Morning Update

Housing Data Dampens Early Advance

Stocks have relinquished early gains and are nearly unchanged following a much lower-than-expected reading of housing starts, accompanied by a larger-than-anticipated drop in building permits. The disappointing data is more than offsetting early enthusiasm in financials amid signs that the credit markets are thawing and on a report that some major US banks are expected to be close to paying back government loans, which helped Asian markets rally and is supporting trading in Europe. In equity news, Home Depot topped earnings expectations, American Express announced reengineering initiatives, and Medtronic matched profit expectations. Treasuries are mixed.

As of 8:50 a.m. ET, the June S&P 500 Index Globex futures contract is 1 point below fair value, the Nasdaq 100 Index is 8 points below fair value, and the DJIA is 22 points below fair value. Crude oil is up $0.34 at $59.37 per barrel, and gold is up $0.90 at $922.60 per ounce.

Dow member Home Depot (HD $26) posted 1Q EPS ex-items that fell about 15% to $0.35, but seven cents above the Reuters estimate, as revenues declined 9.7% to $16.2 billion, which also topped the $15.8 billion consensus forecast. Same-store sales for the quarter fell 10.2%, led by an 8.6% drop in US comparable sales, and the world's largest home improvement retailer said, "Our markets, and the consumer in general, remain under pressure." HD reaffirmed its full-year revenue and EPS guidance.

Fellow Dow component and financial firm American Express (AXP $26 ¹) announced a new companywide reengineering initiative expected to produce cost benefits of approximately $800 million during the remainder of 2009. The plan includes the elimination of approximately 4,000 jobs, or about 6% of its current workforce, reduced investment spending on marketing and business development, and further cutbacks in operating costs. The company said, "While we have remained solidly profitable at a time when some parts of the card industry were incurring substantial losses, we continue to be very cautious about the economic outlook and are therefore moving forward with additional reengineering efforts to help further reduce our operating costs."

The Financial Times is reporting that US authorities told Wall Street executives they would allow five or six banks to repay the loans received from the government's Troubled Asset Relief Program (TARP), according to people familiar with the matter. The report said that Goldman Sachs (GS $143), JPMorgan Chase (JPM $37), and American Express-which were all found to have adequate capital levels following the recent government stress tests of the industry-are expected to be in that first group. None of the entities involved commented on the report.

Medtronic (MDT $34) reported fiscal 4Q EPS ex-items of $0.82, in line with the Street's estimate, as revenues declined 1% to $3.8 billion. The pacemaker manufacturer said it generated the second-straight quarter of free cash flow above $1 billion, due to its strong balance sheet management. MDT said it expects 2010 EPS ex-items to be in the range of $3.10-3.20, versus the Street's forecast for the company to report earnings of $3.20 per share.

Housing starts lower than expected

Housing starts and building permits came in lower than expected. Starts in April fell 12.8% to an annual rate of 458,000, below the Bloomberg estimate of 520,000. Building permits also came in lighter than expected as the more forward-looking indicator of homebuilding declined 3.3% to an annual rate of 494,000, below the forecast of 530,000. Additionally, March's figure for starts was revised higher, while permits were revised lower. Treasuries are mixed following the housing data.

Economic enthusiasm supports Europe

Stocks in Europe are nicely higher in afternoon action, led by financials and basic materials on optimism that the credit markets may be returning to normalcy and the global recession may have seen its worst days. Banks are up across the board on enthusiasm that US banks are strengthening after several firms appear to be getting closer to paying the government back the TARP funds they borrowed and after a key metric of credit market conditions improved. The three-month Libor rate-an interest rate at which banks borrow from each other in the short term-declined four basis points to 0.75%, suggesting that some of the lending apprehension of banking firms is dissipating and the credit markets, which are the lifeblood of the global economy, are improving.

Additional support to economic sentiment came in the form of a key reading of investor confidence in Germany, Europe's largest economy. The German ZEW survey of economic sentiment rose from 13.0 in April to 31.1 in May, which topped the reading of 20 that economists surveyed by Bloomberg expected, and was the strongest level in about three years.

Wall Street enthusiasm travels to Asia

Stocks in Asia posted broad-based gains, moving solidly higher, led by optimism in the financial sector as some US banks are aiming to pay back government loans, and some key interest rate measures eased, suggesting the credit markets may be on the mend. Japanese shares were solidly higher as the Nikkei 225 Index rose 2.8% and the broader Topix Index gained 2.3%, led by banks and export issues amid the pullback in the yen versus the dollar, which soothed some exacerbated fears that the recent rally in the Japanese currency could thwart profits of companies that rely heavily on the sales in the US. On the equity front, Japan's largest bank, Mitsubishi UFJ Financial Group (MTU $6) rose about 4% after it forecasted that it expects a net profit for its current year, offsetting the report of its first full-year loss since it was formed in 2005 on increased loan losses and declining values of its stock investments. Elsewhere, after surging over 17% yesterday on a favorable nationwide election, India's BSE Sensex 30 Index took a breather, gaining 0.1%.