Morning Market Update

Modest Move Higher as Economic Calendar Set to Fire

Ahead of a plethora of major US economic reports later in the week, headlined by the first policy meeting of the Fed for 2011, equity markets are slightly in the green, following last week’s declines that were seen in the broader indices. However, some disappointing December same-store sales from McDonald’s Corp, as well as food inflation concerns, are overshadowing its inline 4Q profit report and limiting the upward move for the Dow Jones Industrials. Meanwhile, some M&A news is helping lift stocks, with Rock-Tenn Co reaching an agreement to acquire Smurfit-Stone Container Corp for about $3.5 billion. Treasuries are mixed in late-morning action as the economic calendar is calm before the rest of the week’s economic releases. In other equity news, RadioShack Corp. announced that it expects 4Q EPS to come in well below expectations and that its Chairman and CEO is set to resign. Overseas, Asia finished mixed, with China finding pressure from continued policy tightening concerns, while European markets are diverging on mixed PMI data across the pond.

At 10:57 a.m. ET, the Dow Jones Industrial Average is 0.5% higher, the S&P 500 Index is advancing 0.3%, and the Nasdaq Composite is gaining 0.4%. Crude oil is down $1.00 at $88.11 per barrel, wholesale gasoline is decreasing $0.01 to $2.47 per gallon, and the Bloomberg gold spot price is increasing by $5.10 to $1,347.78 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.3% to 77.93.

Dow member McDonald’s Corp. (MCD $75) reported 4Q EPS of $1.16, matching the consensus estimate of analysts surveyed by Reuters, with revenues growing 4% year-over-year (y/y) to $6.2 billion, also inline with what the Street had forecasted. The world’s largest fast-food chain said global same-store sales—sales at stores open at least thirteen months—increased 5.0% y/y, with US sales rising 4.4%, Europe gaining 3.4%, and Asia/Pacific, Middle East and Africa advancing 5.5%. However, shares are lower as the company’s December same-store sales came in a bit disappointing for the US and Europe, due to bad weather in these regions, while the company noted that commodity costs will rise 2011, exacerbating some concerns about margins going forward.

RadioShack Corp. (RSH $16) is down sharply after the company reported that it expects 4Q EPS to be in a range of $0.50-0.54, compared to the $0.66 that analysts were anticipating, with revenue growth seen at 4% y/y to $1.4 billion, inline with the Street’s expectations. RSH also announced that its Chairman and CEO Julian Day plans to retire effective at the company’s annual shareholder meeting scheduled for the week of May 16. RSH named Jim Gooch, its current CFO, as the company’s President, effective immediately, and CEO upon Day’s retirement. The company also announced that it will separate its Chairman and CEO roles, with Daniel Feehan becoming its non-executive Chairman of the Board when Day retires.

In M&A news, paperboard and consumer packaging firm  Rock-Tenn Co. (RKT $57) and fellow packaging producer Smurfit-Stone Container Corp. (SSCC $35) announced that the Board of Directors of both companies have approved a definitive agreement under which Rock-Tenn Co. will acquire Smurfit-Stone Container Corp—which recently emerged from bankruptcy protection— for $35 per share in cash and stock. The aggregate equity value of the transaction is about $3.5 billion, and RKT will assume $1.8 billion in SSCC debt and pension liabilities. RKT is solidly higher, while SSCC is gaining sharply.

Full slate of economic data lies ahead this week

Treasuries are mixed in late-morning action as there are no major US economic releases scheduled for today, with the yield on the two-year note up 1 bp to 0.62%, while the 10-year note is 1 bp lower at 3.39% and the 30-year bond is declining 3 bps to 4.54%.
However, the rest of the week will provide plenty of key economic data for traders to digest, beginning with more data on the housing market on Tuesday as the S&P/CaseShiller Home Price Index will be released, anticipated to show a 1.7% decline y/y in November—the report lags the sales data by a month—and fall of 0.9% month-over-month (m/m). Meanwhile, Wednesday’s release of new home sales is expected to grow 3.5% m/m in December to an annual rate of 300,000 after gaining by 5.5% in November. Last week’s existing home sales report, which reflect closings from contracts entered one to two months earlier, posted a significant upside surprise, rising 12.3% m/m. New home sales are considered a more timely indicator of conditions in the housing market, as they are based on signings instead of closings.
Friday brings the first reading of 4Q gross domestic product (GDP), expected to show a 3.5% annualized rate of expansion, from a 2.6% rate in 3Q. Elsewhere, personal consumption is anticipated to rise 4.0% from 2.4% in 3Q and inflation readings are forecasted to remain subdued, with the GDP Price Index rising 1.7% and the core PCE Index, which excludes food and energy, forecasted to gain 0.4%.

However, the report that may garner the broadest market attention will likely be the midday statement release on Wednesday that concludes the two-day Federal Open Market Committee (FOMC) meeting. No changes are expected to the fed funds target rate, currently at a level between 0-0.25%, or to the $600 billion asset purchase program, commonly known as quantitative easing, or QE2. Fed Chair Bernanke and Vice Chair Yellen have recently indicated that near-term changes to QE2 are unlikely due to the long time expected to return to full employment. Attention will likely focus on the vote in support of QE2, due to the regularly scheduled turnover of four members, as well as any changes to the economic forecast.

Other releases on this week’s US economic calendar include: Consumer Confidence, durable goods orders, the Richmond Fed Manufacturing Index, the MBA Mortgage Applications Index, pending home sales, weekly initial jobless claims, 4Q Employment Cost Index, and the final University of Michigan Consumer Sentiment Index reading for January. Additionally, President Obama will be giving the State of the Union Address on Tuesday night.

Europe mixed as manufacturing reports disappoint

The European equity markets remain mixed in late-day action, with some markets gaining ground but weakness in basic materials and industrials following some disappointing manufacturing data across the pond is bogging down stocks. Measures of PMI Manufacturing in France, Germany, and the euro-zone all came in below economists’ expectations for January to foster some concerns that economic recovery in the region may be losing momentum. However, complimentary PMI Services data in the aforementioned European regions all exceeded expectations to help limit the pessimism in the region. In equity news, shares of Philips Electronics (PHG $33) are down solidly after the world’s largest lighting company, per Bloomberg, reported 4Q profits that missed analysts’ forecasts and offered a lackluster view of the consumer. Meanwhile, political turmoil in Ireland is in focus after Prime Minister Cowen’s government took a blow from the withdrawal of Ireland’s Green Party from the coalition over the weekend, but the withdrawing party said they will support the nation’s 2011 budget. In other international news, Russia’s largest airport was bombed today by a suicide bomber, with at least 31 people killed and more than 130 injured.

The UK FTSE 100 Index is 0.9% higher, France’s CAC-40 Index is up 0.3%, and Ireland’s Irish Overall Index is gaining 1.3%, while Germany’s DAX Index is declining 0.2% and Russia’s US Dollar-denominated RTS Index is falling 1.2%.

Asia mixed ahead of key economic reports

Stocks in Asia finished mixed in light volume ahead of a plethora of earnings reports out of Japan, along with central bank announcements from Japan and India, while traders treaded cautiously in China before a week-long Lunar New Year holiday for the markets beginning on February 2. Japan’s Nikkei 225 Index closed 0.7% higher and South Korea’s Kospi Index rose 0.6%, while the Hong Kong Hang Seng Index declined 0.3% and the Shanghai Composite Index fell 0.7%. Sentiment in China was pressured by continued concerns that the Chinese central bank may be set to announce further policy tightening measures to cool down the economy ahead of the aforementioned holiday as it has done with recent policy measures.

Elsewhere, Australian stocks gained ground as the S&P/ASX 200 Index rose 0.6% on cooled rate-hike expectations following a report that showed the nation’s producer prices rose at a much smaller rate than economists had expected. Australian equities managed to move higher despite a steep loss in shares of Woolworths Ltd. (WOLWF $28) after the nation’s largest retailer lowered its full-year profit forecast. Rounding out the day, India’s BSE Sensex 30 Index gained 0.8%, and Taiwan’s Taiex Index dipped 0.1% as stronger-than-anticipated industrial production data and improving unemployment figures prompted some concerns about possible rate hikes in the nation.