Morning Market Update

Tepid Trading Amid Mixed Economic News

Stocks are struggling to find direction after economic news came in mixed for the second straight day, with jobless claims unexpectedly rising while consumer prices came inline with estimates and showed inflation remains subdued, and Treasuries are higher. With the economic recovery in doubt and uncertainty high, traders have little conviction and are trading cautiously. In equity news, J.M. Smucker announced strong earnings and guidance and consulting services and data provider IHS reported profits ahead of the Street, while homebuilder Toll Brothers provided a market update saying that deposits and traffic are down from a year ago. Overseas, a successful bond auction by the Spanish government buoyed European markets, and Asian shares were mixed.

As of 8:47 a.m. ET, the September S&P 500 Index Globex future is flat, the Nasdaq 100 Index is 3 points above fair value, and the DJIA is 1 point below fair value. Crude oil is down $0.74 at $76.93 per barrel, and the Bloomberg gold spot price is up $15.70 at $1,244.70 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.4% at 85.83.

J.M. Smucker Co (SJM $59) reported 4Q earnings ex-items of $1.07 per share, much better than the analyst forecast of $0.80, as revenues rose 0.1% year-over-year (y/y) to $1.07 billion, ahead of the $1.04 billion estimate. The maker of jams, Jif peanut butter, Folgers coffee as well as Pillsbury products said that sales in its largest unit, US retail coffee, fell 1.4%, and profit declined 15% as marketing costs rose, while revenues in its US retail consumer market division rose 5.2% and profit gained 20% on lower costs. SJM gave EPS guidance for the next fiscal year of $4.50-4.60 per share on revenue growth of 3%, while the Street was at $4.42 earnings per share. Shares are higher.

IHS Inc (IHS $56) reported 2Q earnings ex-items of $0.78 per share, ahead of the $0.74 Street forecast, as revenues grew 13% y/y to $266.5 million, ahead of the $263 million estimate. The provider of data and consulting services to the energy, engineering, security and environmental industries said that its subscription business, which provides 77% of total revenue, grew 12% and 5.5% organically, while consulting revenue fell 0.4%. The company raised its full-year earnings guidance to $2.90 per share from $2.87 per share, while the analyst estimate was for EPS of $2.89.

Toll Brothers (TOL $19) provided a market update ahead of a conference appearance, saying that buyer decisions are more driven by consumer confidence than the tax credit, and that recent stock market volatility and the job market “continue to weigh on the nation’s psyche,” as have the crisis in Europe and the Gulf oil spill. Additionally, deposits and traffic are lower than the year-ago period, and despite demand in recent weeks being “quite choppy,” the company believes that once the employment picture begins to brighten and the economy stabilizes, confidence will improve and the housing market should begin a “steadier recovery.”

Consumer prices subdued and jobless claims continue to disappoint

The Consumer Price Index showed prices at the consumer level were down 0.2% in May month-over-month (m/m), inline with the forecast and after falling 0.1% in April, while the core rate, which strips out food and energy, rose 0.1% in May after being unchanged in April, and was also inline with estimates. On a year-over-year basis, consumer prices were up 2.0% in May, moderating from the 2.2% rate in April, and the core CPI was 0.9% higher y/y.

Weekly initial jobless claims increased 12,000 to 472,000, versus last week's figure which was upwardly revised by 4,000 to 460,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to decrease to 450,000. The four-week moving average, considered a smoother look at the trend in claims, fell by 500 to 463,500, but continuing claims increased by 88,000 to 4,571,000, compared to the rise to 4,500,000 that was anticipated. Treasuries moved higher after the inflation and jobless claims reports.

European shares rise on Spain debt sale

Stocks in Europe are gaining ground after the Spanish government had a successful bond auction wherein it sold 3.5 billion euros ($4.3 billion), the maximum amount set for the auction, in 10-year and 30-year maturities, prompting yields of Spanish bonds to decline. Banking stocks were buoyed by the sale and after the Bank of Spain said yesterday that it will publish the stress tests it is conducting on its lenders. Additionally, after European markets closed yesterday, CNBC reported that Europe would be releasing individual bank results from the stress tests in coming weeks, citing ECB Executive Board member Lorenzo Bini Smaghi. BP Plc (BP $32) is gaining ground after it agreed to set up a fund to meet claims resulting from the Gulf oil spill and suspended its dividend for the rest of the year, while CEO Tony Hayward is expected to testify before the US Congress today, and in prepared testimony said that he was “deeply sorry” for the explosion and spill. France Telecom (FTE $19) is nearly unchanged after the CEO said it can reach its aim of doubling sales in emerging markets in three years, quicker than the announced timeframe of five years.

Elsewhere, Swiss legislators approved a UBS AG (UBS $14) tax treaty with the US that ends a two-year legal battle and clears the way for the Swiss government to hand over to the US the names and account information of UBS clients on suspicion of tax-evasion, while the settlement was in limbo after a Swiss court ruled the agreement violated domestic law. Separately, the Swiss central bank met and kept its benchmark interest rate unchanged at 0.25% and softened its stance on fighting franc gains by buying euros to stem the increase in the franc, saying that the risk of deflation has “largely disappeared.”

In economic news, UK retail sales rose more than expected in May by 0.5% month-over-month (m/m) ex-auto fuel, while euro-zone construction output fell 0.3% m/m after gaining 6.5% in April.

The UK FTSE 100 Index is up 0.7%, France’s CAC-40 Index is rising 0.6%, Germany’s DAX Index is advancing by 0.4%, the Swiss Market Index is flat, Spain’s IBEX 35 Index is gaining 1.1%, and Italy’s FTSE MIB Index is up by 0.3%.

Asian shares mixed

Stocks in Asia were mixed, with Japanese exporters falling as the yen strengthened, leading to a 0.7% decline in the Nikkei 225 Index, and resources names fell after a weak US housing start report yesterday, prompting a 0.7% fall in the Australian S&P/ASX 200 Index. Chinese markets were mixed after coming back from a holiday, with the Hong Kong Hang Seng Index increasing 0.4%, while the Shanghai Composite Index fell 0.4%. In Hong Kong, Henderson Land Development (HLDCY $6) fell 2.3% after the property developer said they received cancellations on sales of 20 luxury apartments that would result in the company taking a $94 million charge. In India, Reliance Communications, India’s second-largest wireless carrier according to Bloomberg, rose after it was reportedly considering the sale of a part of its Reliance Globalcom undersea cable system for as much as $500 million, and India’s BSE Sensex 30 Index rose 0.9%. Elsewhere, Korea’s Kospi Index gained 0.2% and the Taiwan Taiex Index advanced 0.8%.