're looking for negatives...A lot of people got carried out last week looking for a negative" as the market moved higher, he said.
Earnings warning season is in full swing and a few comments crossed the tape Monday. After the close, Halliburton said the conflicts in the Middle East, particularly sanctions on Libya, dented its first quarter profits by $0.03 or $0.04 per share. It also expects to take a bigger hit from weather, between $0.05 to $0.08 per share. Cameron International said it too would take a charge $0.02 because of a project in Libya and another $0.15 because of delays in a subsea project in Nigeria.
Marriott International fell sharply after it cut its first quarter outlook in part because growth in some large group hotel markets, such as Atlanta, Orlando, New York and Washington was softer than expected. After the bell, teen retailer Hot Topic said it would take a $15 million charge related to the discontinuation of its music downloading site, ShockHound.com. Phillips Van Heusen , however, was a positive, reporting earnings and guidance better-than-expected after the closing bell.
Among the companies reporting earnings Tuesday are Apollo Group , which owns the University of Phoenix, as well as Lennar and McCormick . Another Apollo, the private equity firm, Apollo Global Management is expected to price its IPO after Tuesday's closing bell.
On Monday, stocks drifted lower after an early move higher. The Dow was off 22 at 12,197, and the S&P 500 fell 3 points to 1310. The dollar gained about a third of a percent against the yen, but slipped against the euro and sterling. Treasurys fell, with the 10-year yield rising for a fourth day to 3.448 percent, and the 2-year, at 0.773 percent, higher for a seventh day.
"Near term, I think we've backed up a little bit more than I thought we would" said RBS Treasury strategist John Briggs. "Some of it was related to the fact that we have supply coming with quarter end settlement." The Treasury auctions $35 billion in 5-year notes at 1 p.m. Tuesday and another $29 billion in 7-year notes Wednesday. Demand at Monday's $35 billion 2-year auction was weaker than usual.
As for the 5-year, "We're 30 bps off the lows. We're going to be 30 bps off where we were two weeks ago and kind of at the middle to high end of where we've been this year and considering the revisions to growth that looks like an attractive liquidity point to me," said Briggs. The 5-year was yielding 2.172 percent late Monday.
Briggs pointed to the reduced GDP forecast issued Monday by RBS economist Michelle Girard, who cut her first and second quarter forecasts after the personal income and spending data for February was released. She sliced her forecast for first quarter to 2 percent from 2.5 percent, and second quarter to 2.7 percent from 3 percent.
Girard, in a note, said weather may have affected activity and spending in the first quarter. Disruptions from the Japan situation could impact second quarter, along with the run up in gasoline prices which could weigh on spending. Personal income rose by 0.3 percent in February and spending rose by 0.7 percent, but only by 0.3 percent in inflation-adjusted terms, she noted. Girard said inflation prospects look more worrisome and the PCE deflator was up 0.2 percent for a second straight month, the highest back-to-back readings since May and June of 2009.
Data Tuesday includes January's S&P/Case-Shiller home price index at 9 a.m. and March consumer confidence at 10 a.m. Investors are also watching the FDIC Tuesday which is expected to vote on proposed risk retention rules for the mortgage market, including a definition of "qualified residential mortgage." Within hours, House Republicans are expected to introducea series of legislation aimed at shrinking or eliminating Fannie Mae and Freddie Mac.
St. Louis Fed President James Bullard also speaks at 5 a.m. ET in Prague. Comments by Bullard and other Fed officials have sent ripples across financial markets since late last week, when Philadelphia Fed President Charles Plosser said that the Fed would have to raise rates and shrink its balance sheet in the not-too-distant future. Bullard suggested over the weekend that Fed officials should consider an early exit from its quantitative easing program, but several Fed speakers, including Chicago Fed President Charles Evans, Monday reinforced the view that the Fed will complete the program.
Fed officials have said they plan to end their program to buy $600 billion in Treasury securities in June.
"We're paying a lot of attention to these hawkish Fed presidents who really are not the mouthpiece of Fed leadership. Really who matters is the Fed Leadership. We'll see (New York Fed President William) Dudley Friday. I'm watching that speech closely. He's in the leadership camp," said Briggs.
Knapp agreed that the markets have been overly focused on the Fed comments. "The market still isn't moving on rates though," said Knapp. "..it's really still about growth. All this talk about Fed exit strategies right now is a premature discussion."
Oil gave back some of its gains Monday, slipping $1.42 to $103.98 per barrel after Libyan rebels recaptured some important oil ports and said they would resume exports. Saudi Arabia, meanwhile called on oil services companies to help boost its rig count by 30 percent to expand production capacity., according to a Simmons and Co analyst quoted by Reuters.
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