Morning Market Update

Stocks Slipping in Final Session of the Week

Following yesterday’s relative resiliency in the face of a plethora of disappointing US economic data, the US equity markets are under some pressure in early trading ahead of the weekend. Treasuries are nearly unchanged in morning action as there are no major US economic reports scheduled for release today. In equity news, Gap Inc is being pressured by the retailer’s reduced EPS outlook as it said rising costs are outpacing price increases, while Liberty Media Corp announced that it has made a near $1 billion cash proposal to acquire bookseller Barnes & Noble Inc. Overseas, Asia was mixed as the Bank of Japan left its monetary policy unchanged, while European stocks are diverging, with BP Plc receiving a $1.1 billion payment to help with the costs of the Gulf of Mexico oil spill and some disappointing data is stymieing sentiment.

As of 8:48 a.m. ET, the June S&P 500 Index Globex future is 4 points below fair value, the Nasdaq 100 Index is 5 points below fair value, and the DJIA is 25 points below fair value. WTI crude oil is $0.29 higher at $99.22 per barrel, and the Bloomberg gold spot price is up $5.36 at $1,498.64 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.4% to 75.38.

Gap Inc. (GPS $23) is under pressure after the retailer lowered its full-year EPS outlook from a range of $1.88-1.93 to between $1.40-1.50 as the company expects business performance during the year to be “heavily impacted by pressure from sourcing cost inflation.” Analysts surveyed by Reuters were expecting the company to achieve full-year EPS of $1.91. GPS said while it anticipated that the cost of goods would increase during the back half of the year, costs are actualizing above initial estimates. The company expects costs per unit to be up about 20% in the back half of the year, which will “more than outweigh retail price increases.” The guidance accompanied its 1Q EPS report, in which it posted profits that were a penny ahead of analysts’ estimates, while revenues were inline with expectations.

In M&A news, Liberty Media Corp. (LCAPA $89) announced that it has made a proposal to acquire Barnes & Noble Inc. (BKS $14) for $17 per share in cash, or nearly $1 billion. The company said its proposal is subject to various conditions, including satisfactory financing and the participation of BKS’ Chairman Riggio, both in terms of his continuing equity ownership and his continuing role in management. BKS confirmed it has received the offer and will evaluate the proposal.

Economic calendar to end the week on a quiet note

Treasuries are nearly unchanged in morning action as there are no major economic reports scheduled for release today, with the yield on the 2-year note flat at 0.53%, the yield on the 10-year note 1 bp lower at 3.17%, and the 30-year bond rate unchanged at 4.31%.

This week saw mostly disappointing data from the economic front, as the Index of Leading Economic Indicators snapped a nine-month growth streak. Moreover, manufacturing activity slowed, with the Empire Manufacturing Index and the Philly Fed Manufacturing Index both decelerating by much larger amounts than economists had expected, and industrial production came in flat. Meanwhile, housing remained depressed, as housing starts and building permits, existing home sales, and homebuilder sentiment failed to improve as had been projected.

However, the minutes from the April monetary policy meeting of Federal Reserve policymakers showed that the Central Bank will remain accommodative to the economic recovery for the foreseeable future as its discussions regarding an exit strategy showed a consensus on the proper protocol of tightening policy was far from being reached. Also, if there was a silver lining in the week’s data, it was on the employment as the related components in the aforementioned regional manufacturing reports both showed improvement and weekly initial jobless claims fell back to near the 400,000 mark, following recent jumps.

Europe mixed but oil & gas stocks are moving higher

The equity markets in Europe are mixed in afternoon action, with energy firms moving slightly to the upside as oil prices are modestly higher after yesterday’s slide and as shares of BP Plc. (BP $44) are solidly higher after one of its partners agreed to pay the UK energy firm $1.1 billion to help with the costs of the Gulf of Mexico oil spill last year. However, some economic concerns are weighing on stocks outside of the UK, as the Finance Ministry in Germany—Europe’s largest economy—warned in its monthly report that the nation’s economic growth may slow beginning in the middle of the year, per Bloomberg. Moreover, a report showed German producer prices rose more than economists expected in April. The data is overshadowing a separate report that showed Italian industrial orders rose much more than was estimated for March.

The UK FTSE 100 Index is 0.2% higher, while France’s CAC-40 Index is declining 0.2% and Germany’s DAX Index is decreasing 0.5%.

Asia mixed following disappointing US data and commodity weakness

Stocks in Asia finished mixed in an uninspired trading session on the heels of a plethora of disappointing US economic data yesterday, which helped lead to another down day for commodity prices. Australia’s S&P/ASX 200 Index declined 0.5% amid the weakness in the resources sector, while Japan’s Nikkei 225 Index closed down 0.1%. Losses were limited in Japan by some weakness in the Japanese yen, which helped export-related stocks. In economic news, the Bank of Japan (BoJ) held its monetary policy unchanged despite yesterday’s second-straight quarterly contraction in the nation’s 1Q GDP and as the country tries to rebound from March’s devastating earthquake and tsunami. In equity news, after the markets closed, Tokyo Electric Power Co. (TKECY $5) reported a $15 billion full-year net loss, mainly due to the fallout from the nuclear crisis centered at a power facility that it operates that was damaged from the March tragedy and has yet to be fully contained. Additionally, the company announced that its president will resign.

Elsewhere, South Korea’s Kospi Index rose 0.8% to rebound from yesterday’s steep losses, despite weakness in the financial and construction sectors after a warning about real estate loans possibly going bad amid the prolonged slump in the property market, per Reuters. Meanwhile, stocks in China were mixed with the Hong Kong Hang Seng Index rising 0.2%, while the Shanghai Composite Index finished flat. Finally, stocks in India were one of the best performers as the BSE Sensex 30 Index increased 1.0%, due to eased inflation concerns on the drop in commodities and some favorable earnings reports.