Morning Update

Near the Flatline as Fed Meeting Commences

Stocks are nearly unchanged in lackluster morning action as traders continue to take a breather to asses the sustainability of the economic recovery. The Street is also grappling with what the Federal Reserve's monetary policy meeting-which begins today-will reveal about the FOMC's economic outlook and the duration of its accommodative policy stance. Equity news is light to add to the lackluster action, with engineering and construction firm Fluor topping profit projections but missing on the top line. Treasuries are higher in early action, after nonfarm productivity posted the largest gain since 3Q 2003 and unit labor costs fell the most in nine years. Overseas, markets are mixed, with Europe slightly lower and Asia higher on a plethora of data.

As of 8:52 a.m. ET, the September S&P 500 Index Globex futures is at fair value, the Nasdaq 100 Index is 3 points below fair value, and the DJIA is 2 points above fair value. Crude oil is up $0.29 at $70.89 per barrel, and gold is up $0.73 at $947.03 per ounce.

Fluor (FLR $57) reported 2Q EPS of $0.93, two cents above the Reuters estimate, as revenues fell about 8% to $5.3 billion, which came in short of the Street's $5.8 billion forecast. The engineering and construction firm said declines in oil and gas, global services, and its power segments led to the weakness in revenues. FLR added that 2Q new project awards were "substantial," increasing from $6.4 billion a year ago to $6.8 billion. FLR reaffirmed its full-year EPS outlook.

Productivity jumps, labor costs fell more than expected

Preliminary nonfarm productivity rose at a 6.4% annual rate in 2Q, higher than the Bloomberg forecast of 5.5%. Productivity gained the largest since 3Q of 2003, due to hours worked falling 7.3%, much more than output, which fell 5.6% versus the same period a year ago. Unit labor costs declined 5.8%, versus a drop of 2.5% that was estimated. The drop in labor costs was the biggest decline since 2Q of 2000, per Reuters. Treasuries are higher following the report.

Later this morning, wholesale inventories will be reported and are expected to fall 0.9% for June, after declining 0.8% in May.

Fed begins its monetary policy meeting

The two-day Federal Open Market Committee meeting will begin today and will be closely watched. The meeting concludes with the release of a policy 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 banks' willingness to lend, exemplified by elevated levels of cash held by banks in the form of reserves at the Fed.

Last week, the European Central Bank and the Bank of England both left their key interest rates unchanged at 1.0% and 0.5%, respectively, but the BoE surprised traders after it unexpectedly increased its bond purchase by more than $80 billion, saying UK recession is deeper than policymakers expected. Any comments from the Fed regarding the economic outlook and any signals of an exit strategy to unwind the accommodative actions taken to stave off a sustained decline in the economy are likely to take to lion's share of the Street's attention as traders try to asses the sustainability of the recent economic recovery.

Financials bog down Europe

Stocks in Europe are under modest pressure in afternoon action, led by weakness in financials as Lloyds Banking Group (LYG $6) is down about 8% on lingering concerns about the company's plan to raise about 15 billion pounds ($25 billion) in a rights offering. Fears were exacerbated by a report in the Financial Times that the lender could face some resistance from the UK to its rights offering, citing people familiar with the matter. Lloyd's did not comment on the report. Meanwhile, Danske Bank (DNSKY $11)-the Nordic region's largest bank by assets-is under pressure and weighing on the financial sector, after it posted an unexpected quarterly loss and warned that it expects asset impairment charges to remain high. Elsewhere, shares of French lender Natixis (NTXFF $4) are sharply lower after an announcement that the firm's parent company did not plan to delist the firm from the market. In economic news in Europe, a report showed UK house prices fell at a smaller-than-expected rate, while Russia's 2Q GDP contracted the most on record, according to Bloomberg News.

Asia advances amid slew of data

Stocks in Asia were broadly higher as traders digested a full slate of economic data and some upbeat earnings reports. The Nikkei 225 index in Japan rose 0.6%, even after a magnitude-6.5 earthquake hit the region per Bloomberg News, as Aioi Insurance (AIOIY $19) reported a more than four-fold increase in quarterly net income, and Mitsui Sumitomo Insurance Group Holdings (MSIGY $13) said net income rose 37%. Elsewhere, China's Shanghai Composite Index rose 0.5% as a larger-than-expected increase in retail sales for July headlined a busy economic calendar in the region. The upbeat retail sales data in China offset some disappointing reports, such as a sharp drop in new loans and a smaller-than-expected rise in industrial production. Other reports in the region showed consumer and producer prices dropped on a year-over-year basis and exports fell 23% year-over-year to match expectations of economists surveyed by Bloomberg. Meanwhile, Australia's S&P/ASX 200 Index rose 0.7% after a report showed business confidence rose to nearly a two-year high, and South Korea's Kospi Index managed to post a 0.2% gain after the Bank of Korea left its key lending rate unchanged at 2.0%. In other economic news in the Asia/Pacific region, Singapore's 2Q GDP rose more than anticipated on an annualized basis.