Morning Market Update

Housing Data and Tech Outlook Erase Early Gains

The US equity markets have given up an early advance and are lower following unexpected drops in housing starts and building permits, as well as a downwardly revised outlook from Dow member Hewlett-Packard Co. Meanwhile, earnings results out of the retail sector are mixed to stymie sentiment as Dow component Wal-Mart Stores Inc topped the Street’s profit projections, while fellow Dow member Home Depot Inc missed analysts’ revenue estimate. In other earnings news, Urban Outfitters Inc missed on their earnings, but topped revenue expectations. Treasuries have turned higher following the data, ahead of a report on industrial production and capacity utilization. Overseas, Asia finished mixed, while Europe is under some pressure as technology issues are weighing on the equity markets following Hewlett-Packard’s report, along with a disappointing read on German economic sentiment.

As of 8:50 a.m. ET, the June S&P 500 Index Globex future is 2 points below fair value, the Nasdaq 100 Index is 7 points below fair value, and the DJIA is 28 points below fair value. WTI crude oil is $0.67 lower at $96.70 per barrel, and the Bloomberg gold spot price is down $5.19 at $1,484.14 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.1% to 75.71.

Hewlett-Packard Co. (HPQ $40) posted fiscal 2Q EPS ex-items of $1.24, compared to the $1.21 that analysts surveyed by Reuters had expected, with revenues increasing 3% year-over-year (y/y) to $31.6 billion, matching the Street’s forecast. The Dow member was scheduled to report its 2Q results tomorrow after the closing bell but moved up its report following a leaked memo from CEO Leo Apotheker warning employees of “another tough quarter.” HPQ lowered its full-year guidance, due to the near-term impact of the Japan earthquake and tsunami, as well as continued softness in sales of consumer PCs and reduced operating profit expectations for services.

Meanwhile, Dow member Wal-Mart Stores Inc. (WMT $56) reported 1Q earnings ex-items of $0.97 per share, two cents above the consensus estimate of analysts, with revenues rising 4.4% y/y to $103.4 billion, above the $102.9 billion that the Street had expected. The world’s largest retailer said its 1Q US same-store sales—sales at stores open at least a year—declined 0.3% y/y, excluding a gain of 0.7% in fuel sales, as customer traffic declined, while average ticket price increased compared to the same period last year. WMT issued 2Q EPS guidance that was roughly inline with expectations.

Fellow Dow component Home Depot Inc. (HD $37) announced 1Q profits of $0.50 per share, above the $0.49 that the Street had forecasted, as revenues inched 0.2% lower y/y to $16.8 billion, compared to the $17.0 billion that analysts were anticipating. The world’s largest home-improvement retailer said its same-store sales dipped 0.6% y/y. However, HD raised its full-year EPS outlook.

Finally, Urban Outfitters Inc. (URBN $32) achieved 1Q EPS of $0.23, one penny below the consensus estimate of analysts, with revenues increasing 9% y/y to $524 million, topping the $522 million that the Street had projected. The specialty retailer said its same-store sales declined by 5% y/y.

Housing starts and building permits fall, manufacturing and capacity read on deck

Housing starts for April fell 10.6% month-over-month (m/m) from an upwardly revised 585,000 annual rate of units in March, to a rate of 523,000 units, and compared to expectations of economists surveyed by Bloomberg, which called for starts to come in at 569,000. Also, building permits dropped 4.0% m/m in April to an annual rate of 551,000, after March’s downward revision to a 574,000 rate. The expectation was for permits to come in at 590,000 units.

Treasuries have turned higher in morning action following the housing data, with the yield on the 2-year note unchanged at 0.52%, while the yields on the 10-year note and the 30-year bond are declining 1 bp to 3.14% and 4.27%, respectively.

Later this morning, the US economic calendar will yield the release of industrial production and capacity utilization, with production forecasted to increase 0.4% m/m in April and utilization to rise from 77.4% in March to 77.6% for April.

Europe lower on debt concerns and disappointing data

The European equity markets are under some pressure in afternoon action as traders digest developments on the eurozone debt crisis as well as some disappointing data in the US and across the pond. Technology issues are the biggest decliners on the heels of the lowered outlook from Dow member Hewlett-Packard, while telecommunications stocks are clinging to gains amid a solid advance in shares of Vodafone Group Plc. (VOD $27). The UK mobile-network operator is seeing some demand after posting favorable cash flow and revenue results, while offering an upbeat outlook. However, the focus remains on the euro-area debt crisis and a meeting between eurozone officials resulted in talks about the possibility of getting Greek bondholders to extend the debt-laden nation’s debt repayment schedule. Also, officials approved the bailout program for Portugal, but the financial aid package needs to be approved by eurozone governments.

Meanwhile, the economic front offered data that was on the negative side, with the German ZEW Survey of Economic Sentiment deteriorating more than expected in May, while UK consumer prices came in hotter than expected in April.

The UK FTSE 100 Index is down 0.4%, France’s CAC-40 Index is declining 0.6%, and Germany’s DAX Index is decreasing 1.0%. Elsewhere, Greece’s Athex Composite Index is 0.7% lower and Portugal’s PSI 20 Index is declining 0.1%.

Asia mixed as Australian stocks rise despite possibility of future rate hikes

Stocks in Asia finished mixed amid some bargain hunting and as traders continued to grapple with the euro-area debt crisis and concerns about a slowdown in the global economy. However, Japan’s Nikkei 225 Index rose 0.1% as strength in banking issues, which have come under recent pressure, helped buoyed the equity markets, offsetting some weakness in chipmakers. Also, Australia’s S&P/ASX 200 Index increased 0.7% on a rebound in mining issues, despite the minutes from the May 3 monetary policy meeting by the Reserve Bank of Australia showing that policymakers felt further rate hikes may be needed to control inflation. The reports noted that, “If economic conditions continued to evolve as expected, higher interest rates were likely to be required at some point if inflation was to remain consistent with the medium-term target.” Elsewhere, stocks in China finished mixed, with the Hong Kong Hang Seng Index declining 0.3%, while the Shanghai Composite Index closed 0.1% higher. Finally, South Korea’s Kospi Index dipped 0.1% and India’s BSE Sensex 30 fell 1.1%.