Morning Market Update

2Q GDP Misses Forecasts and Stocks Catch a Downdraft

The equity markets are under some pressure in morning action, amid some economic recovery concerns, which were exacerbated by smaller-than-forecasted growth in US 2Q GDP and a much smaller-than-anticipated increase in personal consumption, which is more than offsetting a steep upward revision to 1Q’s output reading. Treasuries extended gains on the report, which also revealed a hotter-than-expected increase in the GDP Price Index. Meanwhile traders are also digesting an inline report on employment costs for 2Q and are awaiting the releases of the Chicago PMI and final revision to the University of Michigan’s Consumer Sentiment Index, which are expected to be released after the opening bell. US earnings news is taking a back seat to the economic docket, with the calendar relatively light but showing Dow members Merck & Co Inc and Chevron Corp both exceeding the Street’s profit forecasts, but their revenues were light. Overseas, Asia finished lower on some disappointing Japanese data, while Europe is also under some pressure from reports out the earnings and economic fronts.

As of 8:54 a.m. ET, the September S&P 500 Index Globex future is 14 points below fair value, the Nasdaq 100 Index is 24 points below fair value, while the DJIA is 110 points below fair value. Crude oil is down $1.17 at $77.19 per barrel, and the Bloomberg gold spot price is up $3.33 at $1,171.58 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is flat at 81.60.

Dow member Merck & Co. Inc. (MRK $35) reported 2Q EPS ex-items of $0.86, three cents above the Reuters estimate, with revenues dipping 1.6% year-over-year (y/y) to $11.3 billion, short of the $11.5 billion that analysts were expecting. The drugmaker said it had strong performances in consumer care and animal health products. MRK lowered its full-year EPS outlook.

Fellow Dow component Chevron Corp. (CVX $76) posted 2Q earnings of $2.70 per share, compared to the $2.44 that the Street had forecasted, with revenues jumping 27.5% y/y to $51 billion, compared to the $52.2 billion that was anticipated. CVX said revenues grew mainly due to higher prices for crude oil, natural gas and refined products, which also help grow its upstream earnings—exploration and production—while its downstream profits—refining—rose on improved margins.

2Q output slows

The first look at 2Q Gross Domestic Product, the broadest measure of economic output, was released this morning and showed a 2.4% annualized rate of growth, compared to the steep upwardly revised 3.7% gain in 1Q, and the 2.6% expansion that economists surveyed by Bloomberg had forecasted. Personal consumption rose 1.6%, short the 2.4% that was forecasted and the large downwardly revised 1.9% growth seen in 1Q.

The GDP Price Index rose 1.8%, above the consensus of economists, which called for a 1.1% increase. The core PCE Index, which excludes food and energy, increased 1.1%, just above expectations which called for a 1.0% increase.

Elsewhere, the Employment Cost Index for 2Q gained 0.5%, matching the consensus. Treasuries moved higher following the GDP and employment cost data.

Later this morning, the economic calendar will yield the Chicago PMI, expected to decrease from a 59.1 in June to 56.0 in July, and the final revision of the University of Michigan’s Consumer Sentiment Index, which is expected to be revised slightly higher to 67.0 for July, compared to the 66.5 that was originally reported for the month.

Europe under pressure on plethora of data

Stocks in Europe are lower in afternoon action, led by basic materials, amid a slew of economic and earnings reports in the region. Some economic recovery concerns came from today’s dose of economic data, with reports showing UK consumer confidence falling more than expected in July, reaching the lowest level since August 2009, and retail sales in Germany—Europe’s largest economy—declining much more than anticipated in June. However, Sweden’s 2Q GDP expanded by a larger amount than forecasted, Italy’s unemployment rate unexpectedly declined to 8.5% in June, euro-zone unemployment rate remained unchanged at 10% as expected. In other economic reports across the pond, euro-zone consumer prices increased 1.7% y/y to match expectations, Italy’s consumer prices rose more than forecasted, while its producer prices increased at a rate that was below expectations, and Spain’s unemployment rate surprisingly inched higher to 20.09% in 2Q.

The disappointing data is pressuring materials, along with a solid decline in shares of Lafarge SA (LFRGY $14) after the world’s largest cement maker, according to Bloomberg, cut its 2010 outlook for global demand. However, there are some positive reports from the corporate sector, with Alcatel-Lucent (ALU $3) moving solidly higher after the telecom equipment maker after maintaining its full-year growth outlook after swinging to a profit, and European Aeronautic Defence and Space Co. (EADSY $23) is trading to the upside after the maker of Airbus aircraft raised its guidance.

The UK FTSE 100 Index, France’s CAC-40 Index, and Germany’s DAX Index are declining 0.6%, Sweden’s OMX Stockholm 30 Index is off 0.9%, Italy’s FTSE MIB Index is decreasing 0.7%, and Spain’s IBEX 35 Index is falling 1.5%

Asia declines on disappointing Japanese economic data

Stocks in Asia posted broad-based losses, led by a 1.6% drop in the Japanese Nikkei 225 Index as the nation’s economic data more than offset some favorable reports from the corporate front. Japan reported that its jobless rate unexpectedly rose from 5.2% in May to 5.3% in June, above the expectation of economists that anticipated the rate to remain unchanged. Other reports that were to the downside in Japan included a surprising drop in industrial production, which fell 1.5% month-over-month (m/m) in June, compared to the forecast of a 0.2% gain, construction orders fell over 10% y/y, vehicle production slowed, but came in at a 25.9% y/y rate, and the nation’s housing starts rose by an amount that was less than half of what was expected. Meanwhile, Japan’s Consumer Price Index fell on a core level—excluding fresh food and energy—by 1.5% y/y in June, a slightly smaller amount than the 1.6% drop that was anticipated. The disappointing reports overshadowed strong gains in shares of some of the nation’s largest electronics makers, Sony Corp. (SNE $32) and Panasonic Corp. (PC $13), which both found support from their better-than-forecasted 1Q profits and increased full-year outlooks. Stocks in Australia also came under pressure to help pace the decline, with the S&P/ASX 200 Index declining 0.7%, pressured by a solid drop in shares of Macquarie Group Ltd. (MQBKY $34) after the financial firm warned that profits would be lower at its advisory, securities, fixed income and commodities units. Also, the South Korean Kospi Index decreased 0.7% after a solid decline in shares of Hyundai Steel Co. after the nation’s biggest maker of construction steel, per Bloomberg, reported a sharp drop in 2Q profits due to the negative impact of foreign exchange. The losses in South Korea came despite a report showing the country’s industrial production rose more than forecasted in June, which may have be tempered somewhat by a separate report that showed South Korea’s Leading Index deteriorated in June.

Elsewhere, stocks in China posted modest losses, with the Hong Kong Hang Seng Index declining 0.3%, while the Shanghai Composite Index decreased 0.4% as losses may have been limited by a survey of business conditions, which improved in July from June. In other economic news in the region, Thailand’s manufacturing production, business sentiment, and trade surplus all improved and the nation’s SET Index gained 0.2%. Rounding out the day Taiwan’s Taiex Index fell 0.5% and India’s BSE Sensex 30 Index dropped 0.7%.