Morning Market Update

Debt Concerns and US Data Bring the Bulls Back to Reality

The US equity markets are under pressure in morning action as the euro-area debt crisis and some unfavorable US manufacturing and inflation data are erasing yesterday’s solid advance. Eurozone policymakers failed to agree on a second bailout plan for troubled Greece, while US consumer prices came in hotter than forecasted and a read on manufacturing activity in New York fell to a level denoting contraction. Treasuries are higher following the data, ahead of reports on industrial production and capacity utilization, as well as a gauge of homebuilder sentiment. Meanwhile, equity news is light, with Scotts Miracle-Gro Co cutting its full-year guidance due to the challenges of unfavorable weather in the US. Overseas, Asian markets finished mixed, while European stocks are in the red amid the aforementioned euro-area debt uneasiness.

As of 8:50 a.m. ET, the September S&P 500 Index Globex future is 9 points below fair value, the Nasdaq 100 Index is 19 points below fair value, and the DJIA is 119 points below fair value. WTI crude oil is $0.96 lower at $98.41 per barrel, and the Bloomberg gold spot price is down $5.89 at $1,517.99 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 1.0% at 75.16.

Scotts Miracle-Gro Co. (SMG $52) reduced its full-year guidance to “reflect the continued challenges of unfavorable weather in most of the United States.” The consumer lawn and garden products company said, “we simply don’t have enough time left in the season” to offset the unusually challenging weather patterns as through mid-June consumer purchases are still below last year’s levels in nearly every major market in the northern and western United States. SMG expects revenues to be inline with its performance last year as it reported sales of $3.1 billion and EPS is expected to be between $3.10-3.20, down from a range of $3.60-3.70 that it had previously estimated. Analysts surveyed by Reuters were expecting the company to report revenues of about $3.0 billion and EPS of $3.40.

Consumer prices hotter than expected, NY manufacturing activity falls, more data to come

The Consumer Price Index showed prices at the consumer level were up 0.2% month-over-month (m/m) in May, above the forecasts of economists surveyed by Bloomberg, calling for a 0.1% increase, with April’s 0.4% increase unrevised. Meanwhile, the core rate, which strips out food and energy, was 0.3% higher m/m in May, exceeding estimates of a 0.2% increase, with April’s 0.2% increase being left unrevised. On a y/y basis, consumer prices were 3.6% higher in May, up from 3.2% in April, and the core CPI was 1.5% higher y/y, after rising by 1.3% in April. Economists expected headline CPI to come in at 3.4% and a core rate of 1.4% y/y.

The Empire Manufacturing Index, a measure of manufacturing in the New York region, fell sharply in June, dropping to -7.79 from May’s level of 11.88, compared to the estimates of economists, which expected a modest improvement to 12.00. A reading below zero denotes a contraction in activity. The report is the first major piece of data looking at manufacturing conditions in June, and later this week, the Philly Fed Manufacturing Index will be released, projected to increase from 3.9 in May to 7.0 in June (economic calendar).

In other economic news, the MBA Mortgage Application Index rose solidly, increasing by 13.0% last week, after the index that can be quite volatile on a week-to-week basis, declined by 0.4% in the previous week. The advance came as a 16.5% jump in the Refinance Index, was accompanied by a 4.5% gain in the Purchase Index. Also, the average 30-year mortgage rate declined by 3 basis points (bps) to 4.51%.

Treasuries remain higher in morning action following the data, with the yield on the 2-year note down 2 bps to 0.42%, the yield on the 10-year note declining 3 bps to 3.07%, and the 30-year bond rate 1 bp lower to 4.28%.

Later this morning, the US economic calendar will yield the releases of industrial production and capacity utilization, with production forecasted to increase 0.2% m/m in May after being flat in April, while utilization is expected to improve slightly from 76.9% in April to 77.0% in May. Also, the NAHB Housing Market Index will be reported, and the gauge of homebuilder sentiment is expected to remain at 16, with any reading below 50 indicating more respondents feel conditions are poor.

Debt concerns resurface to thwart yesterday’s enthusiasm

The equity markets in Europe are lower in afternoon action, led by financials as concerns about the euro-area debt crisis have re-emerged, with the focus on Greece taking the lion’s share of the pessimism. The uneasiness, which is stymieing yesterday’s broad-based advances that came from improved global economic sentiment on favorable data out of the US and China, comes as European officials failed to agree on a plan to provide a second wave of financial aid to the troubled nation of Greece. The dissension among eurozone finance ministers in centered on the involvement of private creditors of Greece. Meanwhile, protests in Greece fueled by opposition among the public toward the nation’s needed austerity measures to receive eurozone bailout funds is exacerbating sentiment across the pond. Moreover, French banking stocks are among the worst performers to pace the declines in the region after Moody’s Investors Service placed the nation’s top three banks on review for a possible downgrade, due to their exposure to Greece’s debt crisis. The euro is down sharply in afternoon trading on the debt concerns.

Elsewhere, economic data is taking a back seat to the festering debt uneasiness, which is overshadowing reports that showed UK consumer confidence improved by a larger amount than expected, while eurozone industrial production in April unexpectedly increased. In other economic news, UK jobless claims rose by a larger-than-anticipated amount, and French consumer prices increased inline with forecasts.

The UK FTSE 100 Index is down 0.7%, while France’s CAC-40 Index and Germany’s DAX Index are falling 1.3%, and Greece’s Athex Composite Index is dropping 3.6%.

Asia mixed as Chinese markets decline following yesterday’s policy action

Stocks in Asia were mixed as Japanese markets gained ground, with the Nikkei 225 Index rising 0.3% following the steep gains in the US yesterday that came courtesy of some favorable economic data. Also, the Japanese equity markets were supported by a sharp advance in shares of Tokyo Electric Power Co Inc. (TKECY $5) as the operator of the nuclear facility that was damaged by the March earthquake and tsunami continued to be boosted by a government plan to compensate victims of the nation’s nuclear crisis. TKECY has surged over 50% in the past two sessions as the plan has gained approval among Japanese lawmakers. Meanwhile, shares of Honda Motor Co. (HMC $36) moved nicely higher to help buoy Japanese stocks despite the automaker’s annual profit forecast that was larger than expected, due to the impact of the production disruptions from the March tragedy and strength in the yen. The advance in Japan came as the Bank of Japan released its monthly economic report, which showed the nation’s economy continues to face downward pressure from the earthquake and tsunami but noting that there were some signs of improving economic activity.

However, stocks in China moved lower on the day, following yesterday’s late-day announcement that the Chinese central bank increased the reserve requirement ratio—the amount of capital that should be set aside in reserve instead of being put back into the financial system for the nation’s largest banks. The tightened monetary policy action came on the heels of some stronger-than-forecasted economic data and elevated inflation figures and was the sixth increase this year as the nation tries to cool inflation. The Shanghai Composite Index fell 0.9% and Hong Kong’s Hang Seng Index declined 0.7%. Elsewhere, Australia’s S&P/ASX 200 Index decreased 0.4% despite yesterday’s improvement in global economic sentiment, as Reserve Bank of Australia’s Governor Stevens noted that a rate hike could still be on the table as inflationary pressure persist and a report showed Australia’s consumer confidence deteriorated. Rounding out the day, South Korea’s Kospi Index rose 0.5% amid strength in airlines and shipping companies.