Morning Market Update

Weak Economic Data and Greece Create Concern

Markets are lower after weak economic data and concerns over Greece are prompting traders to book profits after a nice run over recent weeks. In the US, jobless claims unexpectedly rose, while the Labor Department is noting volatility around Easter, and international economic news included negative surprises from Japanese machine orders and euro-zone retail sales. Greek bond spreads over German bunds continued to widen as markets remain skeptical of EU support that is conditional on Greece’s ability to tap capital markets. Airline consolidation is in the news today, with the New York Times reporting merger talks between UAL and US Airways, while a merger of British Airways and Iberia looks closer to completion. Retailers are reporting same-store sales that are much better than estimates, and Forest Laboratories is lower after reporting failure to receive FDA approval for a lung treatment. Treasuries are mixed, while overseas markets are lower.

As of 8:48 a.m. ET, the June S&P 500 Index Globex future is 4 points below fair value, the Nasdaq 100 Index is 7 points below fair value, and the DJIA is 36 points below fair value. Crude oil is down $0.64 at $85.24 per barrel, and the Bloomberg gold spot price is up $1.73 at $1,151.00 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.4% to 81.72.

The New York Times is reporting that UAL Corp (UAUA $19), parent of United Airlines and US Airways (LCC $7) are holding merger talks that would create the country’s second-largest carrier, combining United’s international Pacific routes and domestic mid-west focus with US Airway’s large presence on the East Coast and in the western US.

Bed Bath & Beyond (BBBY $46) reported fiscal 4Q EPS of $0.86, much higher than the $0.73 Street estimate, with revenues of $2.24 billion also besting estimates of $2.2 billion, on same-store sales, sales at stores open at least a year, of 12%, above the company’s guidance of 3-5%. BBBY issued 1Q and full-year EPS guidance that exceeded analysts’ expectations.

Elsewhere, a slew of retailers are reporting same-store sales figures for March, projected to increase 6.3% according to Thomson Reuters, with easy comparisons to a year-ago and an earlier Easter impacting the results.

Target (TGT $54) raised guidance for 1Q EPS, saying that earnings should “exceed by 10 cents or more the current First Call median estimate of 74 cents,” after reporting that March same-store sales increased 10.3% year-over-year (y/y), compared to the Reuters estimate of 7.8%, citing strength in apparel.

Fellow discounter Costco Wholesale (COST $62) reported March same-store sales grew 10% y/y including the impact of fuel and foreign exchange versus the 9.3% that analysts had anticipated, while increasing 2% excluding these impacts. The company said that the Easter shift negatively impacted results by approximately 1-2%. US same-store sales excluding gasoline and currency impacts were up 5%, while international markets grew 28%.

Amid department stores’ releases, Kohl’s Corp (KSS $57) announced a strong same-store sales result of 22.5%, much higher than the 12.4% Reuters estimate, causing the company to raise 1Q earnings to $0.55-0.57 per share from the prior earnings guidance of $0.48-0.52 per share. Elsewhere Macy’s Inc. (M $22) reported comp store sales of 10.8% versus the 7.9% estimate, and said that it expects April same-store sales to be about flat to last year, generating an increase in same-store sales of approximately 5% for the quarter.

Among the luxury retailers, Nordstrom Inc (JWN $42) reported March same-store sales of 16.8%, much higher than the 10.6% Reuters estimate.

Forest Laboratories Inc (FRX $32) is lower after failing to receive approval from the FDA for a new treatment, to be called Daxas, to treat a lung ailment called chronic obstructive pulmonary disease.

Jobless claims unexpectedly rise, Easter distorting data

Weekly initial jobless claims increased by 18,000 to 460,000, versus last week's figure which was upwardly revised by 3,000 to 442,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to decline to 435,000. The four-week moving average, considered a smoother look at the trend in claims, increased by 2,250 to 450,250, and continuing claims dropped by 131,000 to 4,550,000, the lowest of the year, and below the 4,630,000 forecast. The Labor Department said that the week leading up to Easter and the two weeks that follow are traditionally a “volatile time,” making comparisons difficult. Treasuries are mixed, moving higher following the report and the strong retail same-store sales data and ahead of a $13 billion auction of 30-year Treasury bonds later this morning.

Treasury yields have spiked over the past week, and some have cited concerns about rising US government debt as a reason. However, rising yields should be considered a normal reaction to an improvement in the economy. Also, keeping things in context, rates across the curve are little changed relative to where they were at the beginning of the year.

Europe lower on Greek default worries

Stocks in Europe are lower as continued concerns about the situation in Greece pushed the spreads of the Greek 10-year over the German bund higher again, reaching 438 bps during the day. The Greek finance minister said the nation doesn’t need additional austerity measures as long as existing measures are implemented “correctly,” but markets are skeptical of the support the EU has offered, as it is conditional on Greece being unable to tap capital markets, which have continued to fund new debt, but the rising yields on the debt imply a negative feedback situation, wherein interest payments continue to rise, worsening the outlook for gaining control over the country’s finances.

Meanwhile, major central bank announcements are also in focus across the pond today, with the Bank of England (BoE) keeping its benchmark interest rate unchanged at a record low of 0.5%, while keeping its bond purchase program on hold. The BoE has suspended comment on monetary policy ahead of a May 6 government election, as the path of fiscal policy and its impact on the economy remains uncertain, dependent on the outcome of the election. Also, the European Central Bank (ECB) left its key lending rate unchanged at 1.0%, as expected, and traders are listening to the customary press conference held by ECB President Jean-Claude Trichet that follows the rate decision.

In economic news, UK industrial and manufacturing production were better than forecast, with 11 of 13 categories of manufacturing rising. However, euro-zone retail sales disappointed, falling 0.6% month-over-month in February, while the expectation was for a flat reading, and German industrial production came in flat, lower than the forecast for a 1.0% rise.

In equity news, airlines are in the news in Europe as well, with British Airways (BAIRY $36) and Iberia Lineas Aereas de Espana SA (IBRLF $4) moving closer to a merger that has been in discussion since mid -2008, after the companies signed a definitive merger agreement, subject to approval from European regulators and shareholders. Shares of retailer Marks & Spencer (MAKSY $11) fell after the Chairman said forecasts for 2010 and 2011 remain “cautious’ due to the “current challenging environment.”

Britain’s FTSE 100 Index is 1.3% lower, France’s CAC-40 Index is down 1.8%, Germany’s DAX Index is declining 1.3%, and Greece’s Athex Composite Index is plunging3.9%.

Asia falls on disappointing economic data

Markets in Asia finished mostly lower, lead by commodity stocks and exporters, after Japanese machine orders unexpectedly fell 5.4% month-over-month in February, while estimates were for a 3.7% increase, and an increase in the yen hurt shares of exporters, leading the Japanese Nikkei 225 Index to fall 1.1%. China’s Shanghai Composite Index retreated by 0.9% and Hong Kong’s Hang Seng Index fell 0.3%, lead by declines in property developers, after the Shanghai Securities News reported the city of Shanghai may impose a tax to slow property prices, citing unidentified people. Elsewhere, Thailand’s SET Index fell 3.5% after the nation’s capital of Bangkok was placed in a state of emergency amid fears that anti-government protests may turn violent.

In equity news, shares of Australian Vintage Ltd (AUVGF $0.28) fell 11% after discussions between the company and Constellation Brands (STZ $17) were ended related to combining their Australian and UK businesses, with Constellation’s CEO saying that the goals both parties were attempting to accomplish through the combination were not going to be successful.” Shares of Telstra (TLSYY $14), Australia’s largest telephone company according to Bloomberg, were higher after a report from the Sydney Morning Herald, without citing sources, reported the company was seeking A$12 billion from the National Broadband Network as compensation for losing its copper network and for access to infrastructure built for the planned Australian Internet project. Australia’s S&P/ASX 200 Index lost 0.5%, and India’s BSE Sensex 30 Index decreased 1.4%, while South Korea’s Kospi Index rose 0.4%.