Morning Market Update

Earnings and Euro-Area Data Soothe Sting From Jobless Claims

Stocks are nicely higher in morning trading as a larger-than-forecasted increase in US weekly initial jobless claims is being overshadowed by a plethora of better-than-anticipated earnings reports in the US and a slew of favorable economic releases in Europe. Dow members AT&T, Caterpillar, and 3M all topped analysts’ profit projections, while Travelers Companies missed. Elsewhere on the US earnings front, UPS easily topped the Street’s expectations and raised its guidance. Treasuries are lower amid the improvement in economic sentiment on the aforementioned data, ahead of existing home sales and the Leading Index reports, and the second leg of Federal Reserve Chairman Bernanke’s monetary policy testimony on Capitol Hill. Overseas, Asia was mixed, while Europe is nicely higher.

As of 8:54 a.m. ET, the September S&P 500 Index Globex future is 12 points above fair value, the Nasdaq 100 Index is 19 points above fair value, while the DJIA is 84 points above fair value. Crude oil is up $0.39 at $76.95 per barrel, and the Bloomberg gold spot price is up $1.35 at $1,186.40 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.7% at 82.74.

There were several earnings reports that came from members of the Dow Jones Industrials, beginning with AT&T Corp. (T $25), which posted 2Q EPS ex-items of $0.61, above the Reuters estimate of $0.57, with revenues mostly flat year-over-year (y/y) at $30.8 billion, just shy of the $30.9 billion. T said it expects “strong” EPS growth for the full-year.

Elsewhere among the blue-chip index components, Caterpillar Inc. (CAT $67 ¹) reported 2Q EPS of $1.09, compared to the $0.85 that analysts were expecting, as revenues rose 31% y/y to $10.4 billion, above the $9.8 billion forecast. 3M Co. (MMM $82) achieved 2Q earnings of $1.54 per share, seven cents above the Street’s forecast, with revenues rising 17.7% y/y to $6.7 billion, roughly inline with expectations, and the company increased its full-year guidance.

However, fellow Dow component Travelers Companies Inc. (TRV $50) missed analysts’ forecasts, reporting 2Q EPS ex-items of $1.39, ten pennies short of the consensus estimate, with revenues rising 6% to $5.7 billion, slightly above the $5.5 billion that was expected. The company lowered the top end of its prior full-year EPS guidance.

Meanwhile, outside of the Dow, United Parcel Service Inc. (UPS $60 ¹) reported that its 2Q earnings were $0.84 per share, well above the $0.77 that had been forecasted, with revenues increasing 13% y/y to $12.2 billion, above the $12.0 billion that analysts were anticipating. UPS raised its full-year EPS outlook.

Jobless claims rise, housing report and day-two of Bernanke testimony on deck

Weekly initial jobless claims rose 37,000 to 464,000, versus last week's figure which was downwardly revised by 2,000 to 427,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to increase to 445,000. The four-week moving average, considered a smoother look at the trend in claims, increased by 1,250 to 456,000, while continuing claims fell by 223,000 to 4,487,000, compared to the decline to 4,590,000 that was anticipated by economists.

Later this morning, the economic calendar will continue with several pieces of data, beginning with the second-half of Federal Reserve Chairman Ben Bernanke’s semi-annual monetary policy testimony on Capitol Hill, as he will go in front of the House as the opening bell rings.

Yesterday in front of the Senate, Bernanke reaffirmed the Fed’s view provided in the release of the minutes from the June meeting last week, that the fed funds rate is likely to remain “exceptionally low” for an “extended period,” as the progress in reducing unemployment was slower than expected and that financial conditions are somewhat weaker in recent months due to fallout from the European debt crisis, resulting in committee members having greater uncertainty about the outlook for growth and unemployment than normal. The Fed Chief’s prepared testimony will likely be a carbon copy of yesterday’s commentary, in which he also noted that the economic outlook remains “unusually uncertain,” and markets were disappointed that there was little new information provided, as well as the considerable amount of prepared text devoted to the “exit strategies” the Fed would use to decrease the size of their balance sheet and normalize the composition of the balance sheet over the “longer term” and eventually reverse easy monetary policy. He reiterated that the Fed continues to assess developments, and remains prepared to take further actions “as needed.” By dedicating so much time to the “exit strategy,” investors believe that the Fed is less likely to be considering a renewed move to add stimulus to the economy. However, traders will likely keep at least one ear on the Q&A session for any new details regarding the Fed’s policies.

Also later this morning, existing home sales will be reported, expected to drop by 9.9% in June to an annual rate of 5.1 million units and is likely to be a string of weak housing data as we give back some of the gains seen prior to the expiration of the homebuyers' tax credit. With pending home sales a gauge of the pipeline existing home sales, it is no surprise that economists are forecasting today’s existing home sales report to show a steep drop in sales after an unexpected decline to 5.66 million units in May—a month which still had the support of the housing credit.

The National Association of Realtors mentioned with the May sales report that it expects one more month of elevated homes sales so the report could be discounted if sales come in stronger than forecasted. Existing home sales account for the lion’s share of total home sales and the outlook for further stabilization in the market remains lackluster, keeping the outlook for economic growth subdued and fostering an environment for the Fed to keep its accommodative policy stance intact for an “extended period.”

Rounding out the busy day, the Conference Board will release its Index of Leading Economic Indicators (LEI) for June, which is anticipated to decline 0.3%.

Treasuries are modestly lower in morning action, ahead of the slew of data and despite the larger-than-expected increase in jobless claims, amid an improvement in economic sentiment from solid US earnings reports and strong European economic data.

Europe advancing on upbeat economic data

Stocks in Europe are nicely higher in afternoon action, led by industrials on a plethora of better-than-forecasted economic data across the pond, which is offsetting lingering recovery uncertainty that was exacerbated by US Federal Reserve Chairman Ben Bernanke’s testimony yesterday, which sparked an afternoon sell-off in the US. Also, financials are advancing to help the gains in the region, on optimism ahead of tomorrow’s banking industry stress test results, which is helping overshadow a disappointing profit report from Credit Suisse Group AG (CS $42), which showed a solid profit drop, resulting in smaller-than-forecasted earnings at its investment banking unit on soft trading revenue. Meanwhile, shares of Nokia Corp. (NOK $9) are posting a respectable gain despite the world’s largest cell phone maker posting a 40% drop in 2Q profits, as the company had warned of a decline back in June and some analysts noted that these results were slightly better-than-anticipated.

However, the bulk of today’s sweetened sentiment came from the European economic calendar, highlighted by better-than-expected manufacturing PMI readings for Germany—Europe’s largest economy—and the entire euro-zone for July, according to advance reports. Moreover, France posted better-than-forecasted readings of business confidence and consumer confidence, which offset a smaller-than-expected French manufacturing PMI report. Capping off the favorable string of data, UK retail sales rose more than anticipated on both the headline and core rates.

The UK FTSE 100 Index is 1.0% higher, France’s CAC-40 Index is up 1.9%, and Germany’s DAX Index is advancing 1.6%.

Asia mixed as yen weighs on Japan

Stocks in Asia were mixed with Japanese exporters being pressured by strength in the yen versus the US dollar and most major currencies, which dampened the outlook for foreign business revenues, exacerbated by the economic uncertainty that ramped up in the US yesterday following Fed Chief Bernanke’s monetary policy testimony. Japan’s Nikkei 225 Index declined 0.6%, and Australia’s S&P/ASX 200 Index dropped 0.9% to lead the decliners in the region on global economic uneasiness and after a report showed business confidence in the nation fell. However stocks in China managed to gain ground, with the Shanghai Composite Index advancing 1.1% and Hong Kong’s Hang Seng Index rising 0.5% on strength in steel makers amid an increase in prices for the metal and property issues, which found support on optimism regarding the government’s property tax policies. Hong Kong shares gained ground despite a larger-than-estimated increase in consumer prices for June. Meanwhile, South Korea’s Kospi Index declined 0.8%, pressured by a solid decline in shares of Hynix Semiconductor Inc, which posted better-than-forecasted profits, but offered a weak outlook for prices of NAND flash memory chips—chips used in digital cameras, MP3 players, and cell phones. Elsewhere, Taiwan’s Taiex Index slumped 0.5% following a report that showed the nation’s unemployment rate came in slightly higher than expected, while India’s BSE Sensex 30 Index rounded out the mixed session, rising 0.8%.