Morning Update

Stocks Set to Rise in Tentative Early Action

Stocks are slated to start the day higher, after looking to open lower, after an upgrade of Goldman Sachs by analyst Meredith Whitney. However, trading will likely be tentative today, as traders continue to question whether the economy is on the path recovery. Earnings season began last week, but this week brings a plethora of reports to sift through, and traders are nervous that management commentary and guidance will fail to support the “green shoots” story. Economic reports will also heat up later in the week, with today’s sole report being the monthly budget statement, due out in afternoon trading, and Treasuries are mixed. In equities, concerns on the viability of CIT Group continue. Overseas, Asian shares plummeted, while European markets have erased early losses in afternoon action.

As of 8:38 a.m. ET, the S&P 500 Index Globex futures contract and Nasdaq 100 Index are both 6 points above fair value, and the DJIA is 32 points above fair value. Crude oil is up $0.16 at $60.05 per barrel, and gold is higher by $0.70 at $913.75 per ounce.

Bloomberg is reporting that CIT Group (CIT $2) internal documents indicate that the company believes 760 manufacturing clients would be at risk of failure, and 300,000 retailers would face a potential crisis if CIT defaulted. CIT shares have been under pressure on concerns the FDIC won’t allow the lender to access its Temporary Liquidity Guarantee Program to raise funds in the face of $10 billion of debt maturing through 2010, according to Bloomberg. In a statement, CIT said it is in active discussions with its principal regulators in a series of measures to improve its near-term liquidity position, including options outside of the FDIC program.

In an interview on CNN in London, Treasury Secretary Timothy Geithner said that while the pace of economic decline had slowed, “it’s going to be a while before we’re confident we’re going to have a strong sustainable recovery,” saying that there are still “enormous challenges.” Regarding a second stimulus, he said that he “didn’t that think that’s a judgment we need to make now,” adding that most of the stimulus measures will take effect in the second half this year. President Obama said patience is needed, and his recovery plan needed time to work. He added that the stimulus is a two-year program intended to boost the economy, and would “steadily save and create jobs as it ramps up over the summer and fall.”

Economic calendar heats up starting tomorrow

Inflation readings start off the week, with Tuesday’s release of the Producer Price Index, expected to show prices at the wholesale level increased 0.9% month-over-month in June. Meanwhile, the core rate, which excludes food and energy, is estimated to have increased 0.1%, which would indicate that outside of volatile energy prices, pricing pressure in the economy remains low. Then on Wednesday, the other major inflation reading – the Consumer Price Index – will be announced. It is expected that prices at the consumer level rose 0.6% in June, after rising just 0.1% in May. Similarly, when excluding food and energy, it is expected that consumer prices rose just 0.1%.

Wednesday’s advance retail sales report will also draw investor attention, expected to have risen 0.4%. Ex-autos, sales are expected to have increased 0.5%, which would be inline with the May level. Although recent data shows retail sales may be stabilizing at a low level, consumer spending over the next several years will likely be lower than we’ve seen the past decade. Consumers are rapidly changing their behaviors, as seen by the 6.9% consumer savings rate, which was almost 0% just a year ago.

Wednesday also brings a report on industrial production, forecasted to have fallen 0.6% in June, after dropping 1.1% in May. That is expected to push capacity utilization to another record low level of 67.9%.

Housing starts and building permits will be announced on Friday, to round out the week. Housing starts are expected to show builders broke ground at an annualized rate of 528,000 homes in June, inline with the May level, while building permits are expected to have come in at an annual rate of 524,000. The numbers have been unpredictable in recent months due to erratic changes in weather and the volatile multi-family home market.

European shares erasing early losses

Equities across the pond are higher in afternoon trading, paring earlier losses, as a rally in automakers is offsetting declines in financials. In financial news, the UK’s Lloyds Banking Group (LLOY 64) is reportedly going to announce further losses when it reports in three weeks, and Swiss bank UBS (UBS $12) said it will step back from a court battle regarding the banks’ refusal to reveal names of its offshore customers. In other news, consumer electronics company Royal Philips Electronics (PHG $19) rose after reporting an unexpected earnings gain versus the forecast of a net loss, Daimler (DIA $35) shares rose after agreeing to sell part of its Tesla Motors stake, and Porsche SE (PAH3 46) rallied after a news report that Qatar offered to buy a stake in the firm.

Asian markets end steeply lower

Stocks in Asia were solidly lower, taking cue from the lower-than-expected US consumer confidence release last week, and as traders continue to question whether economic and earnings news are strong enough to support the strong bounce markets have taken since the March bottom, with commodity-related stocks suffering the steepest losses. Taiwan’s Taiex was down 3.5%, after hopes for an economic cooperation agreement with China this year were delayed to next year. Shares in mainland China were buoyed by news that homebuilder China State Construction Engineering Corp were given the final approval to list on the Shanghai market in what is likely to be the world’s largest listing this year. Beijing recently ended a nine-month suspension of IPOs last month, and several smaller companies successfully tested the capital markets last week. South Korea’s KOSPI was among the weakest markets, falling 3.5% after news that North Korea’s Kim Jong-il was diagnosed with pancreatic cancer last summer, highlighting the geopolitical risks in the region. Japan’s Nikkei 225 was lower by 2.6% after Prime Minister Taro Aso called for an election on August 20, and concerns that waning support for his ruling Liberal Democratic Party could lead to a change in the party in power for only the second time since 1955, according to Bloomberg.