Morning Market Update

Durable Goods Manufacture a Morning Decline

US stocks are trading lower in early action after broad-based declines in April durable goods orders continued the downward pressure on the equity markets, which were battling back from early losses before the data was released. However, Treasuries are modestly lower despite the manufacturing data, which also showed solid upward revisions to March’s results. In equity news, Applied Materials Inc posted better-than-expected 2Q results, but its outlook disappointed the Street, while Costco Wholesale Corp exceeded analysts’ earnings and revenue estimates and Hormel Foods Corp matched profit projections. In other economic news, mortgage applications posted the fourth-consecutive weekly gain. Overseas, Asia finished mostly lower amid growing global economic concerns, while Europe is mixed as financials are rebounding despite continued euro-area debt concerns.

As of 8:51 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 36 points below fair value. WTI crude oil is $0.69 lower at $98.90 per barrel, and the Bloomberg gold spot price is down $1.79 at $1,524.86 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is unchanged at 75.92.

Applied Materials Inc. (AMAT $14) reported fiscal 2Q EPS ex-items of $0.38, one penny above the consensus estimate of analysts surveyed by Reuters, with revenues increasing 25% year-over-year (y/y) to $2.9 billion, exceeding the $2.8 billion that the Street had anticipated. The semiconductor equipment maker said it had record sales in its solar business, while sales from its chip segment were down compared to last quarter. AMAT issued 3Q guidance that disappointed analysts, saying “near-term economic conditions have tempered our growth expectations.”

Costco Wholesale Corp. (COST $81) announced fiscal 3Q earnings ex-items of $0.80 per share, three pennies north of the Street’s projection, as revenues grew 16% y/y to $20.2 billion, compared to the $20.1 billion that analysts had forecasted. The retailer said its 3Q same-store sales—sales at stores open at least a year—rose 12% y/y, including gasoline sales and foreign currency translation, which had positive impacts. Excluding gasoline price inflation and strengthening foreign currencies, same-store sales were up 7%.

Hormel Foods Corp. (HRL $30) achieved fiscal 2Q EPS of $0.40, inline with analysts’ estimates, with revenues increasing 15% y/y to $2.0 billion, topping the $1.8 billion that the Street had anticipated. The company said it had sales growth in all five of its segments, and its refrigerated foods and Jennie-O Turkey Store segments led the way. HRL raised its full-year EPS guidance as it said it will combat higher input costs through efficiency gains and increased pricing.

Durable goods fall, while mortgage applications post fourth-straight weekly gain

Durable goods orders dropped more than estimated, falling 3.6% month-over-month (m/m) in April, compared to the 2.5% decline that was expected by economists surveyed by Bloomberg, but March’s figure was favorably revised to a 4.4% increase from a 2.5% gain. Also, ex-transportation, orders unexpectedly fell, dropping 1.5% in April, compared to the expectation of a 0.5% rise, while March’s figure was adjusted upward, to a 2.5% increase, after the initial 1.3% gain that was reported. Meanwhile, orders for non-defense capital goods excluding aircraft, considered a good proxy for business spending, were below expectations, decreasing by 2.6% in April, compared to the 2.1% decline that was anticipated, after rising by a favorably revised 5.4% in March, from the initial report of a 3.7% increase.

In other economic news, the MBA Mortgage Application Index rose by 1.1% last week, after the index that can be quite volatile on a week-to-week basis, increased by 7.8% in the previous week. The fourth-consecutive weekly increase came as the Purchase Index rose 1.5% and the Refinance Index moved 0.9% higher, despite a 9 basis point (bp) increase in the average 30-year mortgage rate to 4.69%.

Treasuries are modestly lower in morning action, showing little reaction to the data, with the yield on the 2-year note unchanged at 0.54%, while the yield on the 10-year note is 1 bp higher at 3.13% and the 30-year bond rate is gaining 2 bps to 4.27%.

Europe mixed as banks rebound despite persistent debt concerns

The equity markets in Europe are mixed in afternoon action, as financials are broadly higher amid some bargain hunting following recent weakness that has accompanied elevated uneasiness regarding the eurozone debt crisis. Banks are showing some resiliency even as uncertainty continues regarding a possible debt restructuring in the troubled nation of Greece. However, commodity-related issues are under some pressure to weigh on stocks in the region as global economic concerns are growing, exacerbated by the recent string of data that has showed the economic recovery is slowing. In economic news, the UK reported that its 1Q GDP remained unrevised at a quarter-over-quarter (q/q) rate of expansion of 0.5%, as strength in exports offset weakness in private consumption. Other reports released today included: stronger-than-forecasted UK service sector activity in March, and a larger-than-estimated drop in Italian retail sales. In equity news, shares of Cable & Wireless Communications Plc. (CWIXF $0.81) is down sharply after the UK telecom company posted disappointing earnings and guidance.

The UK FTSE 100 Index is down 0.2%, France’s CAC-40 Index is 0.3% lower, and Geramny’s DAX Index is declining 0.2%. However, Italy’s FTSE MIB Index is gaining 0.3%, Spain’s IBEX 35 Index is rising 0.4%, and Greece’s Athex Composite Index is advancing 0.2%.

Asia mostly lower amid global concerns

Stocks in Asia finished mostly to the downside on lingering concerns about the global economic recovery amid continued uneasiness stemming from the euro-area debt crisis and signs of slower growth out of the US. Japan’s Nikkei 225 Index declined 0.6% as a solid decline in shares of Sony Corp. (SNE $28) exacerbated sentiment after the company suffered another hacking incident at its website in several countries including Canada. The company is expected to report full-year earnings tomorrow and earlier this week it warned that it will post a loss, due partly to security breaches at its PlayStation online gaming network. However, losses in Japan were limited by strength in automakers and after a report showed the nation’s exports fell by a slightly smaller amount than economists had forecasted for April. Meanwhile, South Korea’s Kospi Index dropped 1.3% amid the dampened global economic sentiment, which also weighed on Australian equities, with the S&P/ASX 200 Index falling 1.0%, despite a report showing the nation’s Leading Index rose. Stocks in Australia were also led lower by weakness in financials and a sharp drop in shares of Austal Ltd. (AUTLY $31) after the shipbuilder lowered its full-year guidance. Finally, stocks in China finished mixed, with the Shanghai Composite Index declining 0.9%, while the Hong Kong Hang Seng Index ticked 0.1% higher.