Morning Market Update

Fed Anxiety and Disappointing Global Data Dampen Sentiment

Equity markets are under pressure in early action, as sentiment is waning following some disappointing data out of China and Europe, with an unexpected drop in 2Q US nonfarm productivity and another monthly deterioration in small business confidence doing little to help the mood. Also, traders may be treading with some caution ahead the afternoon conclusion of the Federal Reserve’s monetary policy meeting, which may be exacerbating the early move downward. Treasuries are mixed following the data and ahead of the Fed’s meeting, which will follow a report on wholesale inventories. US equity news is light, with an unexpected profit from monoline insurer MBIA Inc headlining the docket. Overseas, Asia was lower after a report showed China’s import growth slowed more than forecasted and the Bank of Japan kept its benchmark interest rate unchanged. Meanwhile, stocks in Europe are under some pressure on disappointing data out of the UK and France.

As of 8:54 a.m. ET, the September S&P 500 Index Globex future is 11 points below fair value, the Nasdaq 100 Index is 17 points below fair value, while the DJIA is 90 points below fair value. Crude oil is down $1.45 at $80.03 per barrel, and the Bloomberg gold spot price is down $9.70 at $1,191.65 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.8% at 81.34.

MBIA Inc. (MBI $9) reported 2Q EPS of $6.32, well above the Reuters estimate of analysts, which called for the monocline insurer to post a loss for the quarter of $0.62 per share, driven by a sharp gain in the value of derivatives. Revenues came in at $2.08 billion.

Productivity unexpectedly declines, unit labor costs rise, but Fed announcement looms

The preliminary reading on 2Q nonfarm productivity (chart) fell at a 0.9% annual rate, compared to the Bloomberg forecast of a 0.1% increase, and following the steep upwardly revised 3.9% increase seen in 1Q. Unit labor costs rose 0.2%, versus an increase of 1.5% that was estimated. Treasuries remain mixed, showing little reaction to the report.

In other economic news, the NFIB Small Business Optimism Index declined for the second month in a row, falling from 89.0 in June to 88.1 in July, compared to the expectation of economists, which called for the index to decline to 88.0. Similar to last month, the decline came as the number of firms reporting plans to hire remained weak and those expecting the economy to improve fell. Also weighing on the reading, firms planning to increase capital spending declined, along with components denoting easing of credit conditions and positive earnings trends.

Later this morning, the economic calendar will yield the release of wholesale inventories, expected to rise 0.4% in June, compared to the 0.5% gain that was seen in May.

However, the highlight of the day will be the conclusion of the one-day Federal Open Market Committee (FOMC) meeting and mid-day statement release. No changes are expected to the fed funds target rate, currently at a level between 0-0.25%. In the minutes from the last FOMC meeting, held June 23, the Fed noted that a majority of the participants viewed the risks to the economic outlook as tilted to the downside, and since that time, a slew of economic reports have come in weaker than expected, 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 strengthening 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. Traders will be parsing each word in the FOMC statement to glean any current or potential future changes in direction, and the Fed is likely to carefully choose those words to manage expectations appropriately.

Currently the Fed reinvests proceeds from maturing Treasuries, but the Fed’s balance sheet effectively shrinks when mortgage-backed securities (MBS) are prepaid (when mortgages are refinanced or paid off due to a home sale), or when they mature. The Fed is in a quandary, as the decline in its balance sheet essentially tightens, and money supply is a key variable in the index of leading economic indicators. However, the current expansion of the Fed’s balance sheet hasn’t had its intended impact, as the money isn’t multiplying throughout the economy. Typically, when banks lend, the money spent by the borrower then spurs further spending, by the eventual recipient of the money.

Europe lower in cautious action ahead of US Fed decision

Stocks in Europe are mostly lower in afternoon action, led by weakness in basic materials as some economic data out of China stoked some concerns about the strength of the global economic recovery. However, traders may be treading lightly ahead of the monetary policy announcement in the US, which has a relatively higher degree of uncertainty amid the backdrop of some disappointing data out of the world’s largest economy recently, and will come after the European markets are closed.

Meanwhile, data out of the UK is dominating the headlines, with reports showing home prices unexpectedly fell in July, and retail sales in the area grew at a slower rate in July compared to June. Moreover, the UK trade deficit narrowed by a larger amount than expected. Elsewhere, French economic reports were disappointing, with separate reports showing June manufacturing production unexpectedly fell and industrial production posted a much larger-than-forecasted decline. Other reports in the euro-area included German consumer prices rising by a larger amount than originally forecasted, while wholesale prices in Europe’s largest economy declined.

In equity news, shares of TUI Travel Plc. (TTVLF $3) are sharply lower after Europe’s largest travel company warned that its full-year results will come in at the lower end of expectations, and Hannover RE (HVRRY $25) is down after the German reinsurer posted a decline in 2Q profits, although the results topped expectations.

The FTSE 100 Index is down 0.7%, France’s CAC-40 Index is 1.0% lower, and Germany’s DAX Index is declining 1.2%.

Asia lower amid Chinese data and Bank of Japan decision

Stocks in Asia finished lower, led by steep losses in China, as the Hong Kong Hang Seng Index dropped 1.5% and the Shanghai Composite Index fell 2.9% following a report that showed the nation’s trade surplus unexpectedly rose. China’s trade surplus increased from $20.02 billion in June to $28.73 billion in July, compared to the $19.60 billion that economists had expected. The surprising increase in the Asian nation’s trade balance came as exports surged 38.1% compared to a 35% expectation, while imports rose by a smaller amount than forecasted, rising 22.7%, compared to the 30% increase that was anticipated. The weaker-than-exported import reading prompted some concerns about the strength of the Chinese economy, while the surge in exports caused some concerns that it may put pressure on the government to allow its currency to appreciate. In other Chinese economic news, a separate report showed the pace of housing price increases slowed to 10.3% year-over-year in July, from 11.4% in June, and compared to the 10.5% reading that economists forecasted, exacerbating concerns about the economic recovery. The other major economic event in the region came as the Bank of Japan kept its benchmark interest rate unchanged at 0.1%, as expected, and the BoJ noted that the nation’s economy showed further signs of a “moderate recovery.” Meanwhile, the BoJ disappointed some as it did not address the recent strength in the yen, which has posted an eight-month high versus the US dollar and is nearing the highest level in fifteen years, putting pressure on the outlook for profits of companies that rely on sales outside Japan. The Nikkei 225 Index dipped by 0.2% following the announcement. Elsewhere, Australia’s S&P/ASX 200 Index fell by 1.2% after a report on the nation’s business confidence showed a deterioration to the lowest level since May 2009. Rounding out the day in Asia, South Korea’s Kospi Index declined 0.5%, Taiwan’s Taiex Index dropped 0.7%, and India’s BSE Sensex 30 Index decreased 0.4%.