Morning Market Update

Upward Momentum Continues

US equity markets are gaining some ground in morning trading, extending yesterday’s steep advance, as traders digest a plethora of August same-store sales reports that are revealing some strength in back-to-school sales, as well as a drop in weekly initial jobless claims. Treasuries are lower, extending losses on the retail and jobs reports, and following a larger-than-previously reported decline in 2Q nonfarm productivity. Later this morning, the economic docket will release reports on pending home sales and factory orders. In other equity news, Burger King Holdings Inc. is adding to yesterday’s solid gains after CNBC’s David Faber reported the burger chains has reached an agreement to be acquired by private equity firm 3G Capital for about $4 billion in cash. Overseas, Asia moved nicely higher again, while European markets are nearly unchanged after Wednesday’s surge, and following the monetary policy announcement from the European Central Bank, where it left its benchmark interest rate unchanged at 1.0%.

As of 8:51 a.m. ET, the September S&P 500 Index Globex future is 5 points above fair value, the Nasdaq 100 Index is 6 points above fair value, while the DJIA is 21 points above fair value. Crude oil is down $0.29 at $73.62 per barrel, and the Bloomberg gold spot price is up $4.30at $1,248.60 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is flat at 82.44.

The nation’s retailers are reporting August same-store sales—sales at stores open at least a year—headlined by Target Corp. (TGT $52), which posted a 1.8% increase in sales year-over-year (y/y), just shy of the 2.0% gain that analysts were expecting. August is a key month for back-to-school sales and TGT said it is pleased with its “strong performance” in this category, as well as apparel and food. The company added that guest traffic trends remained healthy throughout the month.

Meanwhile, Costco Wholesale Corp. (COST $58) reported that its August same-store sales rose 7% y/y including fuel and the impact of foreign exchange, compared to the 4.2% increase that the Street expected. Excluding the favorable impacts of gas and currency, sales at the wholesale retailer rose 5%, compared to the 3.6% increase that was forecast.

Elsewhere, department store Macy’s Inc. (M $20) announced that it achieved a 4.3% increase in its August same-store sales, topping the 4.0% growth that was anticipated. The company said its back-to-school business through the month has been strong, led by great performances by Material Girl, the exclusive juniors brand by Madonna, as well as American Rag, its largest private brand in juniors and young men’s. M added that it is particularly encouraged by the response from its customers to new fall fashion.

Inside the mall, Gap Inc. (GPS $17) posted same-store sales in August were unchanged compared to last year, and versus the 0.2% decline that analysts were expecting.

Outside of the retail sales reports pouring in, Burger King Holdings Inc. (BKC $19) is moving higher again after CNBC’s David Faber reported that the fast-food chain has agreed to be acquired by private-equity firm 3G Capital for $24 per share in cash or about $4 billion. None of the entities involved have confirmed the report.

Jobless claims decline, productivity falls and labor costs revised lower

Weekly initial jobless claims fell by 6,000 to 472,000, versus last week's figure which was upwardly revised by 5,000 to 478,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to come in at 475,000. The four-week moving average, considered a smoother look at the trend in claims, declined by 2,500 to 485,500, while continuing claims fell by 23,000 to 4,456,000, compared to the 4,450,000 that was anticipated by economists.

Elsewhere, the final reading on 2Q nonfarm productivity was revised to a 1.8% decline on an annual basis, compared to the Bloomberg forecast of a 1.9% decrease, and following the 0.9% decrease seen in preliminary report. Unit labor costs were revised to a 1.1% increase, versus a gain of 1.2% that was estimated, and the initial 0.2% gain that was reported last month. Treasuries are lower, extending losses following the jobless claims and productivity readings.

Later this morning, the economic calendar will yield the releases of pending home sales, and the gauge of the pipeline of existing home sales is forecast to decline 1.0% month-over-month (m/m) in July, and factory orders, which are expected to show an increase of 0.2% for July.

Europe sluggish after yesterday’s steep gains and as ECB leaves rates unchanged

Stocks in Europe are nearly unchanged in afternoon action as traders take a breather from the sharp broad-based advance across the pond, while digesting a plethora of economic data, and the monetary policy announcement from the European Central Bank. The ECB kept its benchmark interest rate unchanged at 1.0%, as expected, but traders are paying close attention to the customary press conference conducted by ECB President Jean-Claude Trichet, which is getting under way and the central bank is expected to maintain its emergency liquidity measures that were put in place during the financial crisis. ECB council member Axel Weber said in August that the central bank should help banks through end-of-year liquidity tensions before determining in the first quarter when to withdraw these emergency lending measures.

Moreover, there are plenty of other economic reports from the European economic docket that are worth mentioning, headlined by euro-zone 2Q GDP being kept unrevised at 1.0% growth on a quarter-over-quarter (q/q) basis, while compared to the same period last year, output in the region grew 1.9%, compared to the initial 1.7% growth reading, which was the growth rate economists expected the figure to remain. Additional data showed euro-zone producer prices rose by a smaller-than-expected amount on a m/m basis in July, while the y/y rate of 4.0% matched expectations. Other reports rounding out the heavy economic calendar included: UK home prices falling much more than anticipated m/m in August, Switzerland’s 2Q GDP expanding by a larger amount than expected, and France’s unemployment falling solidly to help the unemployment rate in the nation improve. In other central bank news, Sweden’s central bank increased its benchmark interest rate by 25 basis points to 0.75% as expected.

The UK FTSE 100 Index is down 0.1%, France’s CAC-40 Index is 0.1% higher, Germany’s DAX Index is declining 0.1%, Switzerland’s Swiss Market Index is decreasing 0.2%, and Sweden’s OMX Stockholm 30 Index is falling 0.7%.

Asia records another broad-based advance

After receiving a boost yesterday from better-than-forecasted Chinese manufacturing data and a stronger-than-expected 2Q GDP read in Australia, stocks in Asia were higher across the board again as sentiment toward the global recovery was amplified by Wednesday’s favorable manufacturing report in the US. Japan’s Nikkei 225 Index led the advance in the region, gaining 1.5%, on strength in export issues, which benefit from sales in the US and elsewhere outside the Asian nation, even as the yen moved higher versus the US dollar and other major currencies. Additionally, equity markets in China helped pace the advance in Asia, with Hong Kong’s Hang Seng Index rising 1.2% and the Shanghai Composite Index increasing 1.3%, as auto makers showed some strength following yesterday’s report that showed passenger-car sales jumped 59% in August, more than three times July’s pace, per Bloomberg. Also, some M&A news in China aided the advance, with Chinese insurer Ping An Insurance (PIAIF $8) announced it has agreed to purchase an additional 29.1 billion yuan ($4.3 billion) stake in Shenzhen Development Bank, giving it control of the Chinese lender, and shares of both firms moved nicely higher. Elsewhere, Australia’s S&P/ASX 200 Index rose 0.8%, to build on yesterday’s solid advance on the upbeat output report in the nation, and despite a report that showed the Australian trade surplus narrowed by a larger margin than anticipated. Rounding out the day, South Korea’s Kospi Index increased 0.6%, Taiwan’s Taiex Index gained 0.7%, and India’s BSE Sensex 30 Index inched 0.2% higher.