Morning Market Update

Stocks Trying to Ride as Bulls Take Disappointing Data in Stride

The US equity markets are moving to the upside, showing some resilience in the face of disappointing US retail sales, higher consumer prices, and an unexpected deterioration in consumer sentiment. Also, the bulls appear to be taking another policy tightening move out of China in stride, aided by better-than-expected 4Q results from Dow members Intel Corp and JPMorgan Chase & Co, along with larger-than-forecasted gains in industrial production and capacity utilization. Treasuries are higher amid the disappointing data, which also included a smaller-than-anticipated increase in business inventories. In other equity news, Coinstar Inc tumbled after the company issued unfavorable guidance. Overseas, Asia finished mixed as commodity issues and financials diverged, while concerns following the action in China are hampering European trading, but the aforementioned US earnings are helping limit losses.

At 10:54 a.m. ET, the Dow Jones Industrial Average, the S&P 500 Index, and the Nasdaq Composite are gaining 0.2%. Crude oil is down $0.54 at $90.86 per barrel, wholesale gasoline is up $0.02 to $2.47 per gallon, and the Bloomberg gold spot price is down by $12.08 to $1,361.70 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.1% to 79.07.

Dow member Intel Corp. (INTC $21) reported 4Q EPS of $0.59, six cents above the consensus estimate of analysts surveyed by Reuters, with revenues increasing 3% quarter-over-quarter (q/q) to $11.5 billion, above the $11.4 billion that the Street had forecasted. Compared to 3Q, the chipmaker said its data center group revenue was 15% higher, while its PC client group, Atom microprocessor, and architecture units all posted revenues that were flat. The company added that average selling prices for microprocessors was up slightly compared to the previous quarter. INTC said it expects 1Q revenues to be between $11.1-11.9 billion, compared to the $10.7 billion that analysts were anticipating. Shares are lower.

Fellow Dow member JPMorgan Chase & Co. (JPM $45) posted 4Q EPS of $1.12, above the $1.00 that the Street was looking for, with revenues increasing 6% year-over-year (y/y) to $26.7 billion, compared to the $24.2 billion that analysts had forecasted. The company said its noninterest revenues jumped 34% y/y to $14.5 billion, largely reflecting higher trading results and higher mortgage fees, while its interest income fell 15% y/y, driven by lower loan and securities balances. Meanwhile, JPM said its EPS surged by 51% y/y, driven by a “significantly lower” provision for credit losses and higher revenues. JPM’s CEO Jamie Dimon said although the company continues to face challenges, there are signs of stability and growth returning to both the global capital markets and the US economy. JPM is moving higher.

Elsewhere, Coinstar Inc. (CSTR $43) is down over 20% after the operator of coin-counting machines and Redbox DVD-rental kiosks lowered its 4Q guidance and it issued full-year 2011 guidance that missed expectations. CSTR said it expected stronger performance from DVD rentals during the holiday season and demand for new releases “did not materialize,” while Redbox consumers utilized “rent and return anywhere” to a higher level than expected, which caused temporary imbalances in available titles across the kiosk network.

Retail sales and consumer prices headline disappointing economic docket

Advance retail sales for December rose 0.6% month-over-month (m/m), below the forecast of economists surveyed by Bloomberg of an increase of 0.8%, and while November’s 0.8% gain was unrevised, October was adjusted down by 0.3% to a gain of 1.6%. December sales ex-autos increased 0.5%, below expectations of a 0.7% increase, and November was revised 0.2% lower to a gain of 1.0%. Sales ex-autos and gas gained 0.4% in December, versus the 0.3% increase that was anticipated, and 9.1% in 4Q, the best quarter since first quarter of 2006.

Meanwhile, the Consumer Price Index showed prices at the consumer level were up 0.5% m/m in December, above the forecast of a gain of 0.4%, and the 0.1% increase experienced in November. Energy costs rose 4.6% and food prices gained 0.1%, while excluding these, the core rate was 0.1% higher m/m in December, matching estimates, after rising 0.1% in November. On a year-over-year basis, consumer prices were 1.5% higher in December, and the core CPI was up 0.8% y/y, matching November for the smallest increase since records began in 1958.

Elsewhere, the November reading of  industrial production of a gain of 0.8% m/m was higher than the 0.5% rise expected, while the net effect of revisions from July to November left the level of industrial production in November higher than initially reported. Notable strength was seen in consumer goods, which rose for the first time since July, and business equipment remained strong, rising at an annual rate of 10.0%, the third consecutive quarterly double-digit gain. Also, capacity utilization exceeded forecasts, increasing to 76.0% versus the forecast of 75.6%. However, utilization remains 4.6% below its average rate from 1972 to 2009.

While today’s consumer spending disappointed, the demise of the consumer has generally been over estimated. Total retail spending gained 6.6% in 2010, and even automotive and parts sales gained 10.3% during the year, and better-than-expected spending has played a large role in upward revisions to gross domestic product (GDP) over the past year. Despite the better spending, pricing power by businesses remains subdued, and increases in commodity prices thus far have not flowed through to consumers due to competitive pressures and the need for promotional prices to catalyze spending. Speeches by policymakers over the past week demonstrate the low level of inflation, with Federal Reserve Board Vice Chair Janet Yellen stating that absent the Fed’s asset purchase program, “the economy would now be close to deflation,” and Dallas Fed President Richard Fisher saying that he didn’t see inflation presently or in the “immediately foreseeable future.” While the economy remains far from a more normalized level, there are reasons for optimism, and the market tends to look at the trend, not the absolute level.

Moreover, the preliminary University of Michigan’s Consumer Sentiment Index unexpectedly deteriorated, falling from 74.5 in December to 72.7 for January, compared to the increase to 75.5—the highest level since June 2010—that economists had expected. The drop in the index came as the current economic conditions component fell, more than offsetting an improvement in the economic outlook. On inflation, consumers upgraded their outlook for the one-year time frame from 3.0% to 3.3%, while the five-year time frame remained at 2.8%.
In other economic news, business inventories  rose 0.2% m/m in November, below the 0.7% increase that was expected, but October’s 0.7% gain was revised to a 0.8% advance. Sales rose 1.2% m/m, and the inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—declined to 1.25 from 1.27.

Treasuries are higher in late-morning action amid the plethora of disappointing data, with the yield on the two-year note down 3 bps to 0.57%, the yield on the 10-year note 10 bps lower at 3.27%, and the 30-year bond yield losing 6 bps to 4.47%.

Europe turns mixed following US earnings

The equity markets in Europe have pared losses and are mixed in late-day action, as technology and financials issues have overcome early weakness on the heels of the better-than-expected earnings from Dow members Intel Corp and JPMorgan Chase & Co. However, materials are down solidly to bog down the equity markets as commodity prices are moving lower in the wake of further policy tightening in China. Financials are trying to add to recent gains that have come from a string of successful debt auctions of troubled euro-zone nations, which cooled some of the uneasiness toward the region’s debt crisis.

Elsewhere, there were a plethora of inflation reports in Europe that may be grabbing additional attention, given European Central Bank President Jean-Claude Trichet’s comments yesterday that there are signs of short-term upward pressure on overall inflation and they are monitoring price developments “very close.” German consumer prices rose 1.0% m/m in December, matching expectations, producer prices in the UK rose more than economists expected, and euro-zone consumer prices rose 0.6% m/m, as expected. Other inflation reports included: inline consumer prices in both Italy and Spain. In other economic news, the euro-zone trade balance unexpectedly swung to a deficit in November and Italy’s trade deficit widened in November.

The UK FTSE 100 index is down 0.5%, France’s CAC-40 Index is rising 0.1%, Germany’s DAX Index is decreasing 0.2%, Italy’s FTSE MIB Index is increasing 0.4%, and Spain’s IBEX 35 Index is flat, after the index jumped nearly 8% in the past two sessions following the aforementioned successful debt auctions.

Asia mixed but financials rise

Stocks in Asia were mixed with financials posting broad-based gains on the heels of the easing concerns toward the euro-area debt crisis, continuing the upward momentum the sector has enjoyed, while commodity issues came under pressure as crude oil and metals prices declined yesterday. The Japanese Nikkei 225 Index retreated from an eight-month high, falling 0.9% as a stronger yen compared to the US dollar weighed on export issues. Meanwhile, Chinese equity markets were mixed, with the Hong Kong Hang Seng Index rising 0.2%, while concerns of tighter monetary policy pressured the Shanghai Composite Index, which fell 1.3%. The concerns about further policy tightening in China may have been exacerbated by a report from the Conference Board that showed China’s Leading Index gained ground in November. These concerns proved to be correct as the Chinese government announced—after the close of trading—that it raised the bank reserve ratio—the amount of deposits that firms must keep in reserve—by 50 basis points, marking the seventh increase since the beginning of 2010.

Elsewhere, stocks in India were hampered by uneasiness toward the possibility of further interest rate hikes by the central bank following a report that showed wholesale prices came in hotter than expected in December, causing the BSE Sensex 30 Index fell 1.7%. Rounding out the day, Australia’s S&P/ASX 200 Index inched 0.1% higher on strength in financials, while South Korea’s Kospi Index rose 0.9% as gains in automakers complimented the advance seen in the financial sector.