Morning Market Update

US and China Data Support Morning Sentiment

The US equity markets are nicely higher in early trading as some favorable economic data out of China boosted optimism that the Asian nation will likely avoid a hard landing, while some data out of the US came in modestly better than anticipated. US retail sales declined by a smaller-than-projected amount, and stripping out autos and gas, sales were stronger than estimated. Moreover, producer prices rose at a level that matched economists’ expectations. Treasuries are lower amid the advance in the equity markets, showing little reaction to a separate report that showed a deterioration in small business sentiment. Later today, we will get the release of business inventories and a speech by Fed Chairman Ben Bernanke. In equity news, Best Buy Co Inc reported better-than-estimated revenues and earnings, and GT Solar International Inc raised its outlook. Overseas, Asia finished mostly higher after the Chinese data, which is supporting a strong advance in Europe.

As of 8:52 a.m. ET, the September S&P 500 Index Globex future is 14 points above fair value, the Nasdaq 100 Index is 22 points above fair value, and the DJIA is 99 points above fair value. WTI crude oil is $0.09 higher at $97.39 per barrel, and the Bloomberg gold spot price is down $0.66 at $1,514.99 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.2% at 74.36.

Best Buy Co. Inc. (BBY $29) reported 1Q earnings of $0.35 per share, above the $0.33 consensus estimate of analysts surveyed by Reuters, with revenues increasing 1.0% year-over-year (y/y) to $10.9 billion, topping the $10.7 billion that the Street had anticipated. However, the electronics retailer said its 1Q same-store sales—sales at stores open at least a year—declined 1.7% y/y.

GT Solar International Inc. (SOLR $12) raised its fiscal 1Q guidance to a level above analysts’ projections as the solar-equipment company said it finished upgrades faster than expected, resulting in the accelerated completion of orders that were expected to be recognized in 2Q. Also, the company said given the “significant” number of orders it has received thus far, it expects backlog at the end of the year to be well above its previous forecast.

Retail sales above forecasts, wholesale prices gain, small business sentiment declines

Advance retail sales for May declined 0.2% month-over-month (m/m), compared to the 0.5% decline that was forecasted by economists surveyed by Bloomberg, but April’s 0.5% gain was revised to a 0.3% advance. May sales ex-autos rose 0.3%, above expectations of a 0.2% increase, while April’s 0.6% rise was revised to a 0.5% gain. Sales ex-autos and gas advanced 0.3% in May, versus the 0.2% increase that was anticipated, and its April figure was revised from a 0.2% increase to a 0.3% gain.

Elsewhere, the Producer Price Index showed prices at the wholesale level rose 0.2% m/m in May, after increasing by an unrevised 0.8% in April, and slightly above the forecast of economists, calling for a 0.1% rise. Also, the core rate, which excludes food and energy, gained 0.2% m/m, matching forecasts, after increasing an unadjusted 0.3% in April. On a year-over-year basis, headline producer prices were 7.3% higher, versus the 6.8% increase that was projected, and the core rate was up 2.1%, inline with expectations.

In other economic news, the NF IB Small Business Optimism Index declined by a smaller amount than expected, decreasing from 91.2 in April to 90.9 in May, compared to the expectation of economists, which called for the index to decline to 90.5. The decrease came as the number of firms reporting expectations of higher sales dipped, along with plans to increase capital spending, while plans to increase inventory and hiring both declined and are in negative territory. The deterioration in the above components was partially offset by improvements in expectations of higher selling prices and expectations of a better economy.

Treasuries are lower following the data, with the yield on the 2-year note up 4 bps to 0.43%, the yield on the 10-year note 7 bps higher at 3.06%, and the 30-year bond yield advancing 6 bps to 4.26%.

Later this morning, the US economic calendar will bring the release of business inventories, forecasted to increase 0.9% m/m in April, after rising by 1.0% in March.

Finally, Federal Reserve Chairman Ben Bernanke will speak in afternoon action at the annual conference of the Committee for a Responsible Federal Budget. The speech is regarding fiscal sustainability and is expected at 2:30 p.m. ET, with no Q&A session to follow.

Europe higher on Chinese economic optimism

The equity markets in Europe are nicely higher in afternoon action following some favorable data out of China, which improved sentiment toward the health of the Asian economy in the face of monetary policy tightening. The advance across the pond remained even after the announcement that China tightened the reserve requirement for its banking sector in the wake of the economic reports. Meanwhile, technology issues are one of the best performers on the day, courtesy of the China enthusiasm and as shares of Nokia Corp. (NOK $6) are solidly higher after the company announced that it has settled a patent dispute with Apple Inc. (AAPL $327), in which the struggling handset maker will receive an undisclosed one-time payment and recurring royalties. Meanwhile, the equity markets are posting solid gains despite lingering euro-area debt uneasiness, exacerbated by yesterday’s late-day three-notch downgrade of Greece’s sovereign debt rating by Standard & Poor’s, which said the debt-laden nation was increasingly likely to restructure its debt in a way that it would consider a default, per Reuters. S&P also maintained a negative outlook for Greece.

In economic news across the pond, UK consumer prices rose mostly inline with expectations, but the core rate came in slightly cooler than economists estimated, while a separate report showed UK home prices deteriorated more than forecasted.

The UK FTSE 100 Index is 0.6% higher, France’s CAC-40 Index is gaining 1.3%, Germany’s DAX Index is rising 1.8%, and Greece’s Athex Composite Index is advancing 0.9%.

Asia mostly higher after Chinese data soothes concerns

Stocks in Asia finished higher as traders digested a plethora of economic data out of China that soothed concerns that recent monetary policy tightening by the Chinese government could induce a hard landing of the Asian economy. China’s Shanghai Composite Index rose 1.1% after the nation’s industrial production gained 13.3% y/y in May, after increasing 13.4% in April, and above the 13.1% rise that economists had expected. Moreover, separate reports showed retail sales gained 16.9% y/y in May, roughly inline with expectations, while fixed asset investment rose 25.8%, above the 25.2% increase that was anticipated. Finally, inflation data released today showed consumer prices were up 5.5% y/y in May, an increase from the 5.3% that was seen in April, but matching expectations, while producer prices remained 6.8% higher than the same period a year ago, exceeding the 6.5% that was anticipated. However, the stronger-than-expected industrial production, fixed asset investment, and elevated inflation data prompted the Chinese government to announce after the close of trading that it will increase its bank reserve requirement—the amount of funds the nation’s largest banks will need to keep out of the financial system—by 50 basis points to 21.5%. This was the ninth increase in the reserve requirement since last October. Shares in Hong Kong, which remained in action during the announcement, erased early gains to finish modestly lower, with the Hang Seng Index dipping 0.1%.

Elsewhere, Japan’s Nikkei 225 Index rose 1.1% following the Chinese data, and after the Bank of Japan left its benchmark interest rate near zero, while Australia’s S&P/ASX 200 Index increased 0.5%, and South Korea’s Kospi Index advanced 1.4%. Rounding out the day, India’s BSE Sensex 30 Index rose 0.2%, even after a report showed the nation’s wholesale prices rose more than expected in May.