Morning Market Update

Advance Evaporates as Read on Jobs Unexpectedly Deteriorate

The US equity markets have given up an early advance and are modestly below the flatline on the heels of the ADP Employment Change Report, which showed private sector payrolls unexpectedly declined. Treasuries are higher as the employment report unnerved some ahead of Friday’s labor report, while a dip in mortgage applications had little impact on early action. In equity news, YUM! Brands Inc and Costco Wholesale Corp both topped the Street’s profit projections, but agriculture firm Monsanto Co posted a larger-than-forecasted 4Q loss. Overseas, Asia moved nicely higher following yesterday’s strong advance in the US and Europe is higher after some favorable data is overshadowing a credit downgrade of Ireland by Fitch Ratings.

As of 8:51 a.m. ET, the December S&P 500 Index Globex future is 3 points below fair value, the Nasdaq 100 Index is at 7 points below value, while the DJIA is 16 points below fair value. Crude oil is down $0.35 at $82.47 per barrel, and the Bloomberg gold spot price is up $3.15 at $1,343.80 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.1% at 77.73.

YUM! Brands Inc. (YUM $47) reported 3Q EPS ex-items of $0.73, one penny above the Reuters estimate, with revenues increasing 3% year-over-year (y/y) to $2.9 billion, inline with the Street’s forecast. The parent of Taco Bell, Pizza Hut, and KFC said it saw same-store sales—sales at stores open at least a year—grow 1% y/y in the US as well as in its international markets, with sales in China increasing 6%. YUM raised its full-year EPS forecast as new unit development in China and its international segment is a key driver of its overall growth. The company also announced a 19% increase in its quarterly cash dividend to $0.25 per share.

Costco Wholesale Corp. (COST $65) announced fiscal 4Q EPS of $0.97, two pennies above the consensus estimate of analysts, as revenues rose 8% y/y to $23.6 billion, versus the $24.2 billion that the Street had expected. Same-store sales at the wholesale retailer rose 6% including gasoline inflation and foreign exchange, while excluding these variables, sales rose 4%. Meanwhile, COST’s same-store sales for September increased 5% including gas and currency, and rose 4% excluding these impacts.

Monsanto Co. (MON $49) reported a fiscal 4Q loss ex-items of $0.09 per share, compared to the shortfall of $0.06 per share that analysts were anticipating, while revenues at the agriculture firm rose 4% y/y to $1.95 billion, above the $1.81 billion that the Street had expected.

Private sector payrolls unexpectedly fall, mortgage applications dip

The ADP Employment Change Report showed private sector payrolls fell by 39,000 jobs in September, compared to the forecast of economists surveyed by Bloomberg, which called for a 20,000 increase, and August’s 10,000 job decrease was favorably revised to a 10,000 gain. The release does not include government hiring and firing and comes ahead of Friday’s broader nonfarm payrolls report, where economists expect a flat reading in September, after falling 54,000 in August (economic calendar). Excluding government hiring, September private sector payrolls are expected to increase 75,000, after expanding by a better-than-forecasted 67,000 in August.

In other economic news, the MBA Mortgage Application Index inched 0.2% lower last week, after the index that can be quite volatile on a week-to-week basis, dipped 0.8% in the previous week. The slight decline came as the Refinance Index fell 2.5%, offsetting a 9.3% gain in the Purchase Index. The decrease in the overall index came amid a 12 basis-point drop in the average 30-year mortgage rate to 4.25%, the lowest rate since records began.

Treasuries remain higher following the employment and housing sector data.

Europe higher as data helps overshadow sovereign debt rating downgrade

Stocks in Europe are higher in afternoon action, led by materials and industrials following the rally yesterday amid the backdrop of global economic optimism as yesterday’s surprising monetary policy actions in Japan and Australia suggested global central banks remain in favor of fostering the recovery. The increased focus on central bank action across the globe may intensify tomorrow’s monetary policy announcements from the Bank of England and the European Central Bank, which are both expected to keep their benchmark interest rates unchanged at 0.5% and 1.0%, respectively. Meanwhile, some upbeat economic data from the European economic calendar is sweetening the aforementioned global sentiment, overshadowing a credit rating downgrade of Ireland from AA- to A+ by Fitch Ratings, which noted the “exceptional and greater-than-expected cost” of the nation’s banking sector bailout, per Bloomberg. Last week, Ireland said the bailout of the sector could total up to 50 billion euros ($69 billion), resulting in a budget deficit of 32% of its GDP. However, the disappointing jobs report in the US pared gains in the region.

Highlighting the economic docket across the pond, factory orders in Germany—Europe’s largest economy—surged 20.3% y/y in August, above the 17.2% increase that economists had projected, and month-over-month (m/m), orders were 3.4% higher, well above the gain of 0.9% that was anticipated. Also, Spain’s industrial output increased 1.4% y/y in August, versus the 0.2% growth that was forecasted. Elsewhere, the final reading of euro-zone 2Q GDP was left unrevised at a 1.0% quarter-over-quarter (q/q) expansion, and a 1.9% rate of growth y/y. However, euro-zone household consumption was revised lower from a 0.5% increase to a 0.2% gain.

In equity news, shares of easyJet Plc. (ESYJY $24) are sharply higher after Europe’s number-two discount airline, per Bloomberg, said its full-year profit was “slightly ahead” of the upper-end of its prior outlook, on improved demand and lower losses associated with the Icelandic volcano ash cloud.

The UK FTSE 100 Index, Germany’s DAX Index, and Spain’s IBEX 35 Index are increasing 0.6%, France’s CAC-40 Index is up 0.7%, and Ireland’s Irish Overall Index is gaining 1.1%.

Asia sees broad-based gains

Stocks in Asia were broadly higher on the heels of yesterday’s surprise monetary policy easing from the Bank of Japan and as the Reserve Bank of Australia unexpectedly kept its benchmark interest rate unchanged at 4.5% for the fifth-straight month. The moves showed that central banks are committed to continue being accommodative to the economic recovery, and the announcements amplified expectations that other global central banks will announce further stimulus efforts as well, including the US Federal Reserve. The US dollar fell across the board on the announcements, which also increased optimism regarding the economic recovery, boosting commodities prices to lead a strong rally in the US yesterday and buoy the Asian equity markets today. Japan’s Nikkei 225 Index increased 1.8% even though the Japanese yen gained ground despite the BoJ’s action, which was partly in response to the recent surge in the Asian currency that is threatening the Japanese economy, and is back near the 15-year highs versus the US dollar. Meanwhile, the strength in commodities helped lift stocks in the resource-reliant nation of Australia, as the S&P/ASX 200 Index gained 1.7%. There were no major economic data released in Asia and action may have been lighter than usual with markets in mainland China remaining closed for a holiday. Elsewhere, Hong Kong’s Hang Seng Index increased 1.1%, South Korea’s Kospi Index gained 1.3%, India’s BSE Sensex 30 Index rose 0.7%, and Taiwan’s Taiex Index advanced 1.0%.