Morning Update

Modest Rise as Private Sector Payroll Report Offers No Surprise

The equity markets are posting slight gains in morning action as the bulls are trying to continue the recent momentum with traders offering little reaction to the ADP Employment Change Report, which showed private sector payrolls fell by an amount that matched economists expectations. Greece’s announcement of its austerity plan, revealing tax increases and public sector pay cuts that are expected to save $6.5 billion, is helping soothe some concerns about the debt-ridden nation’s impact on the rest of the eurozone economies. The equity front is offering little support to sentiment, as Costco Wholesale Inc. announced 2Q profits and revenues that missed analysts’ forecasts, while Medivation Inc. is down sharply after it announced that its investigational Alzheimer’s treatment—collaborated with Dow member Pfizer—failed to meet primary and efficacy endpoints of late-stage trials. Traders are likely treading lightly in morning action ahead of a major service sector report and the afternoon release of the Fed’s Beige Book. Treasuries are slightly lower. Overseas, Asia was mostly higher, and European markets are mixed.

As of 8:50 a.m. ET, the March S&P 500 Index Globex future is 2 points above fair value, the Nasdaq 100 Index is 3 points above fair value, and the DJIA is 11 points above fair value. Crude oil is up $0.43 at $80.13 per barrel, and the Bloomberg gold spot price is up $5.20 at $1,139.90 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.4% to 80.23.

Costco Wholesale Corp. (COST $61) reported fiscal 2Q EPS ex-items of $0.70, two cents shy of the consensus estimate of Wall Street analysts, with revenues increasing 11% year-over-year (y/y) to $18.4 billion, but also just short of the Street’s forecast of $18.6 billion. Total same-store sales—sales at stores open at least a year—rose 9% including the impact of gasoline inflation and foreign exchange, while excluding fuel and currency, same store sales rose 3%.

Shares of Medivation Inc. (MDVN $40) are sharply lower after the biotech firm, along with fellow drugmaker and Dow member Pfizer Inc. (PFE $18), announced that results from two Phase-3 trials showed its investigational Alzheimer’s treatment failed to meet primary and efficacy endpoints compared to a placebo. PFE is trading modestly lower.

Private sector payrolls fall, major service sector and Fed reports wait in the wings

The ADP Employment Change Report was released and showed private sector payrolls fell by 20,000 jobs in February, matching the forecast of economists surveyed by Bloomberg, and January’s figure was revised to a larger-than-initially reported loss of 60,000. February’s decline was the smallest since the gauge showed payrolls rose in January 2008. 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 decreased by 58,000 jobs in February, and that the unemployment rate ticking higher from 9.7% to 9.8%. Treasuries are slightly lower following the report.

In other economic news, the US MBA Mortgage Application Index rose 14.6% last week, after the index, which can be quite volatile on a week-to-week basis, fell 8.5% in the previous week. The increase came as the Refinance Index advanced 17.2%, and the Purchase Index rose 9.0%. The average 30-year mortgage rate declined 9 basis points to 4.95% and remains above the record low of 4.61% that was reached at the end of March 2009.

However, the headlining economic reports are yet to come, with the ISM Non-Manufacturing Index being released just after the opening bell, forecast to improve from 50.5 in January to 51.0 in February. Although the index, depicting conditions in the service sector, is expected to remain above the 50 mark—the demarcation point between expansion and contraction—it has lagged behind the improvements seen in the manufacturing sector. Despite Monday’s larger-than-expected decline in the ISM Manufacturing Index, it remained in expansionary territory for the seventh-straight month. The manufacturing sector has been supported by international trade, with exports growing for the eighth-straight month, while the service sector report is more domestically-driven and moved back into expansion territory in January for first time since October. The tepid and diverging readings of the service sector, relative to the manufacturing sector will likely continue given the headwinds that facing the consumer.

The Federal Reserve Beige Book will also be released later today at 2:00 p.m. ET, and is expected to provide a broad-based view of conditions across the Fed’s twelve districts in the US. The Beige Book is not a formal survey or index like most other economic reports, but rather it is a compilation of anecdotal pieces of information gathered from the Fed’s various contacts in local businesses and Fed policymakers use the data to prepare for its next monetary policy meeting on March 16th, to gauge whether any changes in policy are necessary.

Europe mixed amid Greek deficit cuts and a flood of economic data

Stocks in Europe are mixed in afternoon action as traders are reacting to the announcement that Greece has approved additional measures to reduce its deficit, including tax increases and public sector pay cuts, which are expected to save 4.8 billion euros ($6.5 billion), equivalent to 2% of the nation’s GDP. Traders are grappling with whether these measures by Greece will be enough to convince Eurozone members that it is committed to getting its deficit problems under control, which may open the door for some form of support, led by Germany. Greece’s leaders are expected to meet with German officials on Friday to discuss.

Meanwhile, the European markets have plenty of economic data to also consider, headlined by upbeat reports out of the UK. Separate reports out of Britain showed UK consumer confidence rose to a two-year high, while its PMI Services posted a reading suggesting the fastest pace of expansion in three years, per Bloomberg. Elsewhere, PMI Services in Germany was unexpectedly revised slightly higher, and Italy’s Services PMI came in at a higher level than anticipated, while the final revisions of the same gauge of services in France and the overall euroarea were unexpectedly revised lower. Rounding out the busy day, separate reports showed retail sales in Germany, which were forecast to decline, came in flat for January month-over-month (m/m), while a 0.3% m/m decline in January eurozone retail sales matched economists’ estimates.

On the equity front, shares of Adidas (ADDDY $26) are under solid pressure after the sporting goods maker posted 4Q profits, which fell more than analysts had expected, and it issued a disappointing full-year outlook.

Britain’s FTSE 100 Index is 0.1% higher, France’s CAC-40 Index is flat, Germany’s DAX Index is advancing 0.1%, and Italy’s FTSE MIB Index is nearly unchanged.

Asia ticks higher in cautious trading

Stocks in Asia were mostly higher amid optimism that Greece’s debt problems may be turning a corner, but traders continued to trade cautiously as uncertainty regarding the global economic recovery remains. Japan’s Nikkei 225 Index rose 0.3% on some strength in the auto sector after mostly better-than-expected reports of February US auto sales yesterday, but gains were limited by some strength in the yen versus the US dollar and other major currencies, which dampened some of the outlook for profits of companies that rely heavily on sales in the US and outside of Japan. Stocks in China were mixed, with the Shanghai Composite Index gaining 0.8%, while Hong Kong’s Hang Seng Index dipped 0.1%, following a report that showed its Purchasing Managers Index declined from 55.8 in January to 54.6 in February.

Meanwhile, Australia traded among the leading performers in the region, as its S&P/ASX 200 Index rose 0.7% after the nation reported that its 4Q GDP rose 0.9% quarter-over-quarter (q/q), matching economists’ expectations, and following an upwardly revised 0.3% q/q expansion in 3Q. Year-over-year, Australia’s output grew 2.7%, which exceeded expectations. Moreover, South Korea’s Kospi Index increased 0.5% following a report that showed its industrial production unexpectedly came in flat m/m in January, compared to a 0.6% decline that was anticipated. Separately, a report showed South Korea’s Leading Index declined y/y in January. Rounding out the day in Asia, Taiwan’s Taiex Index rose 0.4%, while India was the biggest gainer in the region, as its BSE Sensex 30 Index increased 1.4%.