Morning Update

Caution on the Street to Start Week

Stocks are lower in morning action as traders look past last week's stress test results in the financial sector and await a busy economic calendar, looking for more signs that the global recession has already yielded its heaviest blows to the economy and if stability is setting in. On the equity front, BB&T, Capital One Financial, and US Bancorp are the latest firms to announce stock offerings following the stress tests, saying that the proceeds are aimed at paying back government loans. Treasuries are higher as equities slide and there are no major economic reports scheduled for release today, but Fed Chief Ben Bernanke is set to discuss the stress tests this evening, while a major retail report and key inflation measures are poised to be released later this week. Overseas, markets are mixed.

As of 8:49 a.m. ET, the June S&P 500 Index Globex futures contract is 14 points below fair value, the Nasdaq 100 Index is 22 points below fair value, and the DJIA is 111 points below fair value. Crude oil is down $1.33 at $57.30 per barrel, and gold is down $2.40 at $912.50 per ounce.

Three major banks whose capital positions were deemed adequate given the government stress tests under continued adverse economic conditions have announced plans to raise capital aimed at paying back the government loans they received as part of the Troubled Asset Relief Program (TARP). BB&T (BBT $26) announced that it has reduced its quarterly dividend by 68% to $0.15 per share and it will use the proceeds of a $1.5 billion common stock issuance, along with other funds, to repay the government's investment in the company. US Bancorp (USB $21) announced that it has commenced a public offering of about $2.5 billion of its common stock, and Capital One Financial (COF $31) said it will offer 56 million shares, or about $1.75 billion, and use the proceeds to buy back the preferred stock and warrants issued to the US Treasury. Shares of all three firms are lower.

Please read Schwab Center for Financial Research Senior Market Analyst Micelle Gibley's, CFA, article entitled Relief Following Resolution of the Bank Stress Tests, where she provides a detailed analysis of the government tests including some of the metrics used and implications of the different avenues that firms can take to address their capital cushions. You can find Michelle's article at www.schwab.com/marketinsight.

Heavy dose of economic data on deck

Treasuries are higher as equities pull back in morning action and as there are no major economic reports that are scheduled to be released today. However, the economic calendar for the rest of the week will have plenty for the Street to digest.

Advance retail sales will be released on Wednesday and will likely be the highlight of this week's economic calendar, and are expected to be unchanged month-over-month in April, after dropping a revised 1.2% in March. Ex-autos, sales are expected to increase 0.2%, following a 1.0% drop in March. Consumer sentiment and spending have bounced back from the virtual lockdown that occurred during late 2008.Spending has benefitted from pent-up demand, mortgage refinancing, and tax refunds, and the influence of confidence and sentiment can play an important role in human behavior. However, the sustainability of consumers' ability to spend is hampered by their increasing embrace of frugality, saving more and working to make their dollars stretch further by postponing purchases, and their debt levels still have further to fall.

The Producer Price Index will be released on Thursday, and is expected to show prices at the wholesale level rose 0.1% in April, following a 1.2% drop in March. The core rate, which excludes food and energy, is also estimated to have increased 0.1%, after being unchanged in March. The Consumer Price Index will be released on Friday, and it is expected that prices at the consumer level were flat in April, following a 0.1% fall in March. The core rate, which strips out food and energy, is expected to increase 0.1% in April, after rising 0.2% in March. The most volatile component of the price indices is often energy, which fell in March and has been rising recently.

As a result of excess slack in the economy, as measured by record low capacity utilization and low demand, the risk of deflation is the near-term concern. Longer term, the market is worried about the risk of inflation as a consequence of massive government cash injections and stimulative Federal Reserve monetary policy.

Industrial production will be released on Friday, and is expected to have fallen 0.6% in April, after declining 1.5% in March. Capacity utilization is expected to have continued to decline to a record low 68.8% for this series, which began in 1967.

Other reports that will occupy the economic calendar this week include tomorrow's release of the trade balance, followed by the Import Price Index, business inventories, and MBA mortgage applications on Wednesday, and weekly initial jobless claims on Thursday. Friday will likely be the busiest day of the week as the Empire Manufacturing Index and preliminary University of Michigan's Consumer Sentiment Index will join the consumer inflation, and the industrial production and capacity utilization reports.

Traders will likely pay some attention to Federal Reserve Chairman Ben Bernanke's speech on the stress tests of the 19 largest US banks at the Atlanta Fed's Financial Markets Conference. Bernanke will speak tonight at 7:30 p.m. ET and then he will participate in a Q&A session. The Street may be looking for any commentary on whether the companies that have been told to address their capital shortfalls will be able to meet their capital requirements with limited increases in funds provided by the government, while minimizing shareholder dilution.

Commodities pressured and cautious commentary form bank weighing on Europe

Stocks in Europe are under pressure in afternoon action as a pullback in commodity-related issues has the basic materials group trading among the worst performers. Traders are taking the opportunity to book some profits in the sector as they assess sustainability of the recent run-up amid the increased optimism that the worst of the global recession may be over, or, at the very least, that the rate of the descent in the economy is slowing. Financials are also lower to add to the pressure across the pond after Europe's largest bank HSBC's (HBC $44) CEO said "2009 promises to be a tough year," as loan losses increase and the company said it has not come out of the recession yet.

Asia mixed as earnings offset financial optimism

Stocks in Asia were mixed as financial shares posted solid gains as the optimism from last week's stress tests of the largest US banks continued to buoy the sector, but a couple of disappointing reports from the corporate front limited enthusiasm in the region. Shares of Toyota Motor (TM $79) were solidly lower as traders reacted to its forecast of a larger-than-expected loss and announcement that it will slash its dividend. The world's largest automaker said after Friday's close that it expects a loss for the year ending in March 2010 may reach 550 billion yen ($5.6 billion), which almost doubled the 284 billion yen loss that economists surveyed by Bloomberg had anticipated. TM also cut its semiannual dividend from 75 yen per share a year ago to 35 yen per share as part of cost cutting measures to limit the impact of the sharp drop in demand for vehicles amid the global recession. Additionally, Bridgestone (BRDCY $32) fell about 7% after the world's largest tiremaker by sales increased its first half loss forecast from a shortfall of 21 billion yen to 62 billion yen amid an increase of fixed costs and an unfavorable currency.