Morning Market Update

Disappointing NY Activity Read Causes Early Gains to Recede

Stocks have pared early gains and are nearly unchanged in morning action after a much larger-than-expected deterioration in the Empire Manufacturing Index, suggesting the pace of expansion in manufacturing activity in New York slowed sharply. Treasuries are higher after moving to the upside following the manufacturing report, ahead of a full week of economic releases, and before this afternoon’s gauge of homebuilder confidence. A disappointing 2Q outlook from Lowe’s Companies Inc is also contributing to the sluggish start to the week, overshadowing the world’s number-two home improvement retailer’s better-than-expected 1Q profits and revenues. In other equity news, Japan’s Astellas Pharma Inc announced it has agreed to acquire biotechnology firm OSI Pharmaceuticals Inc for $4.0 billion, while the UK’s Man Group Plc agreed to takeover GLG Partners Inc for about $1.6 billion. Overseas, Asia was solidly lower, while Europe is rebounding somewhat from the recent declines.

As of 8:50 a.m. ET, the June S&P 500 Index Globex future is 1 point above fair value, the Nasdaq 100 Index is 1 point above fair value, while the DJIA is 4 points below fair value. Crude oil is down $0.25 at $71.36 per barrel, and the Bloomberg gold spot price is down $3.28 at $1,229.90 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.4% at 86.47.

Lowe’s Companies Inc. (LOW $26) reported 1Q EPS of $0.34, three cents above the consensus estimate of Wall Street analysts, with revenues increasing 4.7% year-over-year (y/y) to $12.4 billion, above the $12.2 billion that the Street had anticipated. The world’s number two home improvement retailer said consumers are showing signs of reengagement in home improvement, including discretionary projects and purchases of bigger ticket products that have been hampered by the economic downturn. However, shares are under pressure after the company issued 2Q EPS guidance that came up short of what analysts were forecasting.

In global M&A news, Japan’s Astellas Pharma Inc. (ALPMY $34) announced that it has entered into a definitive merger agreement, in which it will acquire biotechnology firm OSI Pharmaceuticals Inc. (OSIP $60) for an 11% increased offer price of $57.50 per share, valued at $4.0 billion. The companies said the deal will create a world-class oncology platform. Shares of both firms are lower.

Moreover, the UK’s Man Group Plc. (MNGPY $3) reported that it has agreed to acquire GLG Partners Inc. (GLG $3) in a cash and stock deal valued at about $1.6 billion, with the cash portion being $4.50 per GLG share, while top GLG executives will receive 1.0856 of MNGPY shares for each GLG share they own.

NY manufacturing falls much more than expected, homebuilder sentiment slated for later

The Empire Manufacturing Index, a measure of manufacturing in the New York region, fell in May to a level of 19.11, well below the estimates of economists surveyed by Bloomberg, which expected a slight decrease to 30.00, from the previous month’s level of 31.86. However, the index remains above the level of zero that suggests conditions are neither contracting nor expanding. The report is the first major piece of data looking at manufacturing conditions in May, and later this week, the Philly Fed Manufacturing Index will be released, expected to increase from 20.2 in April to 21.5 in the current month, providing further insight into the health of the sector (economic calendar). Treasuries are higher, erasing early losses following the New York manufacturing gauge.

The second-half of today’s trading session will bring the release of the NAHB Housing Market Index, and the gauge of homebuilder sentiment is expected to move from 19 in April to 20 in May.

The rest of the week will bring some major reports from the economic docket, beginning with tomorrow’s release of the Producer Price Index (PPI), expected to show prices at the wholesale level were up 0.1% month-over-month (m/m) in April, on the heels of a 0.7% increase in March, while the core rate, which excludes food and energy, is also expected to rise a mere 0.1% after increasing 0.1% the prior month. On a y/y basis, the PPI is expected to show a 5.6% increase on a headline basis, but only a 0.9% increase at the core level. The release precedes Wednesday’s report on the Consumer Price Index (CPI), forecasted to show a 0.1% m/m and 2.4% y/y increase, while ex-food and energy, it is expected to rise 0.1% m/m and 1.0% y/y.

Tuesday also will yield the release of housing starts for April, expected to show an increase of 3.8% m/m to an annual rate of 650,000 units, after increasing 1.6% in March, while building permits, one of the leading indicators tracked by the Conference Board, are forecasted to be flat m/m in April after rising a surprising 7.5% in March. This report has been volatile in recent months, distorted by the initial expiration of the buyer tax credit, as well as seasonality and weather.

Meanwhile, traders will be closely monitoring the Federal Reserve’s release of the minutes from the April Federal Open Market Committee (FOMC) meeting mid-day Wednesday. There were no changes made at the April meeting, while some believed there was the potential for the Fed to modify the “extended period” for the “exceptionally low” levels of fed funds. Kansas City Fed President Thomas Hoenig dissented for the third-straight meeting, adding that he believed the “pre-commitment” language limits the Fed’s flexibility to begin to raise rates modestly.

Other releases on the US economic calendar this week include the MBA Mortgage Applications, initial jobless claims, and the Conference Board’s Index of Leading Economic Indicators.

Europe rebounding from recent fall

Stocks in Europe are mostly higher in afternoon action, despite festering fears about the debt crisis in the euro-zone and its potential impact on the overall European economy and the global economic recovery. The euro has pared losses and is modestly lower versus the US dollar after falling to a four-year low earlier today. Financials, which have led the recent decline, are pacing today’s advance as the sector may be benefitting from some bargain hunting in the group. Meanwhile, shares of BP Plc. (BP $47) are moving higher to contribute to the advance after it said it has made progress in containing the massive oil spill from on of its operated oil rigs in the Gulf of Mexico. In other equity news, Banco Popolare (BPSAY $3) is posting a steep gain to help financials move higher after it reported 1Q profits that topped analysts’ estimates.

The economic front is relatively light today, with a report showing UK home prices rose 0.7% m/m in May, while a separate release revealed Sweden’s industrial production increased 4.1% m/m in March.

The UK FTSE 100 Index is up 0.6%, France’s CAC-40 Index is 0.1% lower, Germany’s DAX Index is advancing 0.7% and Sweden’s OMX Stockholm 30 Index is 0.8% in the green. Elsewhere, Spain’s IBEX 25 Index is gaining 0.2% and Portugal’s PSI 20 Index is up 0.3%, while Greece’s Athex Composite Index is off 2.6%.

Asia falls amid continued euro concerns

Stocks in Asia were solidly lower following the weakness in the US to end last week as concerns about the impact of the euro-zone debt crisis on the global economic recovery persist. Chinese issues led the decline with the Shanghai Composite Index falling 5.1% and Hong Kong’s Hang Seng Index dropping 2.1% as the euro-area concerns were exacerbated by lingering uneasiness about further Chinese government actions to cool off its economy and try to prevent property speculation. Japan’s Nikkei 225 Index fell 2.2% in the broad-based decline for the Asia/Pacific region, as the growing global economic recovery fears has boosted the Japanese yen versus most major currencies in flight-to-safety buying, which has dampened the outlook for sales of companies that rely heavily on sales outside of Japan. Moreover, a report that showed Japanese machinery grew 5.4% m/m in March, a smaller increase than the 6.3% growth that economists had expected, did little to help limit the declines in the region.

Elsewhere, Australia’s S&P/ASX 200 Index dropped 3.1% as the aforementioned uneasiness dampened the outlook for demand for commodities, while South Korea’s Kospi Index declined 2.6%, Taiwan’s Taiex Index fell 2.2% and India’s BSE Sensex 30 Index was 0.9% lower.