Morning Market Update

Stocks Cautiously Look Upward

Markets are poised to post a modest gain after a late day surge in stocks yesterday after yesterday’s pending home sales and vehicle sales gained more than expected, but today’s economic data and retailer same-store sales are coming in mixed. Treasuries are lower on the stock advance, while initial jobless claims fell more than expected but ADP reported private sector jobs gained less than expected and reported an upward revision to the prior month. In other equity news, Dow member JP Morgan Chase was fined in the UK for failing to separate client money from the firm’s and Whirlpool Corp announced a recall. Later today will yield another economic report in the form of ISM Non-Manufacturing. Asian markets surged and Europe is posting a session in the green.

As of 8:40 a.m. ET, the June S&P 500 Index Globex future is 3 points above fair value, the Nasdaq 100 Index is 1 point above fair value, and the DJIA is 20 points above fair value. Crude oil is up $0.40 at $73.26 per barrel, and the Bloomberg gold spot price is down $5.55 at $1,217.90 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is nearly flat at 86.74.

Dow member JP Morgan Chase (JPM $40) was fined $48.9 million by the UK Financial Services Authority, which said the fine was the biggest in the FSA’s history. The fine was for failing to separate client money from the firm’s futures and options business during the period from November 2002 to July 2009.

Whirlpool Corp’s (WHR $104) Maytag division said that it is recalling 1.7 million dishwashers to fix a faulty heating element that can ignite a fire according to the Consumer Product Safety Commission. The agency said that consumers should stop using the dishwashers immediately and disconnect the power source.

The nation’s retailers are reporting mixed May same-store sales—sales at stores open at least a year— with Target Corp. (TGT $54) posting a 1.3% increase year-over-year (y/y), compared to the 1.2% increase that analysts surveyed by Reuters estimated. TGT said that it sees continued volatility in the pace of economic recovery and the May result was “somewhat below our expectation.” The company announced that beginning this fall, Target REDcard cardholders would receive an additional 5% off purchases.

Elsewhere, Costco Wholesale Corp. (COST $59) reported May same-store sales grew 11% y/y, including the impact of fuel, while the holiday shift of Memorial Day into the month of May for 2010 from June’s results the prior year positively impacted results by approximately 2%, while analyst estimates were for an increase of 9.7%. Excluding changes in gas prices and foreign currencies, sales were up 5%.

Macy’s Inc. (M $22) announced a 1.4% y/y increase in its April same-store sales, while excluding the holiday shift sales were up 5%, and the Reuter’s estimate was for a 0.9% increase. The department store said its business trend strengthened toward the end of the month as the weather turned warmer and the Memorial Day holiday approached.

Jobs data mixed, services reading out later

A series of job data was released today, starting with weekly initial jobless claims, which declined 10,000 to 453,000, versus last week's figure which was upwardly revised by 3,000 to 463,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to decline to 455,000. The four-week moving average, considered a smoother look at the trend in claims, rose 1,750 to 459,000, and continuing claims increased by 31,000 to 4,666,000, compared to the increase to 4,610,000 that was anticipated.

While the ADP Employment Change Report showed private sector payrolls rose by 55,000 jobs in May, compared to the forecast of economists surveyed by Bloomberg, which called for a 70,000 increase, the miss was offset by an upward revision to April’s figure to 65,000 from 32,000. The release comes ahead of Friday’s broader nonfarm payrolls report, where economists expect an increase of 515,000 in May, after increasing 290,000 in April, while excluding government hiring, private sector payrolls are expected to increase 178,000, after expanding by 231,000 in April, due to the outsized impact of temporary hiring for the Census on the headline number.

Elsewhere, the final reading on 1Q nonfarm productivity (chart) rose at a 2.8% annual rate, below the Bloomberg forecast of a downward revision to 3.4% from the initially reported 3.6% increase. Unit labor costs fell 1.3%, versus a drop of 1.4% that was estimated.

The ISM Non-Manufacturing Index will be released at 10 a.m. EST, and is forecasted to increase to 55.6 in May from 55.4.in April, which would mark the seventh month in the past nine months above the 50.0 level that separates expansion from contraction (economic calendar). The report is generally considered a measure of economic strength in the service sector and is the companion to the ISM Manufacturing Index, which was released on Tuesday and posted a decline to 59.7 in May, indicating a slowing rate of growth.

The services PMI has lagged the manufacturing index, as the higher cyclicality of the manufacturing sector leads changes in the overall economy, and increased production has resulted in job gains, resulting in a positive feedback cycle that results in consumer spending that further propels production increases given the severe reduction in inventories that businesses allowed during the recession.

The other release slated for 10 a.m. EST is factory orders for April, which is anticipated to increase 1.8% after a 1.3% rise in March.

European share rise follows the US yesterday

Stocks in Europe are rising after the data regarding US pending home sales and carmakers’ vehicle sales for May came in higher than expected yesterday and US stock markets posted a late-day surge. Shares of BP Plc (BP $37) are higher despite cuts in the company’s long-term issuer default rating and senior unsecured rating by Fitch Ratings from AA+ to AA citing “concern that BP is still facing substantial additional risks in relation to the oil spill,” while the Coast Guard said that pipe cutting would resume and a top hat would be placed over the pipe. In other equity news, shares of Valeo SA (VLEEY $13) are higher after the company, which is France’s largest auto-parts supplier according to Bloomberg, gave a strong sales and margin forecast. Air France-KLM Group (AFLYY $12) is higher after Europe’s biggest airline said passenger traffic rose 4.3% in May. Shares of Dutch supermarket operator Royal Ahold NV (AHONY $13) are lower after the company said first quarter profit rose less than expected.

In economic news, April euro-zone retail sales fell 1.2% m/m, while the forecast was for a 0.1% gain, and the final reading on May’s euro-zone services PMI was revised slightly upward. In the UK, house prices rose more than expected m/m, while the PMI services index rose less than anticipated. Elsewhere, the unemployment rate in France was unchanged in 1Q, versus the expectation that the rate would increase.

The UK FTSE 100 Index is 1.7% higher, France’s CAC-40 Index is up 2.1%, Germany’s DAX Index is advancing by 1.7%, Italy’s FTSE MIB Index is rising 2.4%, Portugal’s PSI 20 Index is up by 1.6%, while Greece’s Athex Composite Index is increasing 1.5%.

Asia advances on strong May car sales and US home sales reports yesterday

Stocks in Asia advanced, led by a 3.2% gain in the Nikkei 225 Index as the yen continued to weaken after Prime Minister Hatoyama resigned yesterday amid a decline in confidence among voters and his own party and ahead of mid-term elections next month for the upper chamber of parliament. Hatoyama’s Democratic Party of Japan will choose a new leader tomorrow. Shares of carmakers led gains in the region after strong May vehicle sales were reported after Asian markets closed yesterday. In other equity news, Japan’s number one clothing chain operator, Fast Retailing (FRCOY $14) rose after sales at its Uniqlo chain gained for the first time in three months by 3.1% y/y, helped by promotions. In economic news, capital spending in Japan fell more than expected.

The Hong Kong Hang Seng Index rose 1.6%, led by property developers after the Land Registry said that home sales in the city rose 8.7% y/y in May and lender HSBC Plc (HBC $47) said that mortgages in Hong Kong increased more than 40% m/m due to low interest rates. The Shanghai Composite Index fell 0.7% on concern about banks’ fundraising and government measures to slow the property market, while software and biotechnology shares were boosted by government plans that were unveiled to stimulate growth in the two sectors.

Elsewhere in Asia, Australia’s S&P/ASX 200 Index increased 2.4%, led by a rebound in resource-based stocks, despite Xstrata Plc (XSRAY $3) becoming the latest in a string of companies saying it is suspending spending on projects in Australia as the government’s proposed 40% tax results projects becoming unviable, with Xstrata’s spending cut worth $5.6 billion. Arrow Energy Ltd (ARWEF $4) increased after it reported that an independent expert says the takeover offer from Royal Dutch Shell Plc (RDS/A $54) and PetroChina Co Ltd (PTR $110) is fair and reasonable. India’s BSE Sensex 30 Index rose 1.7%, Taiwan’s Taiex Index gained 2.3%, South Korea’s Kospi Index advanced 1.9%.