Morning Market Update

Early Gains Erased on Mixed Earnings and a Wider Trade Deficit

The US equity markets have given up early gains and are modestly lower in morning action, as traders digest some mixed earnings reports, a disappointing read on the US trade deficit, and inflation concerns out of China and the UK. Treasuries are nearly unchanged in early action, showing little reaction to a solid rise in mortgage applications. Meanwhile, Dow member Walt Disney Co is under some pressure after the Dow component missed the Street’s earnings and revenue forecasts, while department store Macy’s Inc is receiving a boost from its much better-than-expected profit report, which was complimented by an increase in its earnings outlook and a doubling of its quarterly dividend. Overseas, Asia finished mixed as China reported hotter-than-forecasted inflation data, while Europe is mostly higher amid some upbeat earnings reports, but the UK markets are being hamstrung by the Bank of England increasing its inflation outlook.

As of 8:49 a.m. ET, the June S&P 500 Index Globex future is 1 point below fair value, the Nasdaq 100 Index is 1 point below fair value, and the DJIA is 11 points below fair value. WTI crude oil is $1.03 lower at $102.85 per barrel, and the Bloomberg gold spot price is down $2.44 at $1,513.83 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.2% to 74.72.

Dow member Walt Disney Co. (DIS $44) reported fiscal 2Q earnings of $0.49 per share, below the $0.57 consensus estimate of analysts surveyed by Reuters, with revenues increasing 6% year-over-year (y/y) to $9.08 billion, versus the $9.12 billion that the Street had expected. The company saw revenue growth at its media networks and parks & resorts segments, but its studio entertainment posted a 13% y/y decline in revenues and a 65% drop in profits, due to decreases in worldwide home entertainment and theatrical distribution, as well as higher film cost write-downs.

Macy’s Inc. (M $26) announced 1Q EPS of $0.30, well above the $0.18 that the Street had estimated, as revenues rose 5.7% y/y to $5.9 billion, inline with what analysts had anticipated. The department store said its 1Q same-store sales—sales at stores open at least a year—increased 5.4% y/y, and it raised its full-year EPS guidance. The company also doubled its quarterly dividend to $0.10 per share.

Trade deficit widens, mortgage applications rise for a second-straight week

The trade deficit widened by a larger amount than anticipated, increasing from a favorably revised $45.4 billion in February to $48.2 billion in March, versus the estimate of economists surveyed by Bloomberg, which called for the deficit to widen to $47.0 billion.

In other economic news, the MBA Mortgage Application Index increased by 8.2% last week, after the index that can be quite volatile on a week-to-week basis, rose by 4.0% in the previous week. The gain came as the Refinance Index rose 9.0% and the Purchase Index registered a 6.7% increase, while the average 30-year mortgage rate declined by 9 basis points (bps) to 4.67%.

Treasuries remain nearly unchanged following the data, with the yield on the 2-year note unchanged at 0.58%, the yield on the 10-year note 1 bp higher at 3.22%, and the 30-year bond rate flat at 4.35%.

Earnings optimism helping Europe overcome inflation and debt concerns

The equity markets in Europe are mostly higher in afternoon action, on the foundation of some favorable earnings reports, which are offsetting continued uncertainty toward Greece’s debt situation, higher inflation reported out of China, and an upwardly revised inflation forecast from the Bank of England (BoE). Highlighting a plethora of upbeat corporate earnings news, AP Moller-Maersk (AMKBF $9800) is moving solidly higher after the shipping container company posted a surge in profits that easily exceeded analysts’ estimates, while Hermes International (HESAY $23) is also trading nicely to the upside after the luxury retailer reported revenues that topped expectations. Elsewhere, the UK pound is solidly higher and the equity markets are lagging behind after the BoE increased its inflation outlook, with BoE Governor King saying “there is a good chance” that inflation could reach 5% later this year, and inflation remains “uncomfortably high.” King also warned that the recent pattern of revisions to the central bank’s projections of “downward to growth and upward to inflation has continued.” The BoE outlook is prompting some to increase expectations that the central bank may need to increase interest rates sooner than initially thought.

The UK FTSE 100 Index is down 0.2%, while France’s CAC-40 Index is gaining 0.4% and Germany’s DAX Index is rising 0.5%. Elsewhere, Greece’s Athex Composite Index is jumping 2.7%.

Asia mixed after Chinese data

Stocks in Asia finished mixed as the economic news in the region was focused on China, with a report showing consumer prices, although slowing modestly in April from March, came in above expectations. China’s Consumer Price Index (CPI) increased 5.3% y/y, after rising 5.4% in the previous month, compared to the 5.2% gain that economists had expected, fostering some concerns about continued monetary policy tightening by the government, which reiterated recently that its top priority was to contain inflation. Moreover, some gauges of financial market liquidity also added to the uneasiness, as new yuan loans and fixed asset investments each exceeded expectations and accelerated in April from March. However, some of the concerns were limited by other reports, which showed the Producer Price Index (PPI) cooled more than anticipated, while industrial production and retail sales both increased by smaller-than-forecasted amounts. Stocks in China finished modestly lower, with the Hong Kong Hang Seng Index declining 0.2% and the Shanghai Composite Index decreasing 0.3%.

Meanwhile, stocks in other parts of Asia finished higher, with Japan’s Nikkei 225 Index rising 0.5%, aided by upbeat corporate reports, as shares of Orix Corp. (IX $48) and NEC Corp. (NIPNF $2) both moved solidly higher after they issued upbeat outlooks. However, after the closing bell in Japan, Toyota Motor Corp. (TM $81) reported earnings that severely missed analysts’ estimates, as the March earthquake and tsunami hampered profits, along with the strength in the Japanese yen. Rounding out the day, South Korea’s Kospi Index gained 1.3%, led by strength in technology and refining issues, while yesterday’s rebound in commodity prices helped Australia’s S&P/ASX 200 Index rise 1.2%.