Morning Update

Upward Momentum Continues Ahead of Full Economic Docket

After last week’s strong advance for the major equity markets, stocks are gaining ground again amid a better-than-expected earnings report from the world’s number-two home improvement retailer Lowe’s Companies and an $11 billion merger agreement in the oil-services sector. Treasuries are mixed as there are no major economic reports scheduled for release today, but the rest of the week is chock full of key releases, highlighted by a revision to 4Q GDP, a plethora of housing data, and Fed Chairman Ben Bernanke’s semi-annual testimony on Capitol Hill. In other equity news, Campbell Soup posted 2Q results that matched the Street’s expectations. Overseas, Asia rallied, except for China, which returned from a week-long holiday break, while European markets are modestly higher.

As of 8:51 a.m. ET, the March S&P 500 Index Globex future is 3 points above fair value, the Nasdaq 100 Index is 6 points above fair value, and the DJIA is 26 points above fair value. Crude oil is up $0.06 at $78.87 per barrel, and the Bloomberg gold spot price is unchanged at $1,119.16 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.2% at 80.48.

Lowe’s Companies (LOW $23) reported 4Q EPS of $0.14, two cents above the consensus estimate of Wall Street analysts, with revenues increasing 1.8% year-over-year (y/y) to $10.2 billion, versus the Street’s forecast of $10.0 billion. The world’s number-two home improvement retailer said its 4Q results suggest “the worst of the economic cycle is likely behind us.” LOW said it expects 1Q EPS to be between $0.27-0.29, compared to the $0.33 that analysts are forecasting, while it raised its full-year EPS outlook and offered 2010 sales guidance that exceeded analysts’ expectations.

Schlumberger Ltd. (SLB $64) confirmed last week’s media reports that it will acquire Smith International Inc. (SII $38) for about $11 billion, saying that the two oil-services firms have approved a definitive merger agreement in which the companies would combine in a stock-for-stock transaction. Under the terms of the agreement, SII shareholders will receive 0.6966 shares of SLB, placing the value of SII shares at $45.84, based on the closing prices of both firms on February 18th.

Campbell Soup (CPB $34) reported fiscal 2Q EPS of $0.74, matching the Street’s forecast, with revenues increasing 1% y/y to $2.2 billion, roughly inline with analysts’ forecasts. CPB said its US soup sales decreased 8% y/y, while its condensed soup business, especially cooking varieties, and its broth business delivered solid performance and remained “well positioned in this economic environment.”

All is quiet on the economic front, but flood of data looms

Treasuries are mixed in morning action as there are no major economic reports on today’s docket, but there will be plenty of reports that will fill the rest of the week, which will have a housing tilt, beginning with tomorrow’s release of the S&P/CaseShiller Home Price Index, expected to show prices declined 3.0% y/y for December (economic calendar). New home sales will be released on Wednesday, forecasted to increase 3.8% m/m in January to an annual rate of 355,000 units, after unexpectedly falling 7.6% in December, as weakness persisted in contract signings despite the extension and expansion of the tax credit, as the month is seasonally weak due to holidays and there was cold weather in many areas of the country. Despite the weakness, there was a glimmer of good news, in that trade-up homes grew as a percentage of sales. Existing-home sales will be reported on Friday, expected to have increased 0.9% m/m in January to an annual rate of 5.5 million units, and reflect closings from contracts entered one to two months earlier.

Friday brings the second reading of Advance Gross Domestic Product (GDP) for 4Q, considered a proxy for corporate profits. Economists are expecting the growth rate to remain at the 5.7% initially reported. The initial figure was primarily driven by a positive contribution from inventories of 3.4%, as stocks of goods fell at a slower rate, as well as a 1.4% contribution from consumer spending, and a 0.8% contribution from capital spending on equipment and software, which rose at a 13.3% pace in 4Q, the most since 2006.

However, in light of last week’s surprising increase in the Federal Reserve’s discount interest rate—a primary credit rate for banks to obtain short term loans from the Fed—from 0.5% to 0.75%, Fed Chairman Ben Bernanke’s semi-annual testimony on Capitol Hill may garner the most attention on the Street. The Fed continues to reiterate that “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” and it was quick to point out that the increased discount rate was not a signal of any change in its outlook for the economy or for monetary policy, but sentiment seems skittish regarding the prospect of the Fed moving to a less accommodative policy. Any comments signaling when the Fed will begin to tighten monetary policy further by the Fed Chief will be closely scrutinized, especially after the rate action last week, which Bernanke hinted to a week earlier in his testimony before the House Financial Services Committee. Bernanke will be delivering his testimony before the House and Senate on Wednesday and Thursday, respectively.

Other reports on this week’s US economic calendar include durable goods orders, the Chicago PMI, the Richmond Fed Manufacturing Index, the MBA Mortgage Applications Index, weekly initial jobless claims, the Conference Board Consumer Confidence Index and the University of Michigan consumer sentiment survey.

Europe slightly higher as healthcare and financials in focus

Stocks in Europe are modestly higher in afternoon action, despite healthcare shares coming under pressure, as financials are gaining modest ground as fears about Greece’s deficit problems continue to abate. The advance in financials is coming despite a solid decline in shares of Bank of Ireland (IRE $7) after the Irish government was forced to receive a 16% stake in the bank in lieu of a 250 million euro cash dividend. Healthcare issues are being pressured by shares of GlaxoSmithKline (GSK $38), which are lower after US drug safety reviewers recommended to the Food and Drug Administration that the company’s diabetes drug Avandia be taken off the market, due to risks of heart attacks. There are no major economic reports in the Eurozone region today, which may be adding to the subdued action across the pond. The UK FTSE 100 Index is up 0.3%, France’s CAC-40 Index is up 0.2%, and Germany’s DAX Index is up 0.1%.

China returns in lackluster fashion, but rest of Asia rallies

Stocks in Asia were mostly higher, with Japan’s Nikkei 225, Hong Kong’s Hang Seng, and South Korea’s Kospi Indexes all posting solid gains of over 2% on continued optimism about the global economic recovery and as concerns about Greece’s debt problems remained relatively subdued. However, China’s Shanghai Composite Index declined 0.5% in the first session back from the week long New Year holiday. Today was the first chance for traders in China to react to the Chinese government’s unexpected increase in its bank reserve requirement—the amount of funds that institutions must set aside instead of lending out—by another 50 basis points (0.50%), taking the total percentage that the country’s biggest banks must put in reserve up to 16.5%. Economic news was relatively light today, with Taiwan reporting that its 4Q GDP rose more than economists’ anticipated y/y, after contracting in 3Q, while its unemployment rate fell by a smaller amount than was forecast. Taiwan’s Taiex Index rose 1.6% as its markets also returned from a holiday. Elsewhere, Australia’s S&P/ASX 200 Index increased by 1.8% and India’s BSE Sensex Index rose 0.3%.