Morning Market Update

It’s A Deal!

The US equity markets are solidly higher in early action, as Congressional leaders, leaving little time ahead of tomorrow’s deadline, are hoping to push through a weekend-constructed bi-partisan deal to raise the US debt limit. The agreed-upon package, announced by President Obama last night, looks to raise the debt ceiling by $2.1 trillion and slash government spending by $2.4 trillion. Treasuries, which have appeared to be unphased by the looming August 2 deadline, are mostly flat in early trading ahead of the month’s first read on manufacturing activity and construction spending. Meanwhile, earnings reports continue to pour in with Allstate swinging to a its first loss in two years on a surge in claims due to an active storm season, while Humana posted profits and revenues that were well above analysts’ forecasts. Stocks in Asia finished solidly higher on the US debt accord announcement, despite reports showing manufacturing in the region cooled, while markets in Europe are higher as well, but tempered somewhat following mixed manufacturing reads in the region, and after Moody’s placed Spain’s credit rating on review for a possible downgrade.

As of 8:50 a.m. ET, the September S&P 500 Index Globex future is 16 points below above value, the Nasdaq 100 Index is 29 points above fair value, and the DJIA is 205 points above fair value. WTI crude oil is $1.55 higher at $97.25 per barrel, while the Bloomberg gold spot price is down $9.99 at $1,617.06 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is 0.2% lower at 73.72.

Allstate Corp. (ALL $28) swung to a 2Q loss ex-items of $1.23 per share, above the $1.56 per share shortfall expected by analysts surveyed by Reuters, its first quarterly loss in more than two years. A season rife with tornadoes and storms pushed the insurer's property-liability ratio—a gauge of how much was paid out vs. each dollar collected in premiums—to 123.3%, up from 96.8% a year ago.

In related industry news, Humana Inc. (HUM $75) reported 2Q EPS of 2.50 ex-items, ahead of the $2.05 expected by analysts, as revenues rose 8.1% year-over-year (y/y) to $9.28 billion, also topping forecasts calling for sales of $9.42 billion. The managed health care company’s Chairman and CEO said the results demonstrate its “on-going commitment to operational excellence across all lines of business,” adding, “We believe the reinvestment spending we intend to make in the back half of 2011 will further position us for success in 2012 and beyond.”

Manufacturing, construction reports begin heavy economic week

Treasuries are mostly flat in morning trading, showing little reaction to the heightened possibility of a debt ceiling deal becoming a reality after President Obama announced that Congressional leaders had come to an agreement to end the impasse in Washington. The plan, which looks to raise the debt limit by $2.1 trillion while cutting spending by $2.4 trillion, will get a vote from both the House and Senate today, with both parties working to get their rank-and-file in line to seal the deal and avoid a default ahead of tomorrow’s deadline. The yield on the 2-year note is unchanged at 0.36%, the yield on the 10-year note is 1 bp higher at 2.81%, and the 30-year bond rate is advancing 2 bps to 4.15%.

Later this morning, the US economic calendar will bring a look at manufacturing activity for last month, in the form of the ISM Manufacturing Index, expected to dip from 55.3 in June to 54.5 for July, with a reading above 50 depicting expansion. Additionally, construction spending will be released, expected to rise 0.1% month-over-month (m/m) in June following a 0.6% decline in May.

With concerns growing that a second-half recovery in the economy may be threatened, the week’s US economic calendar will likely help determine if a rebound is in the cards. In addition to the aforementioned Institute for Supply Management (ISM) manufacturing report, the companion ISM Non-Manufacturing Index will be released on Wednesday, anticipated to improve from 53.3 in June to 53.7 in July. The changes in new orders and inventories of these reports will be analyzed for signs of demand, while the employment components will be scrutinized for signs that the labor market is rebounding from recent weakness.

The employment picture will likely garner the most attention during the week as the jobs components of the ISM reports will be joined by releases of the ADP Employment Change and weekly initial jobless claims on Wednesday and Thursday, respectively, leading up to Friday’s labor report.

July nonfarm payrolls are expected to grow by 90,000 jobs, after rising a disappointing 18,000 in June, and private-sector payrolls are projected to increase 115,000, after advancing by 57,000 in June. The unemployment rate is forecasted to remain at 9.2% and average hourly earnings are anticipated to rise 0.2% month-over-month (m/m), after being flat in June.

Other reports on the US economic calendar for this week include: personal income and spending, MBA mortgage applications, factory orders, and consumer credit.

European manufacturing, Spanish debt news moderate US debt deal relief

European markets are gaining ground amid the announcement of an eleven-hour debt ceiling deal out of Washington, but sentiment is being tempered a bit following some mixed manufacturing reports out of the region. PMI Manufacturing reads in Italy and France were above what economists polled by Bloomberg were expecting, but Germany fell slightly short of forecasts and a plunge in new orders pushed the UK’s level below 50, the demarcation point between expansion and contraction. Also keeping the mood in check, Moody’s Investors Service put Spain’s credit rating on review for a possible downgrade, citing “funding pressures.” The move by the ratings agency follows a similar announcement toward Italy in mid-July.

In equity news across the pond, HSBC Holdings Plc (HBC $49), Europe’s largest bank, reported profits that exceeded analysts’ estimates, while also announcing that it plans too cut up to 30,000 job by 2013 in an attempt to stem rising costs. Meanwhile, European Aeronautics, Defence & Space NV (EADSY $34) agreed to purchase the communications services company Vizada from Apax Partners LLC for $960 million in the hopes to expand its services in the US.

The UK FTSE 100 Index is up 1.5%, France’s CAC-40 Index and Germany’s DAX Index are 0.6% higher, while Spain’s IBEX 35 Index is down 0.8%, and Italy’s FTSE MIB Index is declining 0.6%.

Asian stock rally on debt accord

Stocks in Asia moved higher following the announcement from President Obama of a debt ceiling deal between congressional leaders, overshadowing reports showing that manufacturing in the region weakened in July. Both readings of manufacturing activity in China showed deceleratation, with the PMI Index from the China Federation of Logistics and Purchasing falling to its lowest level since February 2009, while the HSBC Manufacturing Index slipping to a level of 49.3 for the month, the first time in a year the gauge has shown contraction, as noted by a reading below 50. Meanwhile, home prices in the Asian nation rose at the slowest pace in nearly a year amid the government’s efforts to rein in residential real estate prices to avoid an asset bubble in the sector. Despite the soft economic news, the Shanghai Composite Index rose 2.1% and the Hong Kong Hang Seng Index rose 1.0%.

Elsewhere, July manufacturing reads in Australia and Taiwan showed weakness as well, with the HSBC gauge in Taiwan falling further into contractionary territory, but Taiwan’s Taiex Index gained 0.7% and the S&P/ASX 200 Index jumped 1.7%. The Japanese Nikkei 225 Index advanced 1.3% on the US debt deal announcement, amid solid gains from Toyota Motor Corp. (TM $82) and Honda Motor Co. (HMC $40) which count on the US market for a large part of their revenues. Rounding out a busy economic calendar in Asia, India’s trade balance narrowed slightly, but far less than economists’ expectations, while the BSE Sensex 30 Index rose 0.6% and South Korea’s Kospi Index gained 1.8%.