Morning Market Update

Near Session Highs as US Manufacturing Report Flies

The US equity markets are nicely higher in late-morning action as the highest level of manufacturing activity expansion since May 2004 is helping boost the major indices to session highs. Today’s US report joins a chorus of favorable manufacturing data across the globe, helping overshadow rising inflationary pressures that were evident in the global data, as well as lingering uneasiness toward the political unrest in Egypt. Treasuries are lower after the release, which more than offset an unexpected drop in US construction spending. In equity news, Dow member Pfizer Inc, and UPS both topped analysts’ profit projections, and General Motors Co posted a jump in January US auto sales. However, shares of Orexigen Therapeutics Inc are sharply lower after the company’s diet-drug was rejected by the FDA. Overseas, Asia was mostly higher on the aforementioned economic optimism, which is also buoying European markets.

At 10:59 a.m. ET, the Dow Jones Industrial Average is up 0.8%, the S&P 500 Index is advancing 1.2%, and the Nasdaq Composite is gaining 1.4%. Crude oil is down $0.51 at $91.68 per barrel, wholesale gasoline is rising $0.01 to $2.51 per gallon, and the Bloomberg gold spot price is decreasing $2.55 to $1,330.25 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.6% at 77.28.

Dow member Pfizer Inc. (PFE $18) reported 4Q EPS ex-items of $0.47, above the $0.46 that analysts surveyed by Reuters had forecasted, with revenues rising 6% year-over-year (y/y) to $17.6 billion, compared to the $17.0 billion that was expected on the Street. PFE issued full-year 2011 revenue guidance that matched estimates, but its EPS outlook came in short of expectations. Separately, PFE announced an additional $5 billion to its share repurchase program. PFE is trading solidly higher.

United Parcel Service Inc. (UPS $74 ¹) posted 4Q earnings ex-items of $1.08 per share, exceeding the $1.05 that analysts anticipated, as revenues grew 8.4% y/y to $13.4 billion, inline with what the Street had projected. The package delivery and logistics firm said its international and supply chain & freight segments achieved record setting operating profit levels and it delivered 1.1 billon packages during the quarter, which was an increase of 3.9% y/y. UPS issued full-year 2011 EPS guidance that matched the Street’s forecasts. Shares of UPS are trading higher.

Outside of earnings news, shares of Orexigen Therapeutics Inc. (OREX $9) are down over 70% after the US Food & Drug Administration (FDA) rejected its diet-drug Contrave, which it developed with Japan’s Takeda Pharmaceutical Co. (TKPHF $48). The FDA cited concerns about the cardiovascular safety of the treatment. The companies said they are “surprised and extremely disappointed” by the rejection and they plan to work closely with the FDA to determine appropriate next steps regarding the drug’s application.

Elsewhere, General Motors Co. (GM $37) kicked off the industry’s January US auto sales reports, posting a 23% y/y gain in sales of its four core brands—Buick, GMC, Cadillac, and Chevrolet—easily topping analysts expectations, which were for an 11% increase, per CNBC. GM said the gain was driven by solid retail sales, which jumped 36% higher than a “strong January” a year ago. GM is trading higher and other reports from the major automakers are expected to be released later today.

US manufacturing jumps, but construction spending unexpectedly slumps

The  ISM Manufacturing Index improved to a level that exceeded expectations of economists surveyed by Bloomberg, rising from 57.0 in December to 60.8 in January—the highest level since May 2004. A reading above 50.0 depicts expansion and the index has posted eighteen-straight months above that mark. Leading the way, production and new orders expanded further, along with the employment component of the release, which rose to 61.7—the highest level since 1973. However, the prices paid component jumped, increasing from 72.5 to 81.5, exacerbating increasing concerns about inflationary pressures that are facing manufactures. Higher input prices could begin to pressure corporate profits as the current economic conditions may be hampering the ability to pass along higher input costs to consumers.

The US manufacturing data compliments a plethora of reports in the sector from across the globe today, helping boost confidence regarding an accelerating economic recovery. New orders rose to the highest level of expansion since January 2004 and production posted a level not seen since May 2010. However, the prices paid component’s jump to the highest level since July 2008 is curbing some of the enthusiasm of the data for its potential impact on business profits, which may force some of the burden of higher costs along to the consumer, which accounts for the lion’s share of the US economy.

However, while increased commodity prices threaten to increase inflation and cause global central banks to tighten monetary policy, a bigger concern is what they may do to both profit margins and consumers. Companies continue to have trouble passing along rising costs to consumers, thereby squeezing profit margins. Where they can pass those costs on, consumers take the ultimate hit, especially in food, heat and gasoline prices, leaving less money for discretionary purchases.

In other economic news, construction spending unexpectedly fell in December, dropping 2.5% month-over-month (m/m), versus the 0.1% gain seen by economists, and following a decrease of 0.2% seen in November, which was downwardly revised from a 0.4% gain that was originally reported. Residential and nonresidential spending both fell to contribute to the surprising drop in construction outlays.

Treasuries are lower in late-morning trading after extending losses on the ISM report, with the yield on the two-year note up 5 bps to 0.61%, the yield on the 10-year note gaining 8 bps to 3.45%, and the 30-year bond yield advancing 6 bps to 4.63%.

Commodity issues lead advance in Europe following economic data

The equity markets in Europe remain higher in late-day action, led by oil & gas issues and basic materials issues, on the heels of favorable manufacturing activity reports, which complimented the US report. Manufacturing reports showed PMI data in Italy, France, the UK, and Germany—Europe’s largest economy—all exceeded economists’ forecasts, leading to an upward revision to the January euro-zone PMI Manufacturing report. Other favorable reports across the pond included: a larger-than-expected drop in German unemployment, the euro-zone unemployment rate came in below expectations, and UK home prices declined by a smaller rate than anticipated. However, rising inflationary pressures were evident as French producer prices rose more than projected. Meanwhile, equity news is mixed, with the technology sector being supported by a solid gain in shares of  Infineon Technologies AG (IFNNY $11) after the chipmaker posted better-than-expected 1Q profits and raised its full-year outlook. However, shares of BP Plc. (BP $47) are being bogged down by the energy firm’s 4Q earnings that missed analysts’ forecasts, overshadowing the announcement that it will resume its quarterly dividend payment, which was suspended to help cover costs of the Gulf of Mexico oil spill. BP will pay a quarterly dividend of $0.07 per share, down from the $0.14 per share that was being paid out before the oil spill. The advance in Europe comes despite continued uneasiness toward the political unrest in Egypt, whose markets remained closed due to the turmoil.

The UK FTSE 100 Index is rising 1.6%, France’s CAC-40 Index is gaining 1.7%, Germany’s DAX Index is advancing 1.5%, and Italy’s FTSE MIB Index is increasing 2.0%.

Asia mostly higher amid earnings optimism and mixed data

Stocks in Asia were mostly higher, with Japan’s Nikkei 225 Index rising 0.4% as favorable sentiment toward corporate profits in the region, along with the improving economic data in the US—where major Japanese companies have business exposure—helped soothe concerns about the economic impact of the political unrest in the Middle East. Shares of Honda Motor Co. (HMC $44) rose solidly to help the advance after the automaker’s increased full-year profit outlook, on improved demand in the US, overshadowed its 3Q profits that missed analysts’ forecasts. Meanwhile, stocks in China managed to gain ground following reports on the nation’s manufacturing activity, with the Hong Kong Hang Seng Index increasing 0.2% and the Shanghai Composite Index gaining 0.3%. The gains came ahead of the week-long Lunar New Year holiday in China that begins tomorrow, and amid separate Manufacturing PMI releases that the activity continued to expand but input prices also accelerated, fostering concerns about inflation and the possibility of monetary policy tightening in the region. These concerns were also evident in the reaction to India’s Manufacturing PMI report, which showed activity expanded at an accelerated rate, and the nation’s BSE Sensex 30 Index fell 1.7%.

Elsewhere, Australian stocks finished flat after the Reserve Bank of Australia kept its benchmark interest rate unchanged at 4.75%, as it weighs elevated near-term commodity prices and the economic impact of the massive flooding the region saw recently. Finally, South Korea’s Kospi Index rose 0.1% amid the upbeat sentiment toward the corporate sector and following reports that showed consumer prices rose more than expected and the nation’s trade surplus shrunk by a smaller amount than expected.