Morning Market Update

Bulls Harnessed by Inflation and as Sales Miss Expectations

The US equity markets are under pressure in late-morning action on the heels of reports that showed retail sales rose at a smaller-than-forecasted rate, while import prices came in well above economists’ forecasts, exacerbating growing inflation concerns. The disappointing data is overshadowing a larger-than-forecasted improvement in manufacturing activity in the New York region, and Treasuries are mostly higher. In other economic news, home builder sentiment remained unchanged and business inventories rose slightly more than forecasted. Meanwhile, in equity news, FedEx Corp lowered its 3Q earnings outlook on winter weather and higher fuel costs, while Marriott International Inc posted better-than-projected profits. Elsewhere, the highly publicized merger between NYSE Euronext and Deutsche Boerse AG was announced. Overseas, Asia was mixed as traders digested a slew of economic data, while upbeat earnings reports are helping offset some disappointing GDP reports across the pond and European markets are diverging.

At 10:52 a.m. ET, the Dow Jones Industrial Average, the S&P 500 Index, and the Nasdaq Composite are all declining 0.5%. Crude oil is up $0.38 at $85.19 per barrel, wholesale gasoline is flat at $2.52 per gallon, and the Bloomberg gold spot price is gaining $11.40 to $1,373.25 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.1% at 78.52.

FedEx Corp. (FDX $96) announced that its 3Q earnings have been negatively impacted by an estimated $0.25 per share, due to severe winter storms and higher-than-expected fuel prices. As a result, the package delivery company lowered its 3Q adjusted earnings to a range between $0.70-0.90, compared to its previous guidance of between $0.95-1.15. The guidance assumes no further weather impact and stable fuel prices for the remainder of the quarter. Analysts surveyed by Reuters were expecting the company to post 3Q EPS of $1.04. FDX is trading higher despite the announcement.

Marriott International Inc. (MAR $42) reported 4Q EPS ex-items of $0.39, three cents above the Street’s expectations, with revenues growing nearly 6% year-over-year (y/y) to $3.6 billion, roughly inline with expectations. The hotel and resort company said its revenue per available room (REVPAR)—a key industry metric—rose 8.1%. Additionally, the company announced a plan to split its businesses into two, publicly traded companies, as it expects to spin off its timeshare operations and development business. Shares are higher.

In M&A news, the highly touted merger between NYSE Euronext (NYX $39) and Deutsche Boerse AG (DBOEY $8) was announced this morning, creating the world’s largest exchange for equities and derivatives. Deutsche shareholders will have 60% ownership, while NYSE stockholders will control the remaining piece, and one share of Deutsche stock held will be exchanged for one share of the new company, with one share of NYSE stock being exchange at a rate of 0.47 shares of the new company. Shares of both companies are lower.

Retail sales softer than expected, NY manufacturing activity rises, and import prices jump

Advance retail sales for January rose 0.3% month-over-month (m/m), compared to the forecast of economists surveyed by Bloomberg that called for an increase of 0.5%, and December’s 0.6% gain was revised to a 0.5% advance. January sales ex-autos increased 0.3%, below expectations of a 0.5% increase, and December’s 0.5% rise was revised to a 0.3% gain. Sales ex-autos and gas gained 0.2% in January, versus the 0.4% increase that was anticipated, and its December figure was revised from a 0.4% increase to a 0.1% gain. Building materials fell sizably, partially offset by solid gains in food & beverage and gasoline sales, due largely to higher prices.

Meanwhile, the  Empire Manufacturing Index, a measure of manufacturing in the New York region, improved in February to a level of 15.43, compared to the estimates of economists, which expected an increase to 15.00, from the previous month’s level of 11.92. The index moved further into expansionary territory depicted by a reading above zero. However, the bulk of the improvement in the index came as the prices paid jumped nearly ten points to 45.78, more than offsetting declines in new orders, shipments, and employment, which all did remain above zero. The report is the first major piece of data looking at manufacturing conditions in February, while on Thursday, the Philly Fed Manufacturing Index will be released, expected to increase from 19.3 in January to 21.0 in the current month, providing further insight into the health of the sector (economic calendar).

Elsewhere, the Import Price Index rose 1.5% m/m for January, compared to the expectation of economists, which called for the index to increase by 0.8%. Year-over-year (y/y), import prices are higher by 5.3%, versus the 4.4% forecast of economists. Import prices have increased over 1% for the past four months, and January’s increase was led by a 3.9% gain in fuel prices, with industrial supplies and food prices also contributing to the overall advance.

The increase in retail sales and persistent gains in import prices, which were aided by higher fuel and food costs, along with the solid increase in the prices paid component of the Empire Manufacturing Index are causing concerns that inflation pressures could be mounting.

In other economic news, business inventories rose 0.8% m/m in December, compared to the 0.7% increase that was expected, with sales jumping 1.1%, keeping the inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—at 1.25 months.

Rounding out the busy day on the US economic front, the NAHB Housing Market Index, a gauge of homebuilder sentiment, remained at a level of 16 for the month of February, as expected.

Treasuries are mostly higher in late-morning action following the data, with the yield on the two-year flat at 0.84%, while the yields on the 10-year note and the 30-year bond are down 1 bp to 3.61% and 4.66%, respectively.

Europe diverges following a flurry of mixed data

Stocks in Europe are mixed in late-day action with a plethora of economic and earnings data painting a diverse picture of prosperity across the pond. However, financials are higher to lend support to the equity markets, aided by a solid gain in shares of  Barclays Plc. (BCS $21) after it posted full-year earnings that exceeded analysts’ forecasts. Also, a respectable gain in shares of Danone (DANOY $12) is supporting stocks in France after the world’s biggest yogurt maker reported better-than-forecasted full-year sales, while offering favorable 2011 revenue guidance.

Meanwhile, some of the luster from the corporate front is being tarnished by a flood of 4Q GDP reports in the region that came in worse than expected, with output in Germany, France, Italy, and the euro-zone all showing growth that was below what economists had forecasted. However, a report on analyst and investor sentiment in Germany—Europe’s largest economy—which improved by a larger amount than expected, is helping limit some of the pessimism in European sentiment that followed the aforementioned GDP data. The German ZEW Survey of Economic Sentiment improved from 25.4 in January, to 29.5 for February, compared to the improvement to 28.5 that was anticipated. In other economic news worth noting, UK consumer prices accelerated in January, as expected, while Sweden’s central bank raised its benchmark interest rate by 25 basis points to 1.50%, matching expectations.

France’s CAC-40 Index is rising 0.2% and Italy’s FTSE MIB Index is advancing 0.5%, while the UK FTSE 100 Index is down 0.5%, Germany’s DAX Index is decreasing 0.2%, and Sweden’s OMX Stockholm 30 Index is declining 1.1%.

Asia mixed amid a flood of data

The equity markets in Asia finished mixed as traders digested a plethora of key economic reports in the region, headlined by data on inflation and loans in China, as well as the Bank of Japan’s monetary policy meeting. Japan’s Nikkei 225 Index rose 0.2% after the BoJ kept its benchmark interest rate near zero, as expected, but it raised its economic outlook. Also, Japan reported that the pace of industrial production and capacity utilization in December were adjusted upward from preliminary reports. However, the Chinese economic calendar garnered the most attention, amid rising inflation concerns toward the emerging markets, and the nation’s growth in consumer prices accelerated from 4.6% y/y in December, to 4.9% in January, but was below the 5.4% increase that economists had anticipated. Also, China’s producer prices rose more than expected, rising from 5.9% to 6.6%, versus the 6.2% gain that was projected. Another key piece of data that was released in China was new yuan loans, which jumped from 480.7 billion in December to 1.04 trillion in January, but was below the 1.2 trillion that was anticipated. The Hong Kong Hang Seng Index fell 1.0%, while the Shanghai Composite Index finished flat in reaction to the data, which did little to cool concerns about further monetary policy tightening in China.

Elsewhere, South Korea’s Kospi Index dipped 0.2%, and Australia’s S&P/ASX 200 Index inched 0.1% lower, following the release of the Reserve Bank of Australia’s minutes from its monetary policy meeting earlier this month, in which it left its benchmark interest rate unchanged. The RBA’s report noted that continued subdued growth in consumer spending and lower-than-expected inflation “provided additional time” for the RBA to assess the evolving balance of risks to both output and inflation.