Morning Update

Flat Before the Fed

Stocks are near the flatline in morning action as traders are playing their cards close to the vest, awaiting the afternoon interest rate decision by the Federal Reserve. The accompanying policy statement is likely to be the attention grabber, as it may provide some clues to where policymakers stand on the outlook for the economy and if changes are needed to its accommodative stance. Equity news is generally on the positive side, with Applied Materials, Macy's, and Toll Brothers offering better-than-expected reports. Treasuries are higher and the trade deficit widened, but came in smaller that anticipated. Overseas, Asia came under solid pressure, while Europe is modestly higher.

As of 8:53 a.m. ET, the September S&P 500 Index Globex futures is 1 point above fair value, the Nasdaq 100 Index is 2 points above fair value, and the DJIA is 6 points above fair value. Crude oil is up $0.10 at $69.55 per barrel, and gold is down $1.90at $944.20 per ounce.

Applied Materials (AMAT $13) posted flat fiscal 3Q EPS ex-items, compared to the Reuters estimate that called for the company to report a $0.08 per share loss. Revenues fell about 39% versus last year to $1.1 billion, but were up about 11% compared to 2Q, and the Street called for the chipmaker to post 3Q sales of $953 million. AMAT said new order for the quarter totaled $1.1 billion and backlog for the company fell from $3.16 billion to $2.95 billion. The company said it sees 4Q EPS to be between breakeven and $0.04, which topped analysts' expectations that called for the company to post a loss of $0.05 per share.

Macy's (M $15) reported 2Q EPS ex-items of $0.20, topping the $0.17 estimate of analysts, as revenues fell 9.7% to $5.2 billion, largely inline with the Street's forecast. The company said it was able to exceed its expectations with strong earnings and cash flow for the period, despite lower sales in an economic environment that continues to be very difficult. The company said it successfully lowered inventories and managed expenses to align more closely with current levels of business. The company raised its full-year EPS guidance.

Toll Brothers (TOL $20) is nicely higher after it reported preliminary fiscal 3Q net signed contracts rose 3% to 837 units, noting that this is the first time in 16 quarters that net signed contracts have exceeded year-ago figures. The luxury homebuilder's CEO said, "Price is no longer the overwhelmingly dominant factor." The company's cancellation rate was 8.5% in the quarter, which was down from 19.4% in the same period a year ago.

Trade deficit widens less than expected

The trade deficit (chart) increased from $26.0 billion in May to $27.0 billion in June, versus the Bloomberg estimate calling for the deficit to reach $28.7 billion. Goods and services imports rose 2.3%, the first increase in 11 months as oil prices rose, while exports increased 2% on foreign demand for industrial supplies and materials and capital goods. Treasuries are higher.

In other economic news, the US MBA Mortgage Application Index declined 3.5% last week after increasing 4.4% in the previous week, in an index that can be quite volatile on a week-to-week basis. The decline was attributed to the Refinance Index, which fell 7.2% and an increase in the average 30-year mortgage rate by 21 basis points to 5.38% versus the previous week, while the Purchase Index was up 1.1%. The average 30-year mortgage rate remains steadily above the record low of 4.61% that was reached at the end of March.

Fed statement in the spotlight

Later today, the Federal Open Market Committee meeting will conclude with the release of the Fed’s closely-watched policy statement at approximately 2:15 p.m. ET (economic calendar). Although no change is expected to either the fed funds target interest rate, or the size of the Fed’s asset purchase programs, the Bank of England’s surprise increase in its quantitative easing program last week has made investors cautious about writing off the potential for more unconventional central bank measures just yet. The Fed is also expected to comment on its outlook for economic growth and inflation.

Europe higher as traders digest data

Stocks in Europe are in the green in afternoon action, led by oil and gas and utilities issues on some favorable earnings reports. BHP Billiton (BHP $62)—the world's largest mining firm—is higher even after it reported a 65% drop in second-half profit on lower metal prices and soft demand, as its net income topped expectations of analysts surveyed by Bloomberg. Also, shares of E.ON (EONGY $37) are higher after the Germany's largest utility firm announced that first-half profit increased and that full-year earnings may drop less than expected. Elsewhere, Britain's largest builder, Balfour Beatty (BAFBF $5), is higher after posting an increase in first-half profit, while ING Groep (ING $13) is under pressure after saying 2Q earnings fell 96% to a level that missed analysts' estimates, and Nestle (NSRGY $41) is solidly lower after posting its first decline in profits in six years, according to Bloomberg.

There are also plenty of economic data for traders across the pond to digest, with the UK unemployment rate reaching the highest level in 14 years, per Bloomberg, but a separate jobless claims report rose by a smaller amount than economists had anticipated. Staying in the UK, the Bank of England released its quarterly inflation report and the central bank said "there were real downside risks to inflation," and attributing that risk to the reason why it surprised traders last week by expanding its asset purchase program by more than $80 billion. Elsewhere, a report showed eurozone industrial production in June unexpectedly fell on a month-over-month basis and more than expected compared to the same period last year, to limit some of the enthusiasm in European trading.

Asia slides as profit taking presides

Stocks in Asia were broadly lower as traders continued to harvest gains from the recent rally in the equity markets, spurred by lingering uncertainty regarding if there is enough economic fuel to continue the recovery. Earnings reports in the region did little to discourage traders from pushing the sell button, as Great Wall Motor Co. (GWLLF $1)—China's largest maker of pick-up trucks—fell more than 10% after it posted a 36% drop in first-half profit on continued weakness in exports in the region, and China's Zhuzhou Smelter Group dropped 6% after reporting an 84% decline in first-half profit on weak demand and lower prices for lead and zinc. China's Shanghai Composite Index led the decline in the Asia/Pacific region, falling 4.7%, as the aforementioned earnings news was exacerbated by export concerns following China' Commerce Ministry saying that local demand is unlikely "to provide a full remedy for the sharp contraction in external demand." Commodity-related issues also fell to weigh on trading in Asia as economic uneasiness weighed on resource prices. However, commodity producing nation Australia managed to eke out a gain, with the S&P/ASX 200 Index rising 0.3%, supported by a 3.2% advance in shares of Commonwealth Bank of Australia (CBAUF $36) after the nation's number-two lender by market value reported better-than-expected full-year profit. Elsewhere, the yen's solid gain yesterday versus most major currencies weighed on the outlook for profits of Japanese exporters, contributing to the 1.4% decline in the Nikkei 225 index.