Morning Market Update

Retail Reports, Tame Inflation Put Stocks in Upward Formation

Relatively easing fears about the euro-area debt crisis are teaming up with better-than-expected earnings reports from Dow members Wal-Mart Stores Inc and Home Depot Inc, and another subdued inflation report, to help lift equity markets off the flatline in morning trading. Treasuries are nearly unchanged, showing little reaction to inflation report and a separate release, which showed housing starts rose more than expected, while building permits fell. The euro is advancing as it picks itself off of the four-year low it hit versus the dollar yesterday, which is helping Europe gain ground, despite a larger-than-forecasted deterioration in the German ZEW Survey, a gauge of investor confidence in Europe’s largest economy. Elsewhere overseas, Asian markets finished mixed.

As of 8:51 a.m. ET, the June S&P 500 Index Globex future is 8 points above fair value, the Nasdaq 100 Index is 13 points above fair value, while the DJIA is 63 points above fair value. Crude oil is up $2.15 at $72.23 per barrel, and the Bloomberg gold spot price is down $10.65 at $1,211.80 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.1% at 86.10.

Dow member Wal-Mart Stores Inc. (WMT $53) posted 1Q EPS of $0.88, four pennies above the consensus estimate of Wall Street analysts, with revenues rising 6% year-over-year (y/y) to $99.1 billion, above the $97.8 billion that the Street had forecasted. US same-store sales—sales at stores open at least a year—declined 1.1% y/y excluding fuel. The company said its US unit posted a “significant” contribution to operating income, while its international segment remains the fastest-growing unit, with net sales up more than 21% y/y to more than $25 billion. WMT issued 2Q EPS guidance where the midpoint of the range was below analysts’ expectations.

Fellow Dow component Home Depot Inc. (HD $36) reported 1Q EPS ex-items of $0.45, five cents above the Street’s forecast, with revenues increasing 4.3% y/y to $16.9 billion, above the $16.4 billion that analysts were anticipating. Total same-store sales rose 4.8% y/y, with US sales increasing 3.3%, and the world’s largest home improvement retailer said its “solid” start to the year was driven by “great” performance in seasonal categories and strong growth in customer transactions. HD raised its full-year guidance.

Producer prices mixed, housing starts jump, and building permits fall

The Producer Price Index showed prices at the wholesale level dipped 0.1% month-over-month (m/m) in April, after increasing 0.7% in March. The average economist forecast surveyed by Bloomberg called for prices to rise by 0.1%. Meanwhile, the core rate, which excludes food and energy, rose 0.2% m/m, more than the forecast of economists, which called for the core rate to increase 0.1%. On a year-over-year basis, headline producer prices were 5.5% higher, and the core rate was up 1.0%.

Elsewhere, housing starts for April were reported, showing starts increased 5.8% m/m to an annual rate of 672,000 units, from an upwardly revised 635,000 in March, and compared to economists’ expectations, which called for starts to come in at 650,000. However, building permits fell, dropping about 11.5% m/m to an annual rate of 606,000 from March’s unrevised 685,000. The expectation was for permits to be 680,000 units. Treasuries are nearly unchanged, showing little reaction to the inflation and housing data.

Europe rebounding as euro-area debt concerns ease and some corporate news pleases

Stocks in Europe are higher in afternoon action, led by strength in financials as debt concerns in the euro-zone are dissipating as Greece received its first installment of the near $1 trillion euro-area bailout package in time to payout debt obligations that come due tomorrow. Also, the euro is posting a modest gain versus the dollar, extending its advance from yesterday’s rebound after hitting a four-year low, which helped the late-day resiliency in the US markets. Meanwhile, the corporate front is supporting today’s advance across the pond, headlined by British Land Co. Plc. (BTLCY $6) reporting its first annual profit in two years, per Bloomberg, which is boosting its shares. Moreover, appliance maker Electrolux AB (ELUXY $50) is nicely higher after it reported that April shipments of major home appliances jumped 12%.

However, the advance in the euro-area comes despite a report that showed investor confidence in Germany—Europe’s largest economy—deteriorated by a larger amount than expected. The German ZEW Survey of Economic Sentiment fell from 53.0 in April to 45.8 in May, compared to the decline to 47.0 that economists had expected. Other Economic reports in the region included larger-than-expected increases in consumer prices for both the UK and euro-zone, a separate report showed the euro-zone trade surplus widened but to a smaller amount than economists had forecasted, and French nonfarm payrolls declined 0.1% quarter-over-quarter (q/q) in 1Q.

The UK FTSE 100 Index is 1.1% higher, France’s CAC-40 Index is up 2.2%, Germany’s DAX Index is advancing 1.5%, Spain’s IBEX 35 Index is gaining 3.8%, and Greece’s Athex Composite Index is increasing 0.6%.

Asia finishes mixed as China rebounds

Stocks in Asia diverged as stocks in Japan finished mixed and Chinese equity markets rebounded from yesterday’s steep losses that came amid continuing euro-area debt concerns and increased uneasiness regarding whether China with further tighten its monetary policy to control property speculation and prevent the formation of asset bubbles. Japan’s Nikkei 225 Index inched up 0.1%, while the broader Topix Index fell 0.7%. Economic news in Japan fostered the mixed action, as separate reports showed Japanese consumer confidence improved, while the nation’s department store sales fell more than expected y/y in April. Also, the final look at Japanese machine tool orders showed orders were revised slightly higher. In Japanese equity news, Mitsubishi UFJ Financial Group Inc. (MTU $5), Japan’s largest bank by market value per Bloomberg, reported 4Q profits after today’s closing bell that exceeded analysts’ estimates. Meanwhile, the Shanghai Composite Index rose 1.4% and the Hong Kong Hang Seng Index increased 1.2%, following a report that showed the nation’s unemployment rate unexpectedly remained at 4.4%—which is a fifteen month low.

In other economic news, South Korea’s department store sales rose much more than forecasted, while discount store sales increased by an amount that was below economists’ estimates, and the Kospi Index declined 0.5%. Elsewhere, Australia’s S&P/ASX 200 Index ticked 0.1% higher following the release of the minutes from the Reserve Bank of Australia’s most recent monetary policy meeting, in which it raised its benchmark interest rate for the sixth time in seven meetings. The report showed that policy makers viewed the interest rate actions as “timely” but with signs that the actions were “beginning to affect behavior,” suggesting the RBA may be on hold unless inflationary pressures heat up. However, the modest advance was limited by a sharp drop in shares of MacArthur Coal Ltd. (MACDF $12) after it rejected a downwardly revised A$3.8 billion ($3.3 billion) takeover offer from US coal producer Peabody Energy Corp. (BTU $40). Rounding out the day, Taiwan’s Taiex Index dipped 0.2% and India’s BSE Sensex 30 Index rose 0.2%.