Morning Market Update

Data on Housing Repairs the Global Economic Concerns

After opening solidly lower on global economic concerns that were ushered in by disappointing manufacturing and services reports out of Europe and an increase in US weekly initial jobless claims, US stocks have pared losses and are well off of the worst levels of the day courtesy of an upbeat existing home sales report. Also, the Conference Board’s Index of Leading Economic Indicators rose by an amount that tripled expectations, aiding the equity markets’ resilience. Treasuries are higher amid the aforementioned global economic concerns, but did pare their advance on the housing and leading indicators data. Equity news is positive, but having little impact on sentiment, with Dow member McDonald’s Corp increasing its dividend, and Bed Bath & Beyond Inc and Red Hat Inc both exceeding the Street’s profit projections, while Edwards Lifesciences Corp received the ok from the FDA to begin trials of its replacement heart valve. Overseas, Asia was mixed, but volume was much lighter than usual as several major markets were closed, and European stocks are under pressure amid the aforementioned lackluster data.

At 10:59 a.m. ET, the Dow Jones Industrial Average is down 0.1% and the S&P 500 Index is 0.2% lower, while the Nasdaq Composite is advancing 0.3%. Crude oil is down $0.32 at $74.39 per barrel, wholesale gasoline is flat at $1.90 per gallon, and the Bloomberg gold spot price is up by $1.05 at $1,292.40 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.3% at 80.01.

Dow member McDonald’s Corp. (MCD $75) announced that its Board of Directors authorized an 11% increase in its quarterly dividend to $0.61 per share. The world’s largest fast-food chain said today’s dividend increase demonstrates its confidence in the long-term strength of its brand. Shares are modestly lower.

Bed Bath & Beyond Inc. (BBBY $44) reported 2Q EPS of $0.70, above the $0.63 Reuters estimate, with revenues increasing about 12% year-over-year (y/y) to $2.1 billion, roughly inline with the Street’s expectation. Same-store sales—sales at stores open at least a year—jumped 7.4% y/y. The housing products retailer issued 3Q EPS guidance that was inline with the Street’s forecasts, while it increased its full-year earnings outlook, which exceeded expectations. BBBY is trading higher.

Red Hat Inc. (RHT $41) posted 2Q earnings ex-items of $0.19 per share, one cent above the consensus forecast of analysts, with revenues growing 20% y/y to $219.8 million, exceeding the Street’s estimate of $212.3 million. The producer of the Linux open-source operating system said it continued to benefit from new project spending, expansion and cross selling of its product solutions and strong renewals in its top accounts. RHT is up almost 10%.

Edwards Lifesciences Corp. (EW $14) is sharply higher after the cardiovascular technologies firm reported that the US Food & Drug Administration (FDA) conditionally approved the first of two trials of its transcatheter replacement heart valve. According to Dow Jones Newswires, the company’s heart valve replacement is available for sale in Europe after receiving approval there in March.

Home sales and LEI surprise to the upside, while jobless claims rise

Existing home sales rose 7.6% month-over-month (m/m) in August to an annual rate of 4.13 million units, slightly better than the 7.1% increase to 4.10 million units forecasted, and July’s data was revised modestly higher to 3.84 million. The median existing-home price rose 0.8% from a year ago to $178,600, while declining 1.9% m/m, and the supply of homes increased by 0.6% m/m to 3.98 million units, equating to 11.6 months of supply at the current sales pace. Sales of existing homes reflect closings from contracts entered one to two months earlier.

The tax credit boosted sales for most of 2009 and the first half of 2010. However, sales still remain below the 4.5 million annual pace that marked the low before the tax credit, and sales in August were the second-lowest in a decade of record-keeping. The National Association of Realtors (NAR), who releases the data, believes that sales will continue to be soft in September and October, as prior months pulled forward sales. Despite a nearly 40-year high in affordability, homebuyer sentiment remains low due to “lingering economic uncertainty” according to the NAR, and high levels of joblessness. With the high rate of unemployment, and nearly 25% of homeowners underwater in their mortgages, the housing market will continue to be influenced by future inventory coming from foreclosures as there are nearly 8 million homes in some stage of delinquency, default or foreclosure. To-date, the amount of homes that have made it through the foreclosure process has been small, due to foreclosure moratoriums, loan modification programs, and banks’ reluctance to put homes on the market, forcing recognition of losses on the asset.

Weekly initial jobless claims rose by 12,000 to 465,000, versus last week's figure which was upwardly revised by 3,000 to 453,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to come in at 450,000. The four-week moving average, considered a smoother look at the trend in claims, declined by 3,250 to 463,250, while continuing claims dropped by 48,000 to 4,489,000, compared to the 4,473,000 that was anticipated by economists.

In other economic news, the Conference Board released the Index of Leading Indicators (LEI) for August, which increased by 0.3%, above expectations of a 0.1% advance, and July’s 0.1% rise was unrevised. The increase was paced by positive contributions from the money supply and a favorable yield curve, while negative contributors were jobless claims and the pace of deliveries.

Treasuries are higher following the disappointing employment data and unfavorable economic reports out of Europe, but did pare gains on the housing release. Yields have come down recently on concerns about the economic recovery, which prompted the US Federal Reserve, in Tuesday’s monetary policy announcement, to seemingly opening the door for more stimulus efforts in the form of another round of quantitative easing (QE), or purchases of assets such as Treasury bonds, in order to pump more cash into the system. As Senior Market Analyst, Michelle Gibley, CFA notes in her article The Fed’s Opponent: Deflation, the Federal Reserve is charged with promoting maximum employment and price stability, and the economy is falling short on both accounts. Those arguing against more QE note the ineffectiveness of the first program, as lending remains subdued despite the Fed’s injection of money, and the high level of reserves in the system could quickly multiply in the economy when confidence, economic growth and lending return, generating inflation. The case for more QE centers on deflation, and although it's not in the Fed's forecast, it's possible that the specter of deflation is viewed as a more negative outcome.

Europe being pressured by disappointing data and lingering debt fears

Stocks in Europe are under pressure in late-day action, with financials and industrials issues leading the decline following some unfavorable data from the economic calendar across the pond, and as concerns about the region’s sovereign debt situation continues to fester. The euro-zone PMI Composite Index, depicting activity in the manufacturing and services sectors, fell from 56.2 in August to 53.8—a reading above 50 denotes expansion—in September, compared to the modest decline to 55.7 that was anticipated by economists. Euro-zone services posted the biggest decline for the index. Manufacturing and services activity in Germany—Europe’s largest economy—both fell more than expected to pace the worse than forecasted read in the euro-zone, while although France’s services gauge fell more than expected, the pace of manufacturing activity in the nation unexpectedly increased in September.

Other reports from the European economic calendar that are dampening sentiment include: a 16-month low in UK mortgage approvals—per Bloomberg—for August, a smaller-than-expected increase in Italy’s unemployment rates, and an unexpected quarter-over-quarter (q/q) contraction in Ireland’s 2Q GDP, which is feeding the aforementioned sovereign debt uneasiness.

The UK FTSE 100 Index is 1.0% lower, France’s CAC-40 Index is down 1.3%, Germany’s DAX Index is declining 0.9%, Italy’s FTSE MIB Index is decreasing 0.8%, and Ireland’s Irish Overall Index is falling 1.2%.

Asian action limited by holidays

Stocks in Asia were mixed in a muted session as markets in Japan, South Korea, Hong Kong, and China were all closed for holidays. Australia’s S&P/ASX 200 Index and Thailand’s SET Index both rose 0.2%, with the latter posting a 14-year high on a strong advance in banking stocks. Meanwhile, New Zealand’s NZX 50 Index declined 0.3% following a report that showed the nation’s 2Q GDP expanded by a much smaller amount than forecasted by economists, while Taiwan’s Taiex Index inched 0.1% higher after reports showed the country’s unemployment rate declined more than expected and its industrial production expanded at a rate that topped estimates. Elsewhere, India’s BSE Sensex 30 Index declined 0.4%.