Morning Market Update

A Favorable Breeze from Overseas Comes as Debt Fears Ease

The US equity markets are moving higher in late-morning action as the bulls are taking their cue from across the pond, with the European markets posting solid, broad-based gains following a successful debt auction in Portugal and as the European Union appears to be discussing changes to the size and scope of its bailout campaign. Treasuries are lower as equities are gaining ground and import prices rose on a jump in fuel prices, while showing little reaction to a modest increase in mortgage applications. In equity news, Lululemon Athletica Inc boosted its 4Q guidance and AIG announced that it has reached an agreement to sell its Taiwanese life insurance unit for $2.16 billion, while ITT Corp announced that it plans to split into three separate companies. In other action overseas, Asia moved mostly higher on strength in financials and commodity issues.

At 10:55 a.m. ET, the Dow Jones Industrial Average and the S&P 500 Index are advancing 0.7%, while the Nasdaq Composite is gaining 0.5%. Crude oil is up $1.09 at $92.20 per barrel, wholesale gasoline is down $0.01 at $2.47 per gallon, and the Bloomberg gold spot price is down by $1.05 at $1,380.48 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.5% to 80.46.

Lululemon Athletica Inc.  (LULU $73) is nicely higher after the athletic apparel retailer raised its 4Q guidance due to “stronger-than-anticipated” net revenues. LULU said it now expects 4Q EPS to be in a range of $0.55-0.57, versus its previous outlook of between $0.46-0.48, and revenues are anticipated to come in a range of $237-239 million, compared to the $210-215 million it had originally forecasted. Also, the company said same-store sales—sales at stores open at least a year—are expected to reflect a mid-to-upper twenties percentage increase year-over-year (y/y), up from previous guidance of high teens percentage growth. Analysts surveyed by Reuters had expected the company to post 4Q EPS of $0.51 and revenues of $222 million.

American International Group Inc.  (AIG $59) announced that it has reached an agreement to sell its near 98% interest in Taiwanese Nan Shan Life Insurance Company Ltd. to a Taiwan-based consortium led by Ruen Chen Investment Holding Co. Ltd. for $2.16 billion in cash. This is the second time AIG has tried to sell its stake in Nan Shan and the deal needs to be approved by Taiwan’s Financial Supervisory Commission, which in August blocked a previous $3.0 billion offer by Hong-Kong based buyers on concerns they lacked the financial health and commitment to Nan Shan. The deal comes as AIG tries to get itself free of US government control that resulted from the company’s $180 billion bailout during the financial crisis. AIG is modestly higher.

ITT Corp. (ITT $62) is sharply higher after the industrial conglomerate announced that it will split into three separately, publicly-traded companies. ITT Corp will continue as a standalone, industrial company, while its water-related business and its defense segment will be spun off to make up the other two companies. ITT said in today’s business environment it believes this strategy is the best approach to unlock their value-generating potential for shareholders.

Import prices and mortgage apps rise, Fed report due out in afternoon action

The Import Price Index rose 1.1% month-over-month (m/m) for December, compared to the expectation of economists, which called for the index to increase by 1.2%, and following the upwardly revised growth of 1.5%—from a previous report of 1.3%—that was seen in November. Year-over-year (y/y), import prices are higher by 4.8%, versus the 4.7% forecast of economists. Fuel prices led the increase, rising 4.1% to post the third-straight month of gains exceeding 4%. Beginning tomorrow, we will get a more complete picture of inflation as the Producer Price Index will be released, expected to increase 0.8% m/m in December, while excluding food and energy, the core rate is forecasted to rise 0.2%. Moreover, on Friday, the Consumer Price Index will be released, anticipated to show the headline rate rose 0.4%, while the core rate is expected to remain subdued, growing 0.1%.

From the Federal Reserve’s standpoint, the core rates of inflation—more closely monitored by the Fed—remain contained, clearing the way for the Fed to continue its second round of $600 billion in asset purchases, known as quantitative easing or QE2, which it reiterated its intention to do so in its monetary policy meeting in December. However, the Fed noted at their December meeting that several members viewed the risk of deflation—a general decline in prices—as having “receded somewhat.” Meanwhile, from the consumer and corporate profit standpoint, the recent inflation data suggests a potential headwind may be brewing. Rising food and energy prices, or “bad inflation,” threaten the discretionary income of the consumer, which accounts for the lion’s share of economic activity, while higher input prices have the potential to squeeze corporate profits as the current economic environment hampers the ability for businesses to pass along the higher costs of production.

On a related inflation note, crude oil prices extended gains following the Department of Energy’s inventory report, which showed a larger-than-expected drawdown in crude oil stockpiles, which fell 2.2 million barrels last week, compared to the 1.4 million decline that economists surveyed by Bloomberg had forecasted.

In other economic news, the  MBA Mortgage Application Index increased by 2.2% last week, after the index that can be quite volatile on a week-to-week basis, rose 2.3% in the previous week. The increase came as a 4.9% gain in the Refinance Index offset a 3.7% decline in the Purchase Index. The advance in the overall index also came as the average 30-year mortgage rate fell 4 basis points to 4.78%, above the record low of 4.21% on October 8.

Treasuries are lower in late-morning action following the inflation and housing data, with the yield on the two-year note up 4 bps to 0.63%, the yield on the 10-year note 7 bps higher at 3.41%, and the 30-year bond yield gaining 5 bps to 4.54%.

However, the economic calendar will begin to heat up for the back-end loaded week with today’s afternoon release of the Federal Reserve Beige Book, wherein Fed staffers summarize anecdotal economic data from all twelve Federal Reserve districts in preparation for the next Federal Open Market Committee (FOMC) meeting scheduled for January 25-26. After Fed members digested the data from the December Beige Book, which showed the economy continued to improve and hiring activity showed some improvement, the minutes from the December FOMC meeting showed increased confidence regarding the economic recovery, but continued concerns about the slow pace of job growth, leading to the Fed’s statement that the rate of the economic recovery “has been insufficient to bring down unemployment.” Also, the Fed maintained that it will continue to carry out its second round of asset purchases, known as quantitative easing of QE2, and today’s data will be closely scrutinized for signs that the improving economy has accelerated at a rate to prompt the Fed to change its deployment of QE2.

Europe nicely higher as euro-area debt concerns dissipate

The equity markets in Europe remain nicely higher in late-day action, led by financials and materials following a successful debt auction in Portugal and amid some better-than-expected economic data in the region. Financials are solidly higher after demand for Portugal’s debt was more favorable than expected, resulting in lower borrowing costs for the country’s 10-year bonds. Also, the European Union and Monetary Affairs Commissioner Rehn said the European Commission and euro-zone countries are mulling changes to the size and scope of the euro-zone’s bailout fund, which is helping soothe debt crisis concerns.

Meanwhile, the economic calendar across the pond is offering support to sentiment as there were some favorable releases to help boost optimism about the economic health of the European economy, which could help combat the debt crisis in the region. Euro-zone industrial production rose much more than economists expected, rising 1.2% m/m in November, compared to the 0.5% growth that was anticipated, while Italy’s industrial production also exceeded economists’ growth forecasts. Moreover, Germany’s annual GDP growth rate rebounded from a -4.7% rate in 2009 to a 3.6% pace of expansion—the fastest economic expansion in two decades, per Bloomberg—for 2010. However, the UK reported that its trade deficit widened more than anticipated.

The UK FTSE 100 Index is 0.4% higher, France’s CAC-40 Index is gaining 1.7%, Germany’s DAX Index is advancing 1.6%, Italy’s FTSE MIB Index is rising 3.1%, and Portugal’s PSI 20 Index is moving 1.9% to the upside. Elsewhere, Spain’s IBEX 35 Index is jumping 4.4% amid the eased concerns about the debt crisis in the wake of Portugal’s successful bond auction, and as Spain—another nation that is being hampered by uneasiness regarding its debt level—is set to conduct a debt auction tomorrow.

Asia mostly higher as commodities advance

Stocks in Asia were mostly higher as commodity issues posted broad-based gains amid strength in crude oil and gold prices, while financial issues in the region also contributed to the advance, but some caution ahead of key debt auctions in Europe kept the upward move limited. Chinese equities led the way, with the Hong Kong Hang Seng Index rising 1.5%, while the Shanghai Composite Index increased 0.6%, but Japanese shares finished flat amid some profit taking after the Nikkei 225 Index reached an eight-month high during today’s trading session and following a report that showed Japan’s trade surplus narrowed by an amount that exceeded economists’ forecasts.

Elsewhere, Australia’s S&P/ASX 200 Index closed 0.3% higher amid the rise in commodity prices but the nation continues to battle massive flooding in the region, which the Reserve Bank of Australia forecasted could cut up to one percentage point from the nation’s economic growth, per Reuters. The advance in Australia was limited by a steep loss in shares of Caltex Australia Ltd. (CTXAY $27) after warning that the recent severe raining, which unexpectedly shut down its refinery in Brisbane, will hurt earnings. Rounding out the day, South Korea’s Kospi Index rose 0.3% to close at an all-time high and India’s BSE Sensex 30 Index jumped 1.8% despite a report showing the nation’s industrial production rose at a smaller-than-expected rate, while Thailand’s SET Index rose 0.6% after the nation’s central bank increased its benchmark interest rate by 25 basis points to 2.25%.