Morning Market Update

Bulls Running on Monday Morning

The equity markets are higher in early action, after showing some relative resilience to Friday’s disappointing US labor report, and ahead of tomorrow’s one-day monetary policy meeting from the US Federal Reserve. Traders will likely pay close attention to policy statement for any clues regarding what side of the inflation/deflation fence Fed members sit, and if any new stimulus measures will be announced, as some have speculated. Earnings news is light, but there is some major corporate news for traders to digest, with Dow member Hewlett-Packard Co announcing its CEO resigned amid a sexual harassment investigation, and fellow Dow component McDonald’s Corp posting stronger-than-forecasted global same-store sales. Treasuries are modestly lower in early action as there are no major economic reports scheduled for release today. Overseas, most of Asia moved higher, but Japan came under pressure, while Europe is nicely higher on upbeat comments from BP Plc regarding the Gulf of Mexico oil leak and amid some positive euro-zone economic data.

As of 8:50 a.m. ET, the September S&P 500 Index Globex future is 5 points above fair value, the Nasdaq 100 Index is 7 points above fair value, while the DJIA is 41 points above fair value. Crude oil is up $0.70 at $81.40 per barrel, and the Bloomberg gold spot price is down $0.45 at $1,204.95 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.2% at 80.55.

Dow member Hewlett-Packard Co. (HPQ $46) is under pressure after the company’s Chairman, Chief Executive Officer, and President Mark Hurd has decided to resign his positions effective immediately. HPQ said the decision was made following an investigation of the facts and circumstances surrounding a claim of sexual harassment against Hurd and HPQ by a former contractor to the company. HPQ appointed CFO Cathie Lesjak as CEO on an interim basis.

Fellow Dow component McDonald’s Corp. (MCD $72) is trading higher after the world’s largest fast food chain announced global same-store sales—sales at restaurants open at least thirteen months—jumped 7.0% year-over-year (y/y) in July, well above the 4.8% increase that was expected by analysts. Also, the company said its US same-store sales increased 5.7% y/y, versus the 4.6% increase that was expected, while sales in Europe rose 5.7% and in Asia/Pacific, Middle East and Africa (APMEA) rose 10.1%. MCD said its top contributors in the US were beverages, including the recently launched real fruit smoothies and frappes. Europe’s results were led by France, the UK and Germany, while Japan, Australia, and China aided sales in APMEA.

Today’s economic docket is dormant, but Fed meeting gets top billing for the week

Treasuries are slightly lower in early action as there are no major economic releases scheduled for today. There will be some key reports that are likely to gain attention for the rest of the week, including a reading on inflation reported on Friday, in the form of the Consumer Price Index (CPI), forecasted to show a 0.2% month-over-month (m/m) increase in July, while excluding food and energy, the core rate it is expected to rise 0.1% m/m. On a y/y basis, the CPI is expected to be up 1.2% and 0.9% y/y at the core level, both at similar levels to last month.

Also, the week will conclude with advance retail sales, forecasted to rise 0.5% m/m in July, after declining 0.5% in June, while sales ex-autos are estimated to grow 0.3% in July, after falling 0.1% in June. Same-store sales results—sales at stores open at least a year—reported by retailers were mixed and marked by continued steep discounts. The retail sales report includes spending at supermarkets and gas stations.

However, the highlight of the week will likely be tomorrow’s one-day Federal Open Market Committee (FOMC) meeting and afternoon statement release. No changes are expected to the fed funds target rate, currently at a level between 0-0.25%. At the last FOMC meeting held June 23, the Fed noted that the economic outlook remains unusually uncertain, and since that time, a slew of economic reports have come in weaker than expected. News out of the consumer sector has been particularly worrisome, as it constitutes nearly 70% of GDP, with weak retail sales and job growth, prompting calls for more stimulus. In his congressional testimony at the end of July, Fed Chair Bernanke mentioned three actions the Fed could take, if needed, to further support the economy, including bolstering its verbal commitment to keep rates low for an extended period, reinvesting proceeds from its mortgage security purchases, and cutting the interest rate it pays on reserves that banks hold at the Fed.

Other releases on this week’s US economic calendar include: the NFIB Small Business Optimism Survey, preliminary 2Q non-farm productivity, wholesale inventories, MBA Mortgage Applications, the Import Price Index, trade balance, initial jobless claims, the preliminary University of Michigan Consumer Sentiment Index, and business inventories.

Europe nicely higher as oil and gas issues lead the way

Stocks in Europe are solidly higher in afternoon action, led by oil and gas equities on some continued favorable euro-area economic data, and as BP Plc. (BP $41) is gaining ground after providing an upbeat outlook regarding the leaking oil well in the Gulf of Mexico. BP said pressure tests of the well showed its cement plug is being effective and it plans to permanently seal the well this month, according to Bloomberg News. On the economic front, Germany reported that its trade surplus for June expanded by a larger-than-forecasted amount, as its exports jumped more than double what was expected. In other economic news, a report showed euro-zone investor confidence jumped from -1.3 in July to 8.5 in August, the highest level since December 2007, and compared to the 1.6 level that was anticipated, while a separate release showed France’s business sentiment remained unchanged at an upwardly revised 101.

The UK FTSE 100 is 1.5% higher, France’s CAC-40 Index is up 1.7%, and Germany’s DAX Index is rising 1.4%.

Asia mostly higher but Japan lags behind

Most major equity markets in Asia finished in the green but Japanese stocks found some pressure ahead of the conclusion of the Bank of Japan’s monetary policy meeting as traders will be looking to see if the central bank will address the strength in the yen versus the dollar and other major currencies. The yen hit an eight-month high versus the greenback and is threatening a fifteen-year high, which has weighed heavily on export issues as the stronger Asian currency threatens profits of companies that rely on sales outside of Japan. Moreover, a report showed Japan’s current account surplus unexpectedly shrunk, suggesting the strength in the yen may be impacting the nation’s trade. However, a separate report showed the nation’s trade surplus expanded, but at a level that was below economists’ forecasts. Also weighing on trading in Japan, Goldman Sachs downgraded its growth forecast for the nation, due partly to the disappearance of government stimulus efforts, and the Nikkei 225 Index declined 0.7%. Meanwhile, stocks in China moved higher, with Hong Kong’s Hang Seng Index increasing 0.6% and the Shanghai Composite Index rising 0.5%.

In other economic news in the region, Australia’s home loans for June fell more than expected and a separate report showed the nation’s growth in job advertisements declined month-over-month in July, but the S&P/ASX 200 Index increased 0.6%, aided by some M&A optimism in the corporate sector. Additionally, South Korea’s Producer Price Index rose 3.4% y/y in July, after increasing 4.6% in June, and the Kospi Index rose 0.4%. Finally, Taiwan’s trade surplus increased much more than forecasted, and the Taiex Index increased 0.9%. Rounding out the day in Asia, India’s BSE Sensex 30 Index gained 0.8%.