Morning Market Update

Earnings and Data Offset Debt Concerns

The US equity markets have overcome early losses and are modestly higher in early action after better-than-expected 2Q results from Dow member JPMorgan Chase & Co helped erase a downward move that came on continued global debt worries. The US debt ceiling issue is taking relative priority over the eurozone debt crisis as Moody’s Investors Service put the US credit rating on watch for a potential downgrade if an agreement to raise the debt ceiling was not reached. However, Italy is keeping the euro-area debt crisis in focus after the nation, which has been pressured in recent days on fears of contagion, conducted a debt auction that came with much higher yields than recent auctions. Treasuries remain lower amid the modest gains in stocks, while traders are digesting some key economic data. Weekly initial jobless claims fell more than expected and advance retail sales rose slightly, while producer prices were mixed on the headline and core levels. In other equity news, YUM Brands Inc posted better-than-anticipated 2Q results and raised its EPS guidance, and ConocoPhillips announced that it aims to separate the company’s refining & marketing and exploration & production businesses into two stand-alone, publicly traded corporations. Overseas, Asia was mixed following the warning on the US debt ceiling, while Europe is back in the red after snapping a three-session losing streak yesterday.

As of 8:51 a.m. ET, the September S&P 500 Index Globex future is 3 points above fair value, the Nasdaq 100 Index is 8 points above fair value, and the DJIA is 18 points above fair value. WTI crude oil is $0.12 higher at $98.17 per barrel, and the Bloomberg gold spot price is up $7.81 at $1,590.19 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is flat at 74.97.

Dow member JPMorgan Chase & Co. (JPM $40) reported 2Q earnings of $1.27 per share, above the $1.21 consensus estimate of analysts surveyed by Reuters, with revenues rising 7% year-over-year (y/y) to $27.4 billion, compared to the $25.1 billion that the Street had expected. The company’s Chairman and CEO Jamie Dimon said its 2Q earnings reflected “solid performance across most of our business,” with strong earnings across most products at its investment banking unit, while its commercial banking segment posted record revenue and continued loan growth. Meanwhile, its retail banking unit “demonstrated good underlying performance” but continued to experience “high losses for mortgage-related issues.” JPM said its Basel III capital ratio was “well in excess” of what is required today by the global capital rules and greater than the level it expects will be required under the proposed rules for up to five years.

Meanwhile, YUM Brands Inc. (YUM $56) posted 2Q EPS ex-items of $0.66, five cents above the expectation of analysts, with revenues increasing 9% y/y to $2.8 billion, exceeding the $2.7 billion forecast of the Street. The parent of Taco Bell, Pizza Hut, and KFC said its same-store sales—sales at stores open at least a year—fell 4% y/y in the US, while its international same-store sales rose 2%, led by a sharp increase out of China. The company said its “outstanding” international results were offset by a steep decline in US profits, driven by higher commodity costs and the decrease in same-store sales. YUM raised its full-year EPS guidance.

Elsewhere, ConocoPhillips (COP $74) announced that it will pursue the separation of the company’s refining & marketing and exploration & production businesses into two stand-alone, publicly traded corporations via a tax-free spin-off of the refining & marketing business to COP shareholders. The company said it has concluded that two independent companies focused on their respective industries will be better positioned to pursue their individually focused business strategies.

Retail sales rise modestly, wholesale inflation mixed, but jobless claims fall

Advance retail sales for June rose 0.1% month-over-month (m/m), compared to the 0.1% decline that was forecasted by economists surveyed by Bloomberg, and May’s 0.2% decrease was revised to a fall of 0.1%. June sales ex-autos were flat, as expected, while May’s 0.3% rise was revised to a 0.2% gain. Sales ex-autos and gas rose 0.2% in June, versus the 0.4% increase that was anticipated, and its May figure was revised from a 0.3% increase to a 0.2% gain.

Meanwhile, the Producer Price Index showed prices at the wholesale level fell 0.4% m/m in June, after increasing by an unrevised 0.2% in May, and a larger drop than the 0.2% decline that economists forecasted. However, the core rate, which excludes food and energy, rose 0.3% m/m, above forecasts of a 0.2% increase, after rising an unadjusted 0.2% in May. On a year-over-year basis, headline producer prices were 7.0% higher, versus the 7.4% increase that was projected, and the core rate was up 2.4%, above expectations of a 2.2% rise.

Elsewhere, weekly initial jobless claims fell by 22,000 to 405,000, versus last week's figure which was upwardly revised by 9,000 to 427,000, and compared to the 415,000 level that economists had expected. Also, the four-week moving average, considered a smoother look at the trend in claims, declined by 3,750 to 423,250, while continuing claims rose by 15,000 to 3,727,000, above the forecast of economists, which called for continuing claims to come in at 3,680,000.

Treasuries remain lower in early action following the data and amid the modest rise in the equity markets, with the yield on the 2-year note up 2 bps at 0.37%, while the yields on the 10-year note and the 30-year bond are 4 bps higher at 2.92% and 4.21%, respectively.

Later this morning, we will get the release of business inventories, expected to increase 0.8% m/m in May, matching the rise seen in April. Also, Federal Reserve Chairman Ben Bernanke will conclude his two-day semiannual Congressional monetary policy testimony, speaking to the Senate at 10:00 a.m. ET. Bernanke is expected to reiterate what he told the House yesterday, where he noted that additional policy action could be needed if recent economic weakness proves more persistent than expected and deflationary risks reemerge. However, traders will be paying attention to the Q&A session for any new comments on the direction of near-term monetary policy as well as the fiscal challenges facing the US, particularly the raising of the debt ceiling issue. The debt ceiling decision faces an August 2 deadline, and Moody’s Investors Service warned late-yesterday that it may cut the top-notch AAA credit rating of the US if the debt ceiling is not raised by that date.

Global debt issues pressuring European stocks

The equity markets in Europe are under some pressure in afternoon action, as Moody’s Investors Service’s warning that it could cut the US credit rating if its debt ceiling issues are not resolved by early August is exacerbating already debt-sensitive sentiment in the eurozone. Today’s euro-area debt crisis uneasiness comes courtesy of a bond auction in Italy, which although did not fail as some had feared amid the recent contagion worries, the yields the debt-heavy nation had to pay were solidly higher from levels seen in previous auctions. However, stocks are off of the lows of the day following the strong earnings from US Dow member JPMorgan Chase & Co. Meanwhile, conviction is being stymied ahead of tomorrow’s results from the European stress tests of the banking sector and as Italy is set to conduct a confidence vote later today on its austerity plan, which had been expedited to try to cool the aforementioned flare-up in concerns that the eurozone debt crisis could spread to the nation’s shores. In equity news, shares of Software AG (STWRY $14) are sharply lower after Germany’s second-largest maker of business software, per Bloomberg, posted disappointing 2Q revenues. In economic news, eurozone core consumer prices came in hotter than expected y/y in June, but m/m, headline consumer prices were flat.

The UK FTSE 100 Index is down 0.7%, France’s CAC-40 Index is 0.9% lower, Germany’s is declining 0.5%, and Italy’s FTSE MIB Index is falling 1.0%.

Asia mixed following US rating warning

Stocks in Asia finished mixed as yesterday’s enthusiasm that the US Federal Reserve stands ready to provide more monetary stimulus waned amid the warning from Moody’s that the triple-A credit rating of the US may be in jeopardy. Japan’s Nikkei 225 Index declined 0.3%, as the US dollar weakened against the yen to put pressure on Japanese export stocks. Also, Australia’s S&P/ASX 200 Index declined 0.5% amid the uneasiness toward the US debt issue, which also led to a 0.4% decline in New Zealand’s NZX 50 Index, despite a report that showed the nation’s 1Q GDP grew more than anticipated. Meanwhile, Australian stocks were pressured by a sharp drop in shares of David Jones Ltd. (DJONF $4) after the department store issued a second-half profit warning. Elsewhere, South Korea’s Kospi Index finished flat after paring early losses in late-day action, while showing little reaction to the announcement from South Korea’s central bank, which left its benchmark interest rate unchanged at 3.25% as expected.

However, India’s BSE Sensex 30 Index eked out a 0.1% gain, following a report that showed the nation’s wholesale inflation came in cooler than expected. Moreover, stocks in China also managed to post advances, with the Hong Kong Hang Seng Index rising 0.1% and the Shanghai Composite Index increasing 0.5%.