Morning Update

Rally Stalls Despite Smaller-Than-Expected Private Payrolls’ Fall

After posting two-straight sessions solidly higher, the equity markets are under some pressure in early action, even as the ADP Employment Change Report showed a smaller-than-expected drop in private sector payrolls. Traders may be booking some profits from the recent rally, treading cautiously ahead of Friday’s labor report. Meanwhile, a profit miss by Dow member Pfizer may be adding to the early apprehension on Wall Street. Treasuries are lower, extending losses following the employment data, ahead of a key report on service sector activity, and following a jump in mortgage applications. In other equity news, Comcast and Time Warner both topped the Street’s profit projections. Overseas, Asian markets rallied following the lead from the US’ two-day advance, while shares in Europe are mostly higher, but have pared early gains.

As of 8:48 a.m. ET, the March S&P 500 Index Globex future is 6 points below fair value, the Nasdaq 100 Index is 11 points below fair value, and the DJIA is 35 points below fair value. Crude oil is down $0.15 at $77.08 per barrel, and the Bloomberg gold spot price is lower by $1.50 at $1,112.95 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.1% at 79.08.

Dow member Pfizer Inc. (PFE $19) reported adjusted 4Q EPS of $0.49, one penny shy of the estimate of Wall Street analysts, but revenues jumped 34% year-over-year (y/y) to $16.5 billion, exceeding the $15.9 billion that the Street had anticipated. The company said it closed the Wyeth acquisition and immediately began the integration of its operations, and it remains excited about its more diverse product and pipeline portfolio, which it expects will result in improved opportunities for the company in 2010 and beyond. PFE expects 2010 EPS to be in a range of $2.10-2.20 and revenues between $67-69 billion, compared to analysts’ expectations of EPS of $2.27 and revenues of $67.5 billion.

Comcast Corp. (CMCSA $16) posted 4Q EPS ex-items of $0.29, excluding a $0.04 per share benefit, two cents above the forecast of analysts, while its revenues grew 2.9% y/y to $9.1 billion, above the $9.0 billion that the Street was expecting. The company said its revenues benefited from continued growth at its cable unit, which was partially offset by higher expenses at its programming and corporate segment.

Time Warner Inc. (TWX $29) announced 4Q EPS ex-items of $0.55, three pennies above the expectation of analysts, with revenues increasing 2% y/y to $7.3 billion, above the $7.1 billion that the Street had anticipated.

Private sector payrolls fall less than forecast, major service sector report on deck

The ADP Employment Change Report was released and showed private sector payrolls fell by 22,000 jobs, less than the forecast that employers shed 30,000 jobs in January, and December’s figure was revised to a smaller-than-initially reported loss of 61,000, and January’s decline was the smallest since December 2007. The ADP report has been overstating job losses relative to the government’s nonfarm payrolls report in recent months. The Bureau of Labor Statistics will release nonfarm payrolls on Friday, with the Bloomberg survey of economists forecasting payrolls increased by 10,000 jobs in January, and that the unemployment rate remaining at 10.0%. Treasuries extended losses following the report.

In other economic news, the US MBA Mortgage Application Index jumped 21.0% last week, after the index, which can be quite volatile on a week-to-week basis, fell 10.9% in the previous week. The increase came as the Refinance Index surged 26.3%, and the Purchase Index rose 10.3%. The average 30-year mortgage rate dipped 1 basis point to 5.01% and remains above the record low of 4.61% that was reached at the end of March 2009.

Later this morning, the economic calendar will release the ISM Non-Manufacturing Index, forecasted to increase to 51.0 in January from 50.1 in December. The index has been fluctuating around the 50.0 level that separates expansion from contraction, having increased by a smaller-than-expected amount in December back into expansion territory. The report is generally considered a measure of economic strength in the service sector and is the companion to the ISM Manufacturing Index, which was released on Monday and posted the highest level since August 2004, with the new orders and production indexes moving above 60, employment posting the highest level since April 2006, and 13 of 18 industries reporting growth, up from nine industries last month.

Strength in the manufacturing sector does not necessarily translate into immediate improvement in the services sector, but due to the cyclical nature of manufacturing, it tends to lead changes in the overall economy, with increased production resulting in job or wage gains, which filter through the economy in a positive feedback cycle.

Europe modestly higher on mixed data

Stocks in Europe are slightly higher in afternoon action as traders digest some mixed economic data and some disappointing earnings news. Also, European automakers are showing some strength amid some relatively favorable January US auto sales reports, and concerns about Greece’s debt are waning to help sentiment across the pond after the European Commission said it is endorsing the country’s plan to cut its budget deficit. However, the advance in the Eurozone is being limited by a sharp drop in shares of appliance maker Electrolux (ELUXY $50) after the company missed analysts’ profit projections. Additionally, shares of Roche Holding (RHHBY $43) are under pressure to temper the advance after the company posted disappointing sales of its drugs in 4Q, leading the company to post a profit the came up short of analysts’ forecasts.

The economic front is painting a mixed picture, with UK consumer confidence increasing more than expected, while the country’s Services PMI deteriorated more than expected, but remained in expansionary territory. Moreover, Eurozone retail sales unexpectedly came in flat, versus the forecast of economists, which called for a 0.4% month-over-month (m/m) increase, but the Eurozone Services PMI was unexpectedly revised higher for January. Elsewhere, final revisions to Services PMI’s in Germany and France were mixed with the German reading being unexpectedly revised higher, while the French report was surprisingly revised lower, but remaining in expansionary territory. Rounding out the busy Eurozone economic calendar, the first look at Italy’s Services PMI deteriorated more than anticipated—but held at a level indicating expansion—while Russia’s Services PMI fell from 53.4 in December to 51.9 in January. A PMI reading above 50 signals expansion. Britain’s FTSE 100 Index is up 0.2%, France’s CAC-40 Index is 0.2% higher, Germany’s DAX Index is flat, Italy’s FTSE MIB Index is down 0.1%, and Russia’s MICEX Index is advancing 0.8%.

Asia moves higher as momentum in US continues

Stocks in Asia were broadly higher on the heels of the second-straight session of solid gains in the US, with stocks in China leading the way as Hong Kong’s Hang Seng Index rose 2.2% and the Shanghai Composite Index finished 2.4% higher. Strength in financial shares helped the advance in the region as traders sought shares that have been hit hard by concerns about the actions of the Chinese government to restrict lending to control excess liquidity and try to prevent the formation of asset bubbles. Also, a report from the Shanghai Securities News—quoting the nation’s National Bureau of Statistics chief economists—that China’s economic growth will not fall below 8% this year helped boost optimism and support the advance. Meanwhile, Japan’s Nikkei 225 Index lagged behind, rising a modest 0.3%, bogged down by a solid decline in shares of the world’s largest automaker, Toyota Motor Corp. (TM $78), amid continued recall fears, exacerbated by reports that the US government is considering civil penalties against the company, and after the Japanese automaker said its North American and Japanese dealers had received several dozen complaints over insufficient braking on the company’s new Prius hybrid vehicle. However, after the closing bell in Japan, fellow automaker Honda Motor Co. (HMC $34) raised its full-year earnings outlook after posting 3Q profits that exceeded analysts’ forecasts.

The economic calendar yielded some reports that were worth mentioning, as Hong Kong’s Purchasing Managers Index improved slightly from 55.2 in December to 55.8 in January, while India’s Services PMI posted a solid improvement, rising to 59.0 in January from 57.4 in December, supporting a 2.1% increase in the country’s BSE Sensex 30 Index. Elsewhere, Australia’s S&P/ASX 200 Index rose 0.9%, South Korea’s Kospi Index advanced 1.2%, and Taiwan’s Taiex Index increased 1.6%.