Morning Update

First Peek at 2Q Output Sours Sentiment

Stocks have given up early gains and are lower in morning action after the first reading of US output in 2Q showed a smaller-than-expected contraction, but the reaction on the Street is negative. Earnings remain in focus, with Walt Disney and MetLife posting better-than-expected bottom line results but missing on their top lines, Chevron missed on its profits but beat on revenues, and Las Vegas Sands reporting an unexpected profit. Treasuries overcame early losses and moved higher following the GDP report, and after the Employment Cost Index rose more than anticipated. Overseas, Asia continued to advance on upbeat profit reports, while Europe relinquished modest gains and is lower.

As of 8:54 a.m. ET, the September S&P 500 Index Globex futures contract is 4 points below fair value, the Nasdaq 100 Index is 8 points below fair value, and the DJIA is 28 points below fair value. Crude oil is down $0.64 at $66.30 per barrel, and gold is nearly unchanged at $934.43 per ounce.

Dow member Walt Disney Co. (DIS $26) reported fiscal 3Q EPS ex-items of $0.52, one penny ahead of the Reuters estimate, as revenues dropped 7% to $8.6 billion, which was below the $8.8 billion forecast of analysts. The company's saw revenue declines across all of its segments compared to the same period last year, with its parks and resorts unit falling 9% to $2.8 billion, media networks dipping 2% to $4.0 billion, and its studio entertainment business dropping 12% to $1.3 billion. Disney's CEO Robert Iger said a tough global economy impacted its performance in the quarter, but the company remains encouraged by the relative strength of its business.

Fellow Dow member Chevron (CVX $68) announced 2Q EPS of $0.87, below the consensus estimate of $0.97, as revenues declined over 50% to $40 billion, versus the $33.2 billion that was expected.

MetLife (MET $34) posted 2Q EPS ex-items of $0.88, well above the Street's forecast of $0.68, as its premiums, fees and other revenues rose 4% to $8.4 billion, which was short of analysts' estimates. The company said it had very strong deposits and positive net cash flows in its US annuity business, its institutional revenue rose 8% versus last year, and its international business continued to perform well. MET added that consistent growth in its core businesses enabled it to achieve noteworthy results despite lower investment income.

Las Vegas Sands (LVS $11) reported an unexpected adjusted 2Q profit of $0.01 per share, versus the Street's forecast which called for the casino operator to post a $0.01 per share loss. LVS posted revenues of $1.1 billion, roughly in line with analysts' expectations. The company said it operating results reflect the challenging economic environment, but it is pleased with the cash flow performance of its Las Vegas and Macau properties, which reflected the relative strength of its diversified, convention-based business.

2Q GDP contracts at a less-than-expected rate

Advance Gross Domestic Product , the broadest measure of economic output, fell at an annualized rate of 1.0% in 2Q, a lower contraction than the Bloomberg forecast, which called for a 1.5% decline, and far below the 6.4% decline in 1Q—which was negatively revised from -5.5%. Personal consumption fell 1.2%, more than the -0.5% forecast and following a downwardly revised 0.6% advance in 1Q, led by weak durable goods purchases. GDP was negatively impacted by drop in housing and business investment spending, which fell 29.3% and 8.9%, respectively. Real final sales, which exclude changes in inventory, fell 0.2%.

Pricing pressures were subdued, with the GDP Price Index rising 0.2%, compared to a gain of 1.9% in 1Q and the forecast of 1.0%. The core PCE Index, which excludes food and energy, increased 2.0%, below the estimate of 2.3%, and the rate sits at the top end of the Fed’s implied target of 1-2%.Treasuries reversed early losses and moved higher after the report.

Elsewhere, the Employment Cost Index for 2Q rose 0.4%, higher than the Bloomberg consensus of 0.3%.

Europe gives up modest gains

Stocks in Europe have turned lower in afternoon action, relinquishing a modest advance following the US output data and as traders are mulling over another round of earnings reports. However, financials are posting an advance, showing some resiliency after Deutsche Bank's (DTBKY $123) CEO warned that the financial crisis "is not over" as bad corporate and consumer loans could be "the next wave" of the crisis. However, the news from the earnings front is tilted toward the negative side and is limiting the advance across the pond. The oil and gas sector is weighing on the eurozone markets after Italian energy firm Eni (E $49) reported earnings that missed analysts' forecasts, and French oil and gas company Total (TOT $56) said profits dropped 54% and said output fell. Elsewhere, Air France (AFLYY $13) is lower after the airline posted a quarterly loss that was more than twice what analysts surveyed by Bloomberg had anticipated.

Asia advance intact

Stocks in Asia were higher across the board, extending yesterday's steep gains the came from a rebound in China and solid corporate earnings reports. More profit reports continued to support sentiment, with Sony Corp (SNE $27) gaining about 7% as traders had a chance to react to the company's smaller-than-expected loss, and Taiwan Semiconductor (TSM $11) gained over 5% after the world's largest custom chip maker issued profit and sales guidance that topped analysts' forecasts. China rose solidly again to add fuel to the advance, as the Shanghai Composite Index gained 2.7%, and yesterday's rebound in commodity prices helped resource-related countries, such as Australia, post nice gains to help the advance in the Asia/Pacific region. Elsewhere, Hong Kong's Hang Seng Index rose 1.7%, South Korea's Kospi Index advanced 1.5%, and India's BSE Sensex 30 Index added 1.8%. However, there were some disappointing data for the Asian markets to overcome, as a report showed the Japanese jobless rate rose more than expected, Nintendo (NTDOY $33) announced sales of its Wii game consoles pressured its net income, and Mazda (MZDAF $3) said sales fell 45%, leading to the automaker posting a net loss.