Morning Market Update

Drop in Jobless Claims Unable to Light the Bulls’ Flame

Despite a larger-than-forecasted drop in US weekly initial jobless claims, to the lowest level since July 2008, US equity markets are trading lower following some disappointments from the global earnings front. Dow member Cisco Systems and PepsiCo Inc offered outlooks that missed the Street’s forecasts, overshadowing their forecast-topping profit and revenues, to apply the bulk of the pressure on stocks. Meanwhile, the European markets are being hampered by softer-than-expected profits from Credit Suisse, as well as the Swiss bank reducing its dividend and profitability target. Treasuries are lower in the wake of the drop in jobless claims, while showing little reaction to a larger-than-anticipated increase in wholesale inventories. In other equity news, Whole Foods Market Inc increased its outlook and bested the Street’s profit projections and Sprint Nextel Corp posted favorable subscriber growth, while Activision Blizzard Inc’s larger-than-estimated loss and disappointing outlook are overshadowing the video-game maker’s additional $1.5 billion share buyback plan and increased dividend. In other overseas action, Asian markets finished mixed.

At 10:58 a.m. ET, the Dow Jones Industrial Average is declining 0.3%, the S&P 500 Index is down 0.2%, and the Nasdaq Composite is 0.3% lower. Crude oil is up $0.26 at $86.97 per barrel, wholesale gasoline is $0.03 lower at $2.50 per gallon, and the Bloomberg gold spot price is down $2.85 to $1,360.80 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.8% at 78.26.

Dow member Cisco Systems Inc. (CSCO $19) reported fiscal 2Q EPS ex-items of $0.37, two cents above the consensus estimate of analysts surveyed by Reuters, with revenues increasing 6% year-over-year (y/y) to $10.4 billion, above the $10.2 billion that the Street was expecting. However, shares of the networking company are sharply lower as the company’s revenue for switches—used for the connection of multiple computers and a sizeable portion of its business—declined and margins contracted by a larger amount than expected. Also, the company issued an outlook for its revenues and margins that disappointed, and it warned of lower public sector spending.

Meanwhile, PepsiCo Inc. (PEP $63) announced that it achieved 4Q EPS ex-items of $1.05, one penny above the Street’s forecast, with revenues growing 37% y/y to $18.2 billion, above the $17.6 billion that analysts had expected, as volumes increased by 9%. However, the company issued full-year 2011 EPS guidance that missed expectations as it noted that it anticipates “high global commodity cost inflation and difficult macroeconomic conditions in developed markets.” Shares are lower.

However, shares of Whole Foods Market Inc. (WFMI $61) are sharply higher after the natural and organic foods supermarket chain posted fiscal 1Q EPS of $0.51, topping the $0.46 that was estimated by analysts. The company’s revenues rose 14% y/y to $3.0 billion, roughly inline with the Street’s projection, and same-store sales—sales at stores open at least a year—increased 9.1% y/y. Moreover, the company raised its full-year guidance, including its same-store sales outlook.

Moreover, Sprint Nextel Corp. (S $4) is gaining ground after it reported “the best” quarterly total company wireless subscriber additions and net postpaid—customers under contract—additions since the first and second quarters of 2006, respectively. Also, the wireless service provider posted revenues of $8.3 billion, a gain of 6% y/y, and above the $8.2 billion that was expected. The subscriber and revenue figures are more than offsetting the company’s 4Q loss of $0.31 per share, which was wider than the $0.29 per share shortfall that was expected.

Activision Blizzard Inc. (ATVI $11) reported 4Q EPS ex-items of $0.53, two cents above the Street’s forecast, with revenues increasing 2% y/y to $2.6 billion, compared to the $2.4 billion that analysts had anticipated. However, shares of the video game maker are under sharp pressure as the company issued guidance that missed expectations, offsetting the announcements that it will add $1.5 billion to its share repurchase program and increase its dividend by 10%. Also, ATVI announced that it will disband publishing of its Guitar Hero business and discontinue its development for 2011, due to continued declines in the music genre.

Jobless claims fall below 400k, wholesale inventories rise more than expected

Weekly initial jobless claims  dropped by 36,000 to 383,000—the lowest since July 2008—versus last week's figure which was upwardly revised by 4,000 to 419,000, and well below the 410,000 level that economists surveyed by Bloomberg had expected. The four-week moving average, considered a smoother look at the trend in claims, fell by 16,000 to 415,500, and continuing claims dropped by 47,000 to 3,888,000, below the forecast of economists, which called for continuing claims to come in at 3,900,000.

Treasuries remain lower after losing ground following the employment data, with the yields on the two-year and 10-year notes, as well as the 30-year bond gaining 3 bps to 0.82%, 3.68% and 4.74%, respectively.

In other economic news, wholesale inventories for December rose more than expected, increasing 1.0% month-over-month (m/m) compared to the 0.7% increase that economists had expected. Sales gained 0.4%, with petroleum leading the way, rising 3.0%, while computers fell 1.3%. The inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—rose slightly to 1.16 from 1.15.

Europe lower as bank earnings weigh and Bank of England leaves rates unchanged

The equity markets in Europe are under pressure in late-day action, led by weakness in financials on the heels of a solid decline in shares of Swiss bank  Credit Suisse Group (CS $43), after it posted profits that missed expectations on bad debt charges, while reducing its dividend and lowering its profitability outlook. Meanwhile, the Bank of England concluded its monetary policy meeting and kept its benchmark interest rate unchanged at 0.5%, and made no changes to its asset purchase program. In other equity news, Rio Tinto Plc. (RIO $73) is under pressure after the mining giant posted profits, that although rose sharply, missed analysts’ forecasts and offered a cautious outlook, overshadowing its announcements of a $5 billion increase to its share buyback program and a steep rise in its dividend. In other equity news, shares of Alcatel-Lucent (ALU $4) are rising sharply after the French phone-equipment maker posted 4Q earnings that exceeded analysts’ forecasts.

Economic news across the pond was mixed, with French industrial production unexpectedly rising, while its manufacturing activity declined by a smaller rate than forecasted, and Italian industrial production topping expectations, while UK manufacturing production unexpectedly declined.

The FTSE 100 Index is down 0.6%, France’s CAC-40 Index is declining 0.2%, Germany’s DAX Index is flat, Italy’s FTSE MIB Index is 0.7% lower, and Switzerland’s Swiss Market Index is decreasing 0.3%. Also, markets of debt-laden euro-zone peripheral nations such as Spain and Portugal are under the heaviest pressure, falling more than 1%, as lingering debt concerns are exacerbating the negative sentiment that was set by Credit Suisse’s disappointing report.

Asia mixed amid corporate and economic data

Stocks in Asia finished mixed as traders digested a slew of news from the corporate and economic fronts. Japan’s Nikkei 225 Index declined 0.1%, amid some profit taking ahead of a holiday tomorrow, which will close its markets, exacerbated by a report that showed the nation’s machine orders rose at a much smaller rate m/m in December than economists estimated. Also, shares of Nissan Motor Co. (NSANY $22) came under pressure to bog the markets down as its better-than-forecasted profit report and raised full-year outlook late yesterday was overshadowed by concerns about growth in China. However, stocks in Australia managed to eke out an advance, with the S&P/ASX 200 Index rising 0.2%, aided by a report that showed the nation’s employment change increased more than expected. Also, shares of ASX Ltd. (ASXFY $38) rose solidly to help the advance down under, as confidence in the approval from Australian regulators of the proposed takeover of the stock exchange operator by Singapore Exchange Ltd. (SPXCF $7) received a boost following yesterday’s announcement of mergers between major exchanges in Europe, Canada, and the US.

Elsewhere, Chinese stocks finished mixed, with the Hong Kong Hang Seng Index falling 2.0%, as shares of PetroChina Co Ltd. (PTR $136) declined solidly after it announced that it will buy a 50% stake in Encana Corp’s (ECA $31) Canadian shale gas assets for about $5.4 billion, while the Shanghai Composite Index gained 1.6%. Finally, South Korea’s Kospi Index dropped 1.8%, with retailers coming under pressure ahead of tomorrow’s monetary policy announcement from the Bank of Korea, which is expected to increase its benchmark interest rate by 25 basis points to 3.0%.