Morning Market Update

Early Gains Purged as Equity and Economic Data Diverge

The US equity markets are mixed in morning action as early gains from much better-than-expected earnings reported by Dow member Caterpillar Inc were pared following a larger-than-forecasted jump in US jobless claims and an unexpected drop in headline durable goods orders. Treasuries are modestly lower after paring losses following the disappointing economic data, ahead of a report on pending home sales. Meanwhile, traders are digesting other key earnings reports, as Starbucks lowered its full-year outlook on higher coffee prices, while Dow members Procter & Gamble and AT&T Inc both reported earnings that exceeded analysts’ forecasts. Overseas, Asia finished mostly higher before Standard & Poor’s downgraded Japan’s credit rating, and European markets are higher on strength in financials and basic materials issues.

As of 8:48 a.m. ET, the March S&P 500 Index Globex future is 2 points below fair value, the Nasdaq 100 Index is 6 points above fair value, while the DJIA is 5 points below fair value. Crude oil is $0.27 lower at $87.06 per barrel, and the Bloomberg gold spot price is down $13.82 at $1,332.03 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is flat at 77.72.

Dow member Caterpillar Inc. (CAT $96 ¹) achieved 4Q EPS of $1.47, well above the $1.28 consensus estimate of analysts surveyed by Reuters, with revenues jumping 62% year-over-year (y/y) to $12.8 billion, versus the $11.7 billion that the Street had forecasted. The heavy machinery company said as the global economy continued to improve, demand for its products “increased substantially.” CAT issued better-than-expected full-year 2011 guidance, as continued growth in developing countries, improving economies in North America and Europe, strong demand for mining products and the need for its dealers to add to inventories and replenish rental fleets should all contribute to higher sales. However, the company did caution that the increases are likely to be mitigated somewhat by small declines in later cycle industries, such as turbines and marine engines.

Starbucks Corp. (SBUX $33) reported fiscal 1Q EPS of $0.45, above the $0.39 that the Street was looking for, with revenues rising 8% y/y to $3.0 billion, exceeding the $2.9 billion that analysts had projected. The coffee chain said its same-store sales—sales at stores open at least a year—rose 7% y/y, driven by increases in customer traffic and average ticket amount. However, the company issued disappointing full-year EPS guidance, saying higher coffee costs are expected to have an unfavorable $0.20 per-share impact.

Dow member Procter & Gamble Co. (PG $66) posted fiscal 2Q EPS ex-items of $1.13, topping the $1.10 analyst estimate, with revenues increasing 2% y/y to $21.3 billion, compared to the $21.6 billion that the Street was anticipating. The consumer products conglomerate said organic sales—excluding divestitures, acquisitions, and foreign exchange—increased 3% y/y and volumes grew by 6%, as it saw growth in all major geographic regions.

AT&T Inc. (T $29) announced 4Q EPS ex-items of $0.55, one penny above the consensus estimate, as revenues gained 2.1% y/y to $31.4 billion, just below the $31.5 billion that was forecasted by analysts. The Dow component said it achieved its “best-ever” wireless customer additions, with more than 2.8 million subscribers added, while its average monthly revenues per postpaid—customers under contract—subscriber rising 2.2% y/y.

Durable goods orders mixed, jobless claims jump, pending home sales on the horizon

Durable goods orders  unexpectedly fell, dropping 2.5% month-over-month (m/m) in December, compared to the 1.5% increase that was expected by economists surveyed by Bloomberg, and November’s figure was left unrevised at a 1.3% drop. However, ex-transportation, orders rose, gaining 0.5%, compared to the expectation of a 0.9% rise, and November was unadjusted at a 2.4% increase. Meanwhile, orders for non-defense capital goods excluding aircraft, considered a good proxy for business spending grew by 1.4% in December, compared to the 1.3% increase that was anticipated, after rising by an unrevised 2.6% in November.

Moreover, weekly initial jobless claims  jumped by 51,000 to 454,000, versus last week's figure which was downwardly revised by 1,000 to 403,000, and well above the 405,000 level that economists expected. The four-week moving average, considered a smoother look at the trend in claims, rose by 15,750 to 428,750, and continuing claims increased by 94,000 to 3,991,000, exceeding the forecast of economists, which called for continuing claims to come in at 3,873,000.

Treasuries remain lower, but pared losses following the manufacturing and employment data, with the yield on the two-year note unchanged at 0.63% and the yield on the 10-year note up 3 bps to 3.44%, and the 30-year bond yield gaining 2 bps to 4.61%. Yields on the mid-to-long end of the curve are extending yesterday’s solid gains that came in the wake of the Federal Reserve’s monetary policy meeting, in which it said the economic recovery is continuing, while keeping its $600 billion asset-purchase plan, commonly known as quantitative easing or QE2, unchanged.

Later this morning, the economic calendar will yield the release of pending home sales, and the gauge of the pipeline of existing home sales is forecasted to increase 1.0% m/m in December, after rising 3.5% in November.

Europe showing resilience to Japan credit rating cut

The equity markets in Europe are higher in afternoon action, led by financials and materials following the US Federal Reserve’s pledge to continue to stimulate the economy and on the heels of better-than-expected profits from Dow member Caterpillar. The advance across the pond comes after the markets overcame early weakness that followed Standard & Poor’s credit rating downgrade of Japan. The equity front is in focus, with shares of AstraZeneca Plc. (AZN $49) gaining ground after it reported better-than-expected 4Q earnings, while Nokia Corp. (NOK $11) is under pressure after the company reported a drop in 4Q profits and lowered its 1Q outlook, with its CEO saying the company faces “significant challenges,” per Bloomberg. Meanwhile, shares of Swedish retailer Hennes & Mauritz (HNNMY $7) are under solid pressure after it posted an unexpected decline in profits.

In economic news in Europe, consumer prices in Germany fell more than expected m/m in January, a gauge of the housing sector in the UK declined, euro-zone consumer confidence was revised lower, and French consumer confidence deteriorated.

The UK FTSE 100 Index is up 0.2%, France’s CAC-40 Index is gaining 0.1%, and Germany’s DAX Index is advancing 0.4%, while Sweden’s OMX Stockholm 30 Index is declining 0.2%.

Asia mostly higher before Japanese downgrade

Stocks in Asia were mostly higher following the US Federal Reserve’s announcement yesterday that it will carry on with its economic stimulus efforts, with Japan’s Nikkei 225 Index rising 0.7%, aided by optimism regarding the nation’s corporate earnings season, which ramped up after the closing bell. Meanwhile, a solid gain in shares of Fanuc Corp. (FANUY $26) helped the advance in Japan, after the industrial robot manufacturer posted a sharp increase in its quarterly profits. However, the biggest news of the day may have come after the trading session ended as Standard & Poor’s cut Japan’s sovereign credit rating for the first time in nine years, due to the nation lacking a “coherent strategy” to address its debt situation, per Bloomberg. Japan’s rating was lowered to AA- from AA, but it kept its outlook for the rating as stable. Elsewhere in Asia, Chinese stocks finished mixed, with the Hong Kong Hang Seng Index declining 0.3% and the Shanghai Composite Index rising 1.5%, despite weakness in property-related issues as the government announced new measures to cool down real estate prices, including the requirement for city governments to set price control targets, per Reuters. Moreover, Australian stocks finished flat after a report showed the nation’s Leading Index came in unchanged and the government announced a temporary new tax to help cover the costs of the recent flooding in the region, offsetting strength in mining issues in today’s trading session. Rounding out the day, South Korea’s Kospi Index rose 0.2% and India’s BSE Sensex 30 Index fell 1.5%.