Morning Market Update

2Q GDP and Debt Ceiling Drive Bulls Back Into the Stalls

The US equity markets are solidly lower in early action as the delayed vote in the House on a debt ceiling plan yesterday is exacerbating sentiment, while a much softer-than-expected report on 2Q US GDP is amplifying the uneasiness on the Street. Treasuries are higher after jumping on the economic data, which also included a larger-than-expected rise in 2Q employment costs. Meanwhile, reports on consumer sentiment and regional manufacturing activity are set for later this morning. In earnings news, Dow member Merck & Co Inc posted inline profits, while fellow Dow member Chevron Corp topped the Street’s forecasts but revenues missed. Elsewhere, Starbucks Corp and Expedia Inc exceeded analysts’ forecasts for earnings and revenues. Overseas, Asia was broadly lower amid the US debt concerns and a plethora of data, while European stocks are solidly lower on the uneasiness on both sides of the pond.

As of 8:52 a.m. ET, the September S&P 500 Index Globex future is 13 points below fair value, the Nasdaq 100 Index is 16 points below fair value, and the DJIA is 122 points below fair value. WTI crude oil is $1.23 lower at $96.21 per barrel, and the Bloomberg gold spot price is up $8.00 at $1,623.95 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.2% at 74.26.

Dow member Merck & Co. Inc. (MRK $35) announced 2Q profits ex-items of $0.95 per share, inline with the consensus estimate of analysts surveyed by Reuters, with revenues rising 7.1% year-over-year (y/y) to $12.2 billion, exceeding the $11.8 billion that the Street had anticipated. The drugmaker said it benefitted from double-digit growth from key products and successful new product launches, while emerging markets accounted for 18% off sales during the quarter. MRK raised the lower end of its full-year EPS forecast, while reiterating its revenue outlook.

Fellow Dow component Chevron Corp. (CVX $105) reported 2Q EPS of $3.85, above the $3.56 that analysts had projected, but revenues rose 31.4% y/y to $69 billion, below the $71.6 billion that the Street was expecting.

Starbucks Corp. (SBUX $40) announced fiscal 3Q EPS of $0.36, two cents above the estimate of analysts, with revenues increasing 12% y/y to $2.9 billion, topping the $2.8 billion that the Street had expected. The coffee retailer said its 3Q same-store sales—sales at stores open at least a year—rose 8% y/y, driven by “strong traffic,” and a higher average ticket price. The company raised its full-year EPS guidance.

Expedia Inc. (EXPE $29) posted 2Q earnings ex-items of $0.55 per share, above the $0.49 estimate on the Street, with revenues growing 23% y/y to $1.0 billion, topping the $962 million that analysts were anticipating. The online travel agent said its gross bookings rose 19% y/y, while advertising and media revenues rose 27% compared to last year.

First read on 2Q GDP disappoints, employment costs rise, more data on the way

The first look at 2Q Gross Domestic Product, the broadest measure of economic output, showed a smaller rate of expansion than expected, rising at a 1.3% quarter-over-quarter (q/q) annualized rate of growth, compared to the sharp downwardly revised 0.4% increase in 1Q, and the 1.8% growth that was forecasted by a Bloomberg survey of economists. Also, personal consumption was well below expectations, gaining 0.1%, down from the 2.1% that was posted in 1Q, and compared to the 0.8% growth that was forecasted.

The GDP Price Index rose 2.3%, compared to the 2.0% increase that economists anticipated, and the core PCE Index, which excludes food and energy, increased 2.1%, versus the 2.3% rise that was expected.

In other economic news, the 2Q Employment Cost Index rose 0.7%, above the 0.5% increase that economists had expected, after rising by 0.6% in 1Q.

Treasuries moved higher following the GDP and employment cost data, with the yield on the 2-year note down 4 bps to 0.38%, the yield on the 10-year note 7 bps lower to 2.88%, and the 30-year bond rate declining 5 bps to 4.21%.

Later this morning, the economic calendar will yield the releases of the final University of Michigan’s Consumer Sentiment Index, forecasted to improve modestly from the initially reported 63.8 to 64.0 for July, as well as the Chicago Purchasing Managers Index, expected to decline from 61.1 in June to 60.0 in July, with a reading above 50 denoting expansion.

Debt concerns on both sides of the pond pressuring Europe

The equity markets in Europe are solidly lower in afternoon action amid exacerbated concerns about the ability of US lawmakers to come to an agreement on raising the debt ceiling by the August 2 deadline, while eurozone debt concerns continue to hamper sentiment. Also, the disappointing US GDP report is adding to the losses in European trading. Eurozone debt contagion worries are being fostered by Moody’s Investors Service placing Spain, a key nation at the center of the contagion uneasiness, on review for a possible downgrade. Moody’s cited long-term budget-balancing challenges, along with subdued economic growth and “fiscal slippage within parts of its regional and local government sector.” Meanwhile, the earnings front is also adding to the weakness in stocks across the pond, as shares of Veo lia Environment SA (VEOEF $26) are sharply lower after the utility company issued a full-year profit warning, while Total SA (TOT $55) is losing ground after the energy company reported earnings that missed expectations. However, shares of Vodafone Group (VOD $27) is gaining solid ground to limit losses after announcing a special dividend.

There were some major economic reports that were released in Europe, with Germany retail sales surging 6.3% month-over-month (m/m) in June, above the 1.7% increase that economists expected, and eurozone consumer prices for July coming in cooler than expected. Also, the UK released a plethora of data including: consumer confidence falling more than expected, while home prices improved and mortgage approvals rose more than expected. Finally, France released reports showing consumer spending increased more than expected and producer prices declined inline with expectations.

The UK FTSE 100 Index is down 1.4%, France’s CAC-40 Index is 2.0% lower, Germany’s DAX Index is declining 1.4%, and Spain’s IBEX 35 Index is decreasing 0.9%

Asia broadly lower amid US debt concerns and a plethora of data

Stocks in Asia finished broadly lower as the continued failure of US lawmakers to make progress on reaching an agreement to raise the debt ceiling pressured sentiment, while traders digested a slew of earnings and economic data. Japan’s Nikkei 225 Index dropped 0.7% as the US debt worries were met with a sharp decline in shares of Nintendo Co. Ltd. (NTDOY $19) after it cut its full-year profit forecast amid sluggish demand for its new 3-D handheld video game player, and Sony Corp. (SNE $25) moved lower after lowering its full-year guidance on a reduced outlook for TV sales. Meanwhile, on the Japanese economic front, June data showed household spending fell more than expected, industrial production was rose less than forecasted, consumer prices rose roughly inline with expectations, while July manufacturing activity accelerated. Elsewhere, South Korea’s Kospi Index fell 1.1%, even after Samsung Electronics (SSNLF $800) rose after its earnings bested analysts’ forecasts and a report showed the nation’s industrial production rose more than economists’ expected in June, but was a solid deceleration from May.

Meanwhile, Australia’s S&P/ASX 200 Index declined 0.9%, while stocks in China finished lower, with the Shanghai Composite Index decreasing 0.3% and the Hong Kong Hang Seng Index falling 0.6%. In Chinese economic news, the nation’s Leading Index dipped slightly in June from May. Finally, Taiwan’s Taiex Index dropped 1.4% amid the downbeat sentiment and after it reported that its 2Q GDP expanded at the slowest pace since 2009, per Bloomberg, but was slightly stronger than economists anticipated.