Update: Equities Lower On Weak Manufacturing Data, Focus Turns To Fed

U.S. stocks opened mixed on a slew of disappointing earnings reports, but quickly moved lower at 9:45AM after a very weak from Chicago PMI indicated that manufacturing conditions have deteriorated significantly. The market is coming off yesterday’s all-time closing high of 1,594 with the S&P 500 off -0.3% to 1,588 as of 10:35AM.

Despite the market selling off a bit on the weak manufacturing report, it is important to note that this is just another data point that furthers the argument that the Fed must keep their foot on the gas. Right on cue, all focus now turns to the Fed, with the FOMC beginning its two-day meeting on monetary policy today, with a decision slated for tomorrow. With inflation below the Fed’s 2% target, continued weak GDP and employment data, and today’s dismal manufacturing report, expectations have shifted back to the Fed continuing its bond-buying program at $85 billion a month for at least the rest of the year. With any scaling back of Fed policy seemingly now off the table, we could easily get a late day bounce this afternoon, and a push back to the psychologically important 1,600 level on the S&P 500.

Main Factors Driving Today’s Trade:

–          Manufacturing Conditions Deteriorate – Chicago PMI dropped below 50 for the first time since September 2009, falling to 49.0 indicating a slight contraction in Midwest manufacturing. The Chicago PMI, a monthly survey of regional manufacturing conditions, was expected to tick up to 52.5 from last month’s 52.4 reading. Equities shot lower on the reading, with treasury yields continuing to drop. The 10-year yield fell to a fresh yearly low of 1.64%. Despite the ugly PMI number, we continue to have surprisingly strong consumer confidence. The results of the Conference Board’s monthly consumer confidence survey released at 10 AM showed a bump to 68.1 versus expectations of 61.0 in April (from 59.7 in March).

–          Mixed Earnings In Focus – Good bottom-line/weak top-line numbers continue to be the quarterly trend (306 companies in S&P 500 have reported – 69% beating on EPS, while only 44% beating on Revenues), with very disappointing earnings from Cummins, Pitney Bowes,  US Steel, and Pfizer  in focus today. Cummins reported a sharper-than-expected drop in quarterly earnings, citing weak demand for most of products in most of its markets, but an especially dramatic decline in sales of its engines and turbines to customers in the mining and oil and gas industries., Pitney Bowes cut its dividend in what some fear may be the start of a new trend. US Steel sales dropped more than 10%. Pfizer trimmed its full-year profit outlook. Despite a struggling European economy, both UBS and Deutsche Bank posted solid quarterly results, sending both banks up roughly 5%. Elsewhere, Avon Products reported a better-than-expected first-quarter profit in the latest sign the beauty products company’s business continues to improve, helped by higher sales in key markets Brazil and Russia and cost cuts.

–          Continued German/Euro-Zone Weakness – Euro zone unemployment hit a fresh all-time high of 12.1% in March as predicted, up from 12.0% in February. The German unemployment rate was unchanged at 6.9%, but the increase in the number of unemployed, at 4,000 in March, was double what was predicted by economists. Additionally, German retail sales fell 0.3% in March after dropping 0.6% in February, highlighting continued weakness in the German economy.

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