Morning Update

Seeing Red as Economic Optimism Waivers

Stocks are under pressure in morning action as traders continue to grapple with whether the recent economic recovery optimism can continue or if sentiment has gotten ahead of itself. Losses were pared slightly following a subdued reading of inflation at the consumer level and another improvement in manufacturing activity in the New York region. In equity news, the Wall Street Journal is reporting that major US life insurers have gained access to the government's Troubled Assets Relief Program (TARP), J C Penney reported EPS that matched expectations, while fellow department store firm Nordstrom topped the Street's forecast. Treasuries are lower following the inflation and manufacturing data, while key reports remain on deck. Overseas, markets are mixed.

As of 8:50 a.m. ET, the June S&P 500 Index Globex futures contract is 6 points below fair value, the Nasdaq 100 Index is 13 points below fair value, and the DJIA is 49 points below fair value. Crude oil is down $0.70 at $57.92 per barrel, and gold is up $0.40 at $928.80 per ounce.

The Wall Street Journal is reporting that the US Treasury Department is prepared to inject up to $22 million into US life insurer firms from its Troubled Asset Relief Program (TARP). A Treasury spokesman said the government has agreed to provide funds to Hartford Financial Group (HIG $15 ¹), Prudential Financial (PRU $39 ¹), Principal Financial Group (PFG $19), Lincoln National (LNC $16), Allstate (ALL $25), and Ameriprise Financial (AMP $25).

J C Penney (JCP $27) reported 1Q EPS of $0.11, inline with the Reuters estimate, with revenues falling 5.9% to $3.9 billion, and same-store sales fell 7.5%. The company said its alignment of inventory levels to current sales trends led to improved gross margins, while its continued success in controlling expenses helped it achieve flow through to bottomline results. Looking ahead the company said it expects consumer spending and mall traffic to remain weak. The department store issued 2Q EPS guidance below the Street's estimates but it raised its full-year EPS outlook.

Fellow department store Nordstrom (JWN $21) reported 1Q EPS ex-items of $0.31, five cents above the Streets forecast, as revenues fell 9.2% to $1.7 billion, while same-store sales fell 13.2%. JWN raised its full-year EPS guidance.

Consumer inflation matches expectations, New York manufacturing improves again

The Consumer Price Index was unchanged in April, matching the Bloomberg forecast. The core rate, which strips out food and energy, was up 0.3%, above the forecast of 0.1%. Year-over-year (y/y), core inflation rose from 1.8% in March to 1.9% in April, while the headline rate fell 0.7%.

The first reading on activity in the month of May, the Empire Manufacturing Index, a measure of manufacturing in New York, improved from -14.65 to -4.55, better than the estimate of -12.00. However, the index remains at a level indicating contraction as a reading of zero suggests conditions are neither contracting nor expanding. Treasuries moved lower following the consumer inflation and manufacturing data.

Later today, the economic calendar will yield industrial production and capacity utilization and industrial production is expected to decline 0.6% in April, and capacity utilization is expected to decline to a record low of 68.8%. Additionally, preliminary University of Michigan consumer sentiment will be released, expected to increase from 65.1 in April to 67.0 in May.

Output reports thwart advance in Europe

Stocks in Europe were in the green in earlier action but have relinquished those gains and are in the red following a report that showed eurozone output shrank by a larger amount than economists surveyed by Bloomberg had anticipated. Eurozone GDP contracted at a 2.5% rate in 1Q, versus the previous quarter, while the region's output fell 4.6% on a year-over-year basis-the consensus called for readings of -2.0% and -4.1%, respectively. Per Bloomberg, both readings were the biggest drops since the eurozone data were first compiled in 1995. Adding to the disappointing backdrop, a separate report showed output in Europe's largest economy, Germany, contracted more than anticipated, falling 3.8% versus last quarter. However, losses are being limited by some relative strength in financials, led by solid gains in shares of UK bank Barclays (BCS $16) on a report that it was in talks to sell its asset management unit. Barclays did not comment.

Corporate news and manufacturing data drive Asia higher

Stocks in Asia were broadly higher as traders digested a few favorable reports from the corporate sector and a relatively upbeat reading from the economic front. Stocks in Japan led the way, with the Nikkei 225 Index gaining 1.9% and the broader Topix Index advancing 2.2% as the bulk of the enthusiasm came from reports from the region. Traders had a chance to react to Sony Corp's (SNE $26) forecast of an operating loss this year of 110 billion yen ($1.2 billion), which came in smaller than the 135.6 billion yen loss that analysts' polled by Bloomberg expected, and shares of Tokyo Electron (TOELY $95) moved about 8% higher after the semiconductor equipment firm said orders were likely to rise this quarter. Data regarding the manufacturing sector in Japan also helped boost sentiment after machine orders fell at a much lower rate than was forecast. However, a separate report following the close of trading showed Hong Kong's GDP contracted at a larger rate than economists had predicted.

In other equity news, Panasonic (PC $15) issued a forecast for an annual net loss of 195 billion yen ($2.05 billion)-its second-straight annual loss-which came in larger than the 110 billion yen that had been forecasted by analysts. The world's largest maker of plasma TVs also slashed its full-year dividend and provided its lowest annual revenue outlook in 14 years, per Bloomberg news. Elsewhere, shares of Rio Tinto (RTNTF $54) rose about 7% after the world's third largest miner said it remains committed to the multi-billion dollar investment deal with Aluminum Corp. of China (ACH $22).