Morning Market Update

Resiliency Remains

The US equity markets are modestly higher in late-morning action of the final session before the long President’s Day weekend, overcoming lingering Middle East geopolitical concerns, more policy tightening in China, and continued inflation concerns. Treasuries are mixed as there are no major US economic reports out today. However, Federal Reserve Chairman Ben Bernanke offered his global takeaways in the wake of the financial crisis. In equity news, Nordstrom Inc, Intuit Inc, and Brocade Communications Systems all posted better-than-forecasted earnings, while Campbell Soup Co lowered its full-year guidance. Overseas, Asia was mostly higher on continued economic optimism, while European are mixed following data and the policy tightening news out of China.

At 10:59 a.m. ET, the Dow Jones Industrial Average is 0.2% higher, while the S&P 500 Index and the Nasdaq Composite are rising 0.1%. Crude oil is up $1.57 at $90.41 per barrel, wholesale gasoline is increasing $0.02 to $2.54 per gallon, and the Bloomberg gold spot price is increasing $1.95 to $1,386.05 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.1% at 77.90.

Nordstrom Inc. (JWN $47) reported 4Q EPS of $1.04, above the $1.00 consensus estimate of analysts surveyed by Reuters, with revenues increasing 10.9% year-over-year (y/y) to $2.8 billion, inline with the Street’s expectation. The department store retailer said 4Q same-store sales—sales at stores open at least a year—grew 6.7% y/y, led by sales of jewelry, dresses and shoes, while the South and Midwest regions were the top performing geographic areas. Shares are higher, overcoming early weakness that came as the retailer also announced that it will acquire fashion website HauteLook for $180 million in stock.

Intuit Inc. (INTU $54) posted fiscal 2Q EPS ex-items of $0.32, two pennies above analysts’ estimates, as revenues rose 5% y/y to $878 million, below the $884 million that was expected. The business and financial management software firm said its small business unit continues to perform well, with growth accelerating from last quarter, and it is capitalizing on secular tailwinds as customer preferences move toward more digital, connected services in the small business sector. Meanwhile, the company said its QuickBooks segment showed strong growth, but the maker of Turbotax said revenue at its customer tax unit declined quarter-over-quarter (q/q), driven by a shift in revenue from 2Q to 3Q, due primarily to taxpayers waiting longer to file their returns. The company raised its full-year EPS guidance, while it reiterated its revenue outlook. INTU is solidly higher.

Brocade Communications Systems Inc. (BRCD $6) is sharply higher after the networking equipment supplier achieved fiscal 1Q EPS ex-items of $0.12, topping analysts’ forecast by two cents, on revenues that grew 1.2% y/y to $546 million, compared to the $544 million that was anticipated. Also, the company issued 2Q revenue guidance that exceeded expectations. BRCD added that its Ethernet fabric solutions are being “well received by customers in the industry.”

Campbell Soup Co. (CPB $33) is solidly lower after the food maker lowered its full-year guidance after posting fiscal 2Q revenues that fell 1% y/y to $2.1 billion, below the $2.2 billion that the Street expected. The company also reported 2Q EPS of $0.71, matching forecasts, and said the overall competitive environment remains challenging throughout the food industry, particularly in the US. Moreover, CPB noted that it expects “improved price realization” will lead to better profitability in anticipation of higher cost inflation going forward.

Fed Chief speaks to end the week

Ahead of the three-day weekend—all US markets will be closed on Monday in observance of President’s Day—Treasuries are mixed in late-morning action as there are no major economic reports due out today. The yield on the two-year note is down 4 bps to 0.79%, the yield on the 10-year note is flat at 3.62%, and the 30-year bond yield is increasing 2 bps to 4.70%.

However, Federal Reserve Chairman Ben Bernanke spoke as part of a panel at the Bank of France Financial Stability Review on the subject of global imbalances and financial stability, offering little market moving comments as he gave an analysis of the financial crisis. Bernanke noted that the misallocation of international capital flows contributed to the crisis, along with poor performance of the US financial system and regulation in receiving capital inflows. The Fed Chief concluded that we need to clarify and strengthen the “rules of the game,” with an eye toward creating an international system that more effectively supports the simultaneous pursuit of internal and external balance. To achieve a more balanced international system over time, Bernanke said countries with excessive and unsustainable trade surpluses will need to allow their exchange rates to better reflect market fundamentals and increase their efforts to substitute domestic demand for exports. Moreover, he added that at the same time, countries with large, persistent trade deficits must find ways to increase national saving, including putting fiscal policies on a more sustainable trajectory. In addition, to bolster our individual and collective ability to manage and productively invest capital inflows, Bernanke stressed that we must continue to increase the efficiency, transparency, and resiliency of our national financial systems and to strengthen financial regulation and oversight.

Central bank action—or inaction—can have wide-ranging consequences. The US dollar has been trending lower again on the view that the Fed could be one of the last major central banks to begin raising interest rates, and because the US has made little headway toward improving its fiscal health. Thus far, debt markets have given the US a pass, but more austerity will likely be demanded eventually—potentially resulting in higher rates, in direct contrast to what the Fed is trying to engineer. Japan seems to get away with a high level of government debt and hasn't aggressively tackled austerity. However, Japan's outlook is worse than that of the US, with debt twice as high and moribund economic growth. In contrast, weak European nations are reliant on external funding. The recession and subsequent bank losses—as well as a poor outlook of slow growth rates, uncompetitive labor markets and the lack of discrete currencies that would allow member nations' economies to adjust—contributed to the European debt crisis.

Diverging from developed economies, growth in emerging economies has recovered quickly, particularly in Asia. Interest rates remain low, and abundant money due to foreign inflows and high levels of bank lending is resulting in rising inflation rates. As a result, rate hikes are needed in emerging markets as inflation has replaced double-dip concerns in developed economies that dominated 2010. However, a surge in inflation and clampdown on growth via aggressive rate hikes could slow growth in the developing world, the main source of global growth, posing a risk to the world economy. We're more concerned about food-price spikes in emerging economies. This is because food, as a percent of spending, can be roughly twice that in developed economies, and has a better chance of passing through to general prices across the economy.

China tightening and data have European equities mixed

Stocks in Europe are mixed in late-day action, following the announcement of policy tightening in China and some diverse economic data in the region. Meanwhile, the equity front is mixed, with shares of Lafarge (LFRGY $16) moving solidly higher after the French cement maker offered an upbeat outlook on demand and announced a joint venture with the UK ‘s Anglo American Plc. (TMOAF $10) are sharply lower after the navigation-device maker issued a disappointing sales and earnings outlook.

Meanwhile, the economic calendar is painting a mixed picture, with German producer prices coming in much hotter than expected and France reporting its business confidence unexpectedly declined, while UK retail sales surged eight times the expectation of economists and Italian industrial orders jumped more than twice what was anticipated.

The UK FTSE 100 Index is down 0.2% and Italy’s FTSE MIB Index is declining 0.4%, while France’s CAC-40 Index is up 0.1% and Germany’s DAX Index is gaining 0.2%.

Asia mostly higher on continued economic optimism

The equity markets in Asia were mostly higher to cap off a positive week on the heels of some favorable reports from the corporate front and continued enthusiasm toward the global economy, which more than offset festering uneasiness toward the Middle East. The major moves came from South Korea and Taiwan, with the Kospi Index and the Taiex Index both rising 1.8%. Korean stocks were led by shipbuilders on optimism regarding demand, while Taiwanese equities were buoyed by yesterday’s stronger-than-anticipated 4Q GDP report. Meanwhile, the major markets in the region were mixed, with Japan’s Nikkei 225 Index inching 0.1% higher and the Hong Kong Hang Seng Index rising 1.3%, while the Shanghai Composite Index fell 0.9%. Japanese stocks were aided by a more than 30% jump in shares of Kinki Nippon Tourist Co Ltd. after the travel agent issued full-year earnings guidance that was sharply higher compared to last year. Elsewhere, Australia’s S&P/ASX 200 Index finished flat as a solid gain in shares of surfwear maker Billabong International (BLLAY $16), after it forecasted better-than-expected sales, offset some weakness in financials and mining issues.

Economic news was light in the region, with Japan reporting another decline in department store sales, while China’s Conference Board’s Leading Index deteriorated. However, the biggest piece of news came after the close in Asia, as the Chinese government increased its banking industry’s reserve requirement—the amount of capital a lender must keep in reserve instead of using it for loans—for the second time this year, raising the rate by 50 basis-points to an average of nearly 20%. The action follows the People's Bank of China’s interest rate hike less than two weeks ago, as it battles rising inflation and the formation of asset bubbles.