Morning Market Update

Markets Hug Flatline after 4Q Output Data

The US equity markets are nearly unchanged in early action, on the heels of the first reading of 4Q GDP, which although showed output came in a bit short of expectations, personal consumption rose more than anticipated and inflation remained benign. Treasuries maintained losses following the GDP data, while a final reading of consumer sentiment for January is set to be released after the opening bell. In other economic news, the 4Q Employment Cost Index rose at a smaller-than-forecasted rate. Meanwhile, earnings news continues to pour in, with Dow member Microsoft Corp topping analysts’ profit projections, while Amazon.com Inc’s revenues were softer-than-anticipated, and Ford Motor Co posted earnings that severely missed the Street’s forecasts. Overseas, Asia was lower following the credit rating downgrade of Japan by Standard & Poor’s, while Europe is mixed as the UK markets are under pressure in the wake of a drop in consumer confidence.

As of 8:50 a.m. ET, the March S&P 500 Index Globex future is 1 point above fair value, the Nasdaq 100 Index is 1 point above fair value, while the DJIA is 1 points above fair value. Crude oil is $0.35 higher at $85.99 per barrel, and the Bloomberg gold spot price is up $1.00 at $1,314.93 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.2% at 77.84.

Dow member Microsoft Corp. (MSFT $29) reported fiscal 2Q EPS of $0.77, above the $0.68 consensus estimate of analysts surveyed by Reuters, with revenues rising 5% year-over-year (y/y) to $20.0 billion, exceeding the $19.2 billion that the Street had forecasted. The company said it is “enthusiastic” about the consumer response to its holiday lineup of products, including the launch of its Kinect sensor, which boosted sales of its Xbox 360 game consoles. MSFT said that its Office 2010 is the fastest selling consumer version of Office in history, and business demand for its productivity and infrastructure products and cloud solutions is “strong.”

Ford Motor Co. (F $19) announced 4Q EPS ex-items of $0.30, below the $0.49 that analysts had projected. According to CNBC’s Phil LeBeau, Ford’s CEO Alan Mulally said analysts underestimated lower volumes the company experienced during the quarter, structural costs, commodity increases, and profitability of its European unit. Revenues fell 6.6% y/y to $32.5 billion, but came in well above the $29.3 billion that analysts had projected.

Amazon.com Inc. (AMZN $184) achieved 4Q earnings of $0.91 per share, two cents above the consensus estimate, as revenues rose 36% y/y $12.9 billion, compared to the $13.0 billion that was anticipated on the Street. The company said it eclipsed the $10 billion quarterly revenue mark for the first time, supported by sales of its Kindle e-readers, which led to Kindle books overtaking paperback books as the most popular format on Amazon.com. AMZN issued 1Q revenue guidance that was inline with analysts’ forecasts.

4Q GDP expands less than forecasted, consumer sentiment set to follow opening bell

The first look at 4Q Gross Domestic Product, the broadest measure of economic output, was released this morning and showed a 3.2% annualized rate of growth, compared to the 3.5% increase expected by a survey of economists by Bloomberg, but personal consumption rose 4.4%, exceeding the 4.0% estimate.

The GDP Price Index rose 0.3%, well below the 1.6% gain that economists anticipated, and the core PCE Index, which excludes food and energy, increased 0.4%, matching expectations.

In other economic news, the 4Q Employment Cost Index rose 0.4%, below the 0.5% that economists had expected, after rising by the same amount in 3Q.

Treasuries remain lower after the GDP report, with the yield on the two-year note up 2 bps to 0.60%, the yield on the 10-year note gaining 4 bps to 3.43%, and the 30-year bond yield advancing 5 bps to 4.62%.

Later this morning, the economic calendar will yield the final version of the University of Michigan’s Consumer Sentiment Index for January, expected to be upwardly revised to 73.3 from the initial reading of 72.7, while still lower than the 74.5 mark hit in December.

Europe mixed as UK stocks fall on dampened consumer confidence

The equity markets in Europe are mixed in afternoon action, with basic materials finding pressure following an analyst downgrade in the sector, while traders are digesting the mixed US GDP data. Meanwhile, stocks in the UK are solidly lower after a report showed consumer confidence fell the most since 1994, per Bloomberg, to -29 in January, from -21 in December, and compared to the dip to -22 that economists had forecasted. Concerns about a higher value-added tax (VAT), a sales tax which was raised from 17.5% to 20% earlier this month to try to combat a ballooning deficit, were noted as a main reason for the decline in sentiment. The report follows the disappointing UK 4Q GDP report that was reported earlier this week, dampening the outlook for economic prosperity in the nation. Meanwhile, a solid drop in shares of Sanofi-Aventis (SNYNF $70) is weighing on the markets, as the drugmaker’s experimental cancer drug posted disappointing results in a key study. In other economic news, Italian consumer confidence deteriorated more than expected, while Sweden’s retail sales unexpectedly dropped.

The UK FTSE 100 Index is down 0.8%, France’s CAC-40 Index is rising 0.3%, Germany’s DAX Index is gaining 0.2%, Italy’s FTSE MIB Index is advancing 0.6%, and Sweden’s OMX Stockholm 30 Index is declining 0.2%.

Asia lower as Japan slides on rating downgrade

Stocks in Asia were mostly lower, led by a 1.1% drop in the Nikkei 225 Index in the wake of yesterday’s credit rating downgrade of the Asian nation by Standard & Poor’s, which cut the world’s third-largest economy’s 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. Also, shares of Canon Inc. (CAJ $51) moved solidly lower to contribute to the decline after the world’s largest camera maker posted lower-than-expected profits. The soured sentiment in Japan overshadowed economic reports showing the nation’s jobless rate unexpectedly declined, while consumer prices surprisingly came in flat, compared to a 0.1% decline that economists forecasted. Moreover, excluding food and energy, Japan’s consumer prices declined by a smaller amount than anticipated. In other economic news in Japan, large retailers’ sales fell much more than expected, and a separate report revealed that its retail trade fell almost three times the forecast of economists.

Elsewhere, South Korea’s Kospi Index declined 0.3%, pressured by a drop in shares of Kia Motors Corp. (KIMTF $52) after the automaker posted quarterly results that disappointed, but losses were limited by a gain in Samsung Electronics Co. Ltd. (SSNLF $448) after the world’s second-largest maker of mobile phones, per Bloomberg, reported better-than-expected 4Q profits. Meanwhile, stocks in China were mixed, with the Hong Kong Hang Seng Index declining 0.7% and the Shanghai Composite Index rising 0.1%. Rounding out the day, Australia’s S&P/ASX 200 Index dropped 0.7% as uneasiness toward the cost of massive flooding recently in the region—the government announced yesterday a one-time tax to help cover the costs—pressured the equity markets.