Morning Market Update

Final GDP Surprise and Jobless Claims Report Help Stocks Rise

The US equity markets are moving higher in early action to close out 3Q and the final session of the uncharacteristically strong September, with a favorable read on US 2Q GDP and a larger-than-forecasted drop in weekly initial jobless claims supporting sentiment. Treasuries are higher following the reports, ahead of testimony from Federal Reserve Chairman Ben Bernanke as well as a read on manufacturing activity in the Midwest. In equity news, AIG announced that it will sell some Japanese assets to Prudential Financial Inc and unveiled its plan to exit the control of the US government. Overseas, Asia was mixed as Japanese markets sank, while European equities are relatively taking continued sovereign debt data in stride.

As of 8:56 a.m. ET, the December S&P 500 Index Globex future is 4 points above fair value, the Nasdaq 100 Index is at 8 points above value, while the DJIA is 40 points above fair value. Crude oil is up $0.96 at $78.82 per barrel, and the Bloomberg gold spot price is up $4.10 at $1,313.95 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.3% at 78.53.

Prudential Financial Inc. (PRU $57 ¹) announced that it has signed a definitive agreement with American International Group Inc. (AIG $37) for it to acquire Japanese units AIG Star Life Insurance Co. Ltd. and AIG Edison Life Insurance Company for a total purchase price of $4.8 billion. PRU said the addition of these operations to its existing businesses in Japan will increase its presence. Separately, AIG reported the it has agreed in principle on a plan for the US government to sell its stake in the insurer, in which the Treasury is expected to receive about 1.655 billion shares of AIG common stock after exchanging the $49.1 billion of preferred shares that were sold to the government as part of the bailout from the Troubled Asset Relief Program (TARP). The Treasury will own 92.1% of AIG common stock, which it will sell on the open market.

Final read on 2Q GDP revised slightly higher, jobless claims fall

The final look at 2Q Gross Domestic Product, the broadest measure of economic output, was released this morning and showed a 1.7% annualized rate of growth, compared to the 1.6% expected by a survey of economists by Bloomberg, and the 3.7% expansion seen in 1Q. Personal consumption was upwardly revised to 2.2% from 2.0%, and was expected to remain unadjusted.

The GDP Price Index was unchanged at a rise of 1.9%, matching the consensus of economists, and the core PCE Index, which excludes food and energy, increased 1.0%, better than the unrevised 1.1% estimate.

Meanwhile, weekly initial jobless claims fell by 16,000 to 453,000, versus last week's figure which was upwardly revised by 4,000 to 469,000, and compared to the consensus estimate of economists surveyed by Bloomberg, which called for claims to come in at 460,000. The four-week moving average, considered a smoother look at the trend in claims, fell by 6,250 to 458,000, while continuing claims fell by 83,000 to 4,457,000, compared to the 4,473,000 that was anticipated by economists. Treasuries are higher following the GDP and employment reports.

Later this morning, the economic calendar will yield the release of the Chicago PMI, expected to deteriorate from 56.7 in August to 55.5 in September.

Also, US Federal Reserve Chairman Ben Bernanke will testify at a Senate Banking Hearing titled, “Implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act,” at 10:00 a.m. ET. The Fed Chief is not expected to provide much elaboration on the Fed’s assessment of the current economic situation, but traders will be paying attention to his comments for any insight into whether it will launch another stimulus campaign, which expectations of have ramped up recently, amplified by the Fed’s most recent monetary policy meeting on September 21. At its meeting last week, the Fed appeared to open the door for further quantitative easing—buying assets to expand its balance sheet to pump more cash into the system in an attempt to stimulate the economy—by slightly tweaking its view on inflation, saying “measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability.” Also, the Fed said it will “continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”

Europe modestly lower despite continued sovereign debt news

Stocks in Europe are under some pressure in afternoon action as the euro-area debt situation remains in focus but the markets are showing some relative resilience. Moody’s Investors Service cut Spain’s top credit rating one notch to Aa1 from Aaa, due to a “weak” outlook for the nation’s economy and the tough austerity measures that face the debt-laden country. Also, Ireland unveiled its final bill of nearly 40 billion euros ($54.7 billion), per Reuters, for rescuing troubled banks in the nation, most notably Anglo Irish Bank. Moreover, Ireland’s finance minister announced that the government was likely to take a majority stake in Allied Irish Banks (AIB $2) which is down sharply today.

On the European economic front: UK consumer confidence deteriorated more than expected—but a separate report showed home prices in the nation unexpectedly gained ground—unemployment in Germany fell by an amount that doubled expectations, French producer prices were cooler than expected, while the estimate for euro-zone CPI rose to a level that matched expectations.

The UK FTSE 100 Index is down 0.2%, France’s CAC-40 Index is 0.9% lower, Germany’s DAX Index is declining 0.3%, and Spain’s IBEX 35 Index is decreasing 0.4%, while Ireland’s Irish Overall Index is 0.2% higher.

Asia mixed as Japan struggles

Stocks in Asia were mixed, with Japanese equity markets declining on disappointing reports from the economic calendar and a stronger yen, while Chinese stocks showed some resilience in the face of government actions to cool the property markets. Japan’s Nikkei 225 Index fell 2.0% amid the backdrop of a rising yen, which exacerbated continued uneasiness about the negative impact of the currency’s recent surge on companies that rely heavily on exports and the overall Japanese economy. Also, economic concerns ramped up to pressure Japan’s equity markets, with a report showing industrial production unexpectedly fell in August, declining 0.3% month-over-month (m/m) compared to the forecast of economists that called for a 1.1% increase. Also, a separate report showed Japanese retail trade rose 1.4% m/m in August, short of the 1.9% increase that was anticipated, adding to the soured sentiment in the nation, offsetting another release that showed Japan’s vehicle production increased 20.8% year-over-year (y/y) in August, after rising 16.8% y/y in the previous month. Moreover, Nintendo Co. (NTDOY $33) continued to tumble after yesterday’s announcement from the world’s largest maker of video-game consoles that it is cutting its annual profit forecast, as the recent strength in the yen dampened its outlook, and the company said its newest handheld game device, the Nintendo 3DS, will be delayed until February—after the holiday shopping season.

Meanwhile, stocks in China seemed to shrug off the announcement that the government will implement new measures to try to cool off rising real estate prices. The Chinese Government asked banks to stop providing loans to buyers of third homes and extended a requirement of at least a 30% downpayment for mortgages to all first-time home buyers. Also, according to Bloomberg, China announced that it will speed up the introduction of a trial property tax in some cities and then expand it to the whole country to try to help stem the surge in property prices. However, the Shanghai Composite Index managed to jump 1.7% on the day, while the Hong Kong Hang Seng Index ticked 0.1% lower. Shares of Industrial & Commercial Bank of China were down solidly after Goldman Sachs (GS $144) announced that it will sell $2 billion of its stake in the Chinese lender. Elsewhere, Australia’s S&P/ASX 200 Index fell 1.3% after a report showed building approvals unexpectedly fell, dropping 4.7% m/m in August, compared to a flat reading, and South Korea’s Kospi Index rose 0.3% after it reported an increase in industrial production, while the pace growth in its leading index slowed. Finally, Taiwan’s Taiex Index was flat ahead of the announcement after the close that the nation’s central bank expectedly increased its benchmark lending rate from 1.375% to 1.500%.