Morning Update

Traders Pause to Contemplate Recent Rally Cause

Stocks are lower in morning action to kick off the week as traders are taking the time to book some profits that followed the recent rally in equities, awaiting some major economic reports this week to try to determine the sustainability of the momentum. The Federal Reserve's two-day monetary policy meeting, which begins tomorrow, and Thursday's retail sales reports will likely go a long way in determining if the recent run in the equities is inline with the economic reality. Treasuries are higher as equities come out of the gate in the red and as there are no economic releases today. In equity news, McDonald's posted better-than-expected same-store sales for July, Berkshire Hathaway missed profit projections, and Hormel raised its full-year profit guidance. Overseas, markets are mixed as Asia reacts to Friday's upbeat US labor report.

As of 8:55 a.m. ET, the September S&P 500 Index Globex futures contract is 7 points below fair value, the Nasdaq 100 Index is 9 points below fair value, and the DJIA is 51 points below fair value. Crude oil is down $0.58 at $70.354 per barrel, and gold is down $8.70 at $946.258 per ounce.

Dow member McDonald's Corp. (MCD $55) is higher after posting global same-store sales increased 4.3% in July, topping the analysts' estimates, which called for the company to report about a 3.2% gain. The fast-food chain said US same-store sales in July increased 2.6%, compared to the Street's forecast of about a 2% increase. MCD said its US sales rose on top of strong prior-year growth due to new products, including its McCafe espresso-based coffees, and continued strength of its core menu.

Berkshire Hathaway (BRKA $108,100) reported 2Q operating earnings excluding investments of $1,147 per share, missing the $1,285 per share that the Reuters estimate called for. Revenues fell 2% to $29.6 billion.

Hormel Foods (HRL $36) is higher after the meat and food company, which makes Spam, raised its full-year profit outlook from a range of $2.15-2.25 per share to between $2.36-2.42 per share, a level that exceeds the Reuters estimate of $2.29 per share. The company said a strong performance from its refrigerated foods segment, an improved performance by its Jennie-O Turkey store segment and continued solid results from its grocery business, allowed it to deliver a stronger than expected 3Q.

Economic docket full of key data

Treasuries are higher in morning action and although today's economic calendar will be void of any major releases, this week is full of important reports that could go a long way in helping traders determine if the recent rally on economic optimism has more fuel to continue.

The two-day Federal Open Market Committee meeting, which begins tomorrow, will be closely watched. The meeting concludes with the release of its statement mid-day Wednesday. The Federal Reserve is not expected to change its fed funds target rate or its asset purchase programs, but traders will be scrutinizing how the Fed weighs the signs of economic improvement with the still lagging recovery in bank’s willingness to lend, exemplified by elevated levels of cash held by banks in the form of reserves at the Fed.

Recent Fed discussion has been centered on the exit strategies the Fed would employ to unwind the accommodative actions taken to stave off a sustained decline in the economy. It is likely that the Fed will work in reverse order to unwind, first allowing the Fed’s balance sheet to contract by allowing asset purchase programs to expire. The Fed’s short-term credit extensions have already declined to less than $600 billion as of mid-July from about $1.5 trillion at the end of 2008, falling automatically as credit market conditions improved.

The expectation for the Fed to raise interest rates went up slightly with the better-than-expected labor report on Friday, as an economic recovery would imply banks begin to accelerate lending, which has the potential to stoke inflation as the money multiplier kicks in, with each additional dollar lent out creating approximately ten dollars of demand.

Advance retail sales for July will be reported on Thursday, expected to show sales rose 0.7%, after posting a 0.6% increase in June. Excluding the more-volatile auto sector, sales are expected to rise 0.1%, after registering a 0.3% rise in June. Excluding autos, gasoline and building materials, the figure the government uses to calculate the consumer spending component of GDP, sales have been anemic, falling 0.1% in June and were unchanged in May.

Other releases on the economic docket include nonfarm productivity and wholesale inventories Tomorrow, MBA mortgage applications and the trade balance on Wednesday, initial jobless claims, import prices and business inventories on Thursday, while the Consumer Price Index, industrial production and capacity utilization, and the University of Michigan consumer sentiment will round out the busy week on Friday.

Europe in the red as traders book profits

Stocks in Europe are broadly lower in afternoon action, led by basic materials and consumer goods as traders take the opportunity to harvest some gains from the recent rally in the equity markets on renewed optimism the global economy has turned a corner. Automakers are also under pressure to weigh on trading, as shares of Daimler (DAI $48) and Volkswagen (VLKAY $72) are solidly lower after analysts recommended selling their shares. Elsewhere, shares of Lloyds Banking Group (LYG $7) are lower after the London Times reported that the firm was considering a rights offering to raise between 10-15 billion pounds aimed at reducing its participation in the UK's asset protection plan. A spokesperson for Lloyds said the company is working with the government to complete the detailed terms of its intended participation in the government's scheme, and it expects to agree to terms that are in the best interests of its shareholders.

US labor data cheer carries over to Asia

Stocks in Asia were mostly higher, with the Nikkei 225 Index rising 1.1% as traders had a chance to react to Friday's better-than-expected labor report, and the solid decline of the yen versus the dollar that came after the report boosted profit optimism of export issues that rely heavily on sales in the US. Adding to the upbeat mood in Japan, a government report showed machine orders rose much more than expected, rising 9.7% in June quarter-over-quarter, compared to the 2.6% gain that economists surveyed by Bloomberg had anticipated. Equity news also helped boost sentiment, as Bridgestone Corp. (BRDCY $36) gained almost 6% after the world's largest tiremaker increased its full-year guidance, forecasting a profit compared to a previous outlook of a break-even year. The upbeat outlook helped soothe the company's announcement of a first half net loss. Elsewhere, Hong Kong's Hang Seng Index led the Asia/Pacific region with a 2.7% gain, while China's Shanghai Composite fell 0.3%, even after Chinese Premier Wen Jiabao said the nation will maintain its current macroeconomic policy stance aimed at bolstering domestic spending as the nation continues to experience fallout from the global recession, per Bloomberg News. Meanwhile, Australia's S&P/ASX 200 Index pared early gains and finished 0.1% higher, after mining firm Rio Tinto (RTP $164) came under pressure amid concerns about a strained relationship with China, after a Chinese government-funded web site claimed the company overcharged the country for ore by 700 billion yuan ($102 billion)—according to Bloomberg News. RTP declined to comment.