Morning Update

Earnings, Retail Sales, and Financial Health in Focus

Stocks are higher in morning action as the Street digests more reports of how some of the largest banks fared as a result of the government's stress tests, while digesting a smaller-than-expected loss from General Motors, and much better-than-expected April same-store sales from fellow Dow member Wal-Mart. Overseas, Europe is higher as the eurozone is reacting to a slew of upbeat earnings and a couple of rate decisions from key central banks in the region. In other equity news, Cisco beat earnings expectations and Target reported same-store sales that were slightly below expectations but issued upbeat 1Q earnings commentary. Treasuries are lowers as a drop in jobless claims is helping aid sentiment and nonfarm productivity rose more than anticipated. Elsewhere, Japan surges to support Asia, after returning form a three-session holiday.

As of 8:54 a.m. ET, the June S&P 500 Index Globex futures contract is 8 points above fair value, the Nasdaq 100 Index is 6 points above fair value, and the DJIA is 71 points above fair value. Crude oil is up $1.43 at $57.77 per barrel, and gold is up $10.70 at $921.70 per ounce.

According to the Wall Street Journal, people familiar with the matter said as a result of the government's stress tests—final results are due out after today's closing bell—Dow component Bank of America (BAC $12 ¹) must take steps to address a roughly $34 billion gap in its capital position, which was the largest shortfall among the 19 firms tested. The Journal also repots that Wells Fargo (WFC $27) will also need up to $15 billion in capital, and GMAC LLC, Citigroup (C $4), Morgan Stanley (MS $28), Regions Financial (RF $6) and State Street (STT $39) were listed as firms that need to address their respective capital positions. BAC has verified this figure but notes that it will have many options in making up the capital shortfall. None of the other banks have commented on the results.

Meanwhile, the Journal reported that a slew of other banks, including JP Morgan (JPM $37), Goldman Sachs (GS $140), Metlife (MET $32), Bank of New York Mellon (BK $30), and American Express (AXP $27 ¹), and Capital One Financial (COF $22), have passed the stress tests with no needs to improve their current capital position. These banks did not comment on the report. The results of the remaining six firms were not able to be located, according to the report.

Cisco Systems (CSCO $20) reported fiscal 3Q EPS ex-items of $0.30, five cents ahead of the Reuters estimate, as revenues fell 17% to $8.2 billion. The largest maker of routers and switches for the internet said it delivered solid results despite the challenging environment, and its CEO said customers are seeing some signs of stabilization.

Dow member General Motors (GM $2) reported a 1Q adjusted net loss ex-items of $9.66 per share, narrower than the Street's forecast that called for a loss of $11.05 per share. Revenues fell almost 50% to $22.4 billion due to GM's production volume decline of approximately 40% year-over-year. GM's 1Q cash burn rate was $10.2 billion. GM's CFO said it is planning for restructuring out of court but it is ready for bankruptcy if needed.

Meanwhile, several major retailers are reporting April same-store sales results, highlighted by Dow member Wal-Mart (WMT $50) reported sales increased 5.0%, excluding fuel, besting analysts' estimate of 2.9%, and Target (TGT $41) said April same-store sales increased 0.3%, slightly below the Street's estimate of a 0.4% gain, but said it expected 1Q earnings to be well above analysts forecasts. Shares of both are nicely higher.

Jobless claims fall and productivity rises

Weekly initial jobless claims (chart) fell by 34,000 to 601,000, versus last week's figure that was upwardly revised by 4,000 to 635,000. The drop in claims was well below the Bloomberg consensus of 635,000. The four-week moving average fell by 14,750 to 623,500, and continuing claims jumped again, gaining 56,000 to 6,351,000, versus the forecast of 6,350,000.

Preliminary nonfarm productivity (chart) rose at a 0.8% annual rate in 1Q, above the Bloomberg forecast of 0.6%. Output fell 4.1%. Unit labor costs rose 3.3%, versus a 2.7% estimate, as the number of hours worked declined 5.8% versus last year.

Treasuries are lower as traders digest the data, and later this afternoon, consumer credit will be released and is expected to improve from -$7.5 billion in February to -$4.0 billion (economic calendar).

Europe higher amid flurry of data

Stocks in Europe are in the green in afternoon action, buoyed by financials on relatively favorable sentiment that the US government stress tests will reveal manageable financial conditions of the major banks. Traders across the pond also have plenty of data to chew on, which is helping support the advance. The earnings front is offering the lion's share of the equity news, as Swiss Re (SWCEY $26) is up about 19% after the world's second-largest reinsurer reported better-than-expected profits, Anheuser-Busch InBev (AHBIF $32) is about 7% higher after the world's largest brewer said 1Q profits almost doubled to top analysts' estimates, and Unilever (UL $20) is up sharply after the world's second-largest maker of consumer goods posted better-than-expected 1Q sales growth.

The economic front in Europe is also in focus as a couple of key central banks announced interest rate decisions. The Bank of England kept its key lending rate unchanged at 0.50%, but said it will add 50 billion pounds ($75 billion) to its program of asset purchases. Elsewhere, the European Central Bank cut its benchmark lending rate by 25 basis points to 1.0%, and traders are awaiting the press conference from ECB President Jean-Claude Trichet to see if the central bank will announce the deployment of any nontraditional measures to help return normalcy to the financial markets, like the US, UK, and Japan have announced.

Asia jumps as Japan joins the week

Stocks in Asia were broadly higher, led by a surge in financials on relative relief from a report regarding the major US banks that underwent the government's stress tests. Some upbeat employment data also helped improve sentiment and support the advance. Following yesterday's much less-than-expected drop in US private sector payrolls, reported by ADP, Australia's employment picture unexpectedly improved as the nation's statistics bureau said the number of people employed rose by 27,300 in April and the unemployment rate declined from 5.7% to 5.4%. Economists surveyed by Bloomberg had expected the employment change to fall by 25,000 people, and the unemployment rate to increase to 5.9%. Australia's S&P/ASX 200 Index climbed 1.9%, but Japan—which has not traded in the past three sessions due to a holiday—led the way with the Nikkei 225 Index and the broader Topix Index both jumping 4.6%. In equity news, shares of Nintendo (NTDOY $35) failed to participate in the rally after the largest maker of video game consoles forecasted earnings that fell short of analysts' estimates. The disappointing guidance comes as a result of slowing sales of its Wii video-game players and expectations of a drop in annual sales of its portable DS player.