Morning Update

Markets Look Modestly Lower on Weak Data and Earnings

Markets are modestly lower, after early morning economic data disappointed, with the ADP employment report showing a slightly higher rate of job losses than forecast and a report showed that mortgage applications fell. Markets will likely trade tentatively ahead of releases later today, with the ISM Non-Manufacturing slated for 10 am EST and the minutes from the last FOMC meeting due out mid-day. Economic news overseas is doing little to boost sentiment, as European economic data missed and UK consumer confidence fell, while the Chinese government is seeking to curb lending, and overseas markets are mixed. In US equity news, Monsanto missed profit forecasts and Family Dollar Stores beat estimates and raised guidance for the next quarter. Treasuries are mixed.

As of 8:41 a.m. ET, the March S&P 500 Index Globex future and Nasdaq 100 Index are both 1 point below fair value, and the DJIA is 6 points below fair value. Crude oil is up $0.03 at $81.80 per barrel, and the Bloomberg gold spot price is higher by $12.75 at $1,130.75 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.1% at 77.68.

Monsanto Co. (MON $83) is trading lower, after the company issued a first quarter ongoing loss of $0.02 per share, lower than the consensus estimate of breakeven, on sales of $1.70 billion versus the expectation that sales would be $1.96 billion. The company confirmed full-year earnings and cash flow guidance saying that “early indicators of the seeds and traits business show the company on track” for the full year and with its operational plan through 2011 and 2012, while the first quarter is “a small but important quarter.”

Family Dollar Stores Inc (FDO $30) is trading higher, after reporting 1Q EPS of $0.49, higher than the analyst estimate of $0.47, while revenue for the quarter ended November 28 was $1.8 billion, as previously reported. The company also reported same-store sales of 4% for December, while the comparison for stores open more than a year in 2008 increased 6%. As a result, the company is forecasting 2Q EPS to come in at $0.65-0.79 per share amid a 2-4% increase in same-store sales, while the Street estimate is for a profit of $0.64 per share. The company affirmed its full-year earnings forecast while reducing its target revenue growth by 1% to a range of 4-6%.

ADP employment missed, ISM and FOMC on tap

The US MBA Mortgage Application Index rose by 0.5% last week, after the index, which can be quite volatile on a week-to-week basis, plunged 23% in the previous week, and today’s release is for a two-week period due to the Christmas holiday. Rates on 30-year fixed mortgages exceeded 5% for the first time since October. The average 30-year mortgage rate rose to 5.18% versus 5.08% previous week and 4.91% the week before. Within the index, the Refinance Index fell 1.6% after dropping 30.5% the previous week, to offset more modest changes in the Purchase Index, which rose 3.6% last week after dipping 4.0% the prior week. The average 30-year mortgage rate remains above the record low of 4.61% that was reached at the end of March.

Elsewhere, the ADP Employment Change Report was released and fell by 84,000 jobs, worse than the forecast that private sector employers shed 75,000 jobs in December after declining by 169,000 in November. The ADP report has been overstating job losses relative to the government’s nonfarm payrolls report in recent months. The Bureau of Labor Statistics will release nonfarm payrolls on Friday, with the Bloomberg survey of economists forecasting payrolls were flat in December, and that the unemployment rate increased to 10.1%, after falling to 10.0% in November. Treasuries are mixed.

The ISM Non-Manufacturing Index will be released after the market open, and is expected to have increased back into expansion territory, to 50.5 in December, after dipping below the 50 level that marks the separation between expansion versus contraction in November, falling to 48.7 (economic calendar). Monday’s better-than-expected release of the companion ISM Manufacturing Index improved to 55.9 in December after dropping to 53.6 in November, the fifth-straight month of expansion in the manufacturing sector and the highest reading since April 2006, with new orders jumping to 65.5, the best level since December 2004, and employment posted the third-consecutive month of expansion. The recovery in the manufacturing sector has been aided by “cash-for-clunkers” production and export strength, and due to its more cyclical nature, tends to lead changes in the service sector, but services comprise nearly 90% of the economy and are largely domestic-driven.

Markets have been indecisive when receiving bullish economic reports, at times cheering the prospect of a self-sustaining recovery, while at other times, demonstrating nervousness regarding the implication that the Fed would need to raise rates to keep growth from overheating. As such, the mid-day release of the minutes from the December Federal Open Market Committee (FOMC) meeting will receive extra focus from investors. While there were no surprises from the statement read immediately following the meeting, investors will be looking for signs of the timing that the Fed may be contemplating for exit of monetary stimulus.

European shares mixed

Stocks in Europe are mixed as industrial new orders and services PMIs out of the Euro zone came in lower than expected and the UK reported the first decline in consumer confidence in more than a year. In equities, Marks & Spencer (MAKSY $13), the UK’s largest clothing retailer, is lower after reporting a sales increase that some analysts said missed estimates, while the company said the 0.8% increase in same-store sales would have been 1% higher if it included the first day of its clearance sale like it did last year. Elsewhere in Europe, government debt was in view, ahead of a three-day meeting to discuss the finances of the Greek government, as the country’s Finance Minister rejected speculation they will need a bailout, saying “There will be no need for any outside help” and “we’re doing what needs to be done to bring the deficit down and control the public debt.” The comments were in contrast to a quote in an Italian paper citing European Central Bank policy maker Juergen Stark as saying “The markets are deluding themselves when they think at a certain point the other member states will put their hands on their wallets to save Greece.” Adding to the bearish government debt sentiment, Fitch Ratings lowered the credit rating on Iceland’s sovereign debt one level below investment grade.

China seeks to curb lending while Japanese companies report strong sales

Markets in Asia were mixed amid news the Chinese government will limit credit for some home purchases while Japanese companies reported strong sales. The Japanese Nikkei 225 Index was 0.5% higher after Toyota Motors (TM $84) reported unadjusted US vehicle sales rose 32% in December from a year earlier, and Nintendo (NTDOY $31) said sales of its Wii game console probably exceeded 3 million in the US in December, after selling 1.26 million in November, and 2.15 million in December 2008. South Korea’s Kospi Index rose 0.9% after Hynix Semiconductor, the world’s second largest computer-memory chipmaker according to Bloomberg, was reported by the Electronic Times to have received an offer to buy a stake in the firm by the United Arab Emirates government in November, while the company said they had no comment on the report. Australia’s S&P/ASX 200 Index fell 0.1% despite news that permits to build or renovate houses and apartments rose 5.9% in November, better than the 3.9% expectation. The Australian government gave grants for as much as $19,000 for first-time buyers of newly built dwellings in 2009, but has reduced the grant by two-thirds for 2010 and rates will likely rise as the central bank has hiked rates in three-straight meetings.

The Shanghai Composite Index was 0.9% lower after the Housing Minster said that the central bank will “closely watch changes in the property market, strictly implement relevant property lending policies,” will seek to prevent “abnormal volatility in lending between quarters and at the ends of months, guide the pace of lending and encourage the flow of money into existing projects rather than new ones, and “stabilize the stock market’s operations,” while supporting “relatively fast” economic growth and manage inflation expectations. They affirmed their commitment to a “stable” yuan, despite a call today by a researcher at the Chinese Academy of Social Sciences for a one-time 10% appreciation in the currency.