Morning Market Update

Stocks Find Elevation Before Flood of Data

The US equity markets are gaining ground in early action ahead of some pivotal events this week, highlighted by tomorrow’s US mid-term elections and beginning of the Fed’s meeting, culminating with Friday’s labor report. Some strong manufacturing data out of China is helping lift equities but early gains have been pared following a disappointing report on personal income and spending, which is supporting Treasuries in morning trading. Earnings news continues to trickle in, with Humana Inc topping the Street’s forecast, but Corning Inc missed analysts’ earnings expectations. Overseas, Asia was mostly higher on the aforementioned Chinese manufacturing data, but stocks in Japan were bogged down by disappointing corporate news, while some caution before key data this week has Europe mixed.

As of 8:49 a.m. ET, the December S&P 500 Index Globex future is 5 points above fair value, the Nasdaq 100 Index is 8 points above fair value, while the DJIA is 38 points above fair value. Crude oil is up $0.60 at $82.03 per barrel, and the Bloomberg gold spot price is down $0.45 at $1,358.95 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.1% at 77.08.

Humana Inc. (HUM $58) reported 3Q EPS ex-items of $2.01, above the $1.66 consensus estimate of analysts surveyed by Reuters, with revenues increasing 9.2% year-over-year (y/y) to $8.4 billion, compared to the $8.5 billion that was anticipated on the Street. The health insurer said it had “strong” performance in both its government and commercial segments. “With the success of our one-to-one retail approach to membership growth solidly aligned with the continued expansion on Medicare and potential retail opportunities in the individual market, Humana faces the post-reform future with confidence,” the company said. HUM raised its full-year EPS outlook.

Corning Inc. (GLW $18) announced 3Q EPS ex-items of $0.51, one penny short of analysts’ forecasts, with revenues rising 8% y/y to $1.6 billion, roughly inline with the forecast on the Street. However, sales were down 6% quarter-over-quarter (q/q) as glass volume at its display technologies unit fell 8% versus 2Q. GLW said its LCD glass business adjusted with the supply chain correction that occurred in 3Q, but global retail demand for LCD products continued to show y/y growth in all markets other televisions in the US.

Personal income and spending miss forecasts, national manufacturing read on deck

Personal income fell 0.1% in September, versus the Bloomberg survey of economists, which called for a 0.2% gain, while August’s 0.5% increase was revised to a 0.4% advance. Personal spending was 0.2% higher in September, compared to expectations of a 0.4% advance, but August’s 0.4% rise was revised to a 0.5% increase. The savings rate moved lower to 5.3% in September, after a downwardly revised 5.6% for August.

Also, the PCE Price Index, which is released with the income and spending data, was up 1.4% y/y in September, matching expectations, after August’s 1.5% increase was revised to a 1.4% gain. The core PCE Price Index, which excludes food and energy, was flat month-over-month (m/m), compared to the 0.1% increase that economists expected, while y/y core prices moved 1.2% higher, below the consensus 1.3% estimate. Treasuries are mostly higher following the income and spending data.

Later this morning, the economic calendar will yield the release of the ISM Manufacturing Index, forecasted to decrease to 54.0 in October from 54.4 in September, while the ISM Non-Manufacturing Index, to be released on Wednesday, is forecasted to increase to 53.5 in October from 53.2 in September. The level that separates expansion from contraction is 50.0. Also, today’s docket will include the release of construction spending, forecasted to decline by 0.5% in September.

However, the bulk of the economic fireworks will likely come later this week, highlighted by the midday statement release on Wednesday that concludes the two-day Federal Open Market Committee (FOMC) meeting and Friday’s release of nonfarm payrolls. No changes are expected to the fed funds target rate, currently at a level between 0-0.25%, but rising expectations about the potential for the Fed to begin another round of asset purchases due to the weak economic data have been building since Fed Chair Ben Bernanke’s speech at Jackson Hole at the end of August, and his speech in Boston on October 15, where he said that the “risk of deflation is higher than desirable.” Additionally, Fed officials have added to the speculation, particularly New York Fed President William Dudley, who has been saying since the beginning of October that unemployment and inflation levels and the timeframe over which they will return to levels consistent with the Fed’s mandate are “unacceptable.” However, the size of the potential purchase program has been widely debated, and estimates as high as $1–2 trillion over the next six months could set the market up for disappointment.

Nonfarm payrolls are expected to grow 60,000 in October after falling 95,000 in September, while excluding government employment, which has been distorting the headline number as temporary Census workers are relieved, private sector payrolls are expected to increase 80,000, after expanding by 64,000 in September. The unemployment rate is estimated to remain at 9.6%.

Other releases on this week’s US economic calendar include: factory orders, pending home sales, MBA Mortgage Applications, the ADP Employment Change, nonfarm productivity, initial jobless claims, consumer credit, and wholesale inventories.

Europe mixed ahead of major economic events later this week

Stocks in Europe are mixed in afternoon action, with materials being buoyed by some favorable manufacturing data out of China, while financials and technology shares are seeing some pressure. Traders appear to be treading with some caution ahead of tomorrow’s US elections and Wednesday’s conclusion of the US Federal Reserve’s monetary policy meeting. Also, central bank news will be in focus across the pond as well, with the Bank of England and European Central Bank both conducting their policy meetings, which they are expected to keep their benchmark interest rates unchanged at 0.5% and 1.0%, respectively. Recent rhetoric from policy makers suggest the BoE and ECB are on divergent policy paths, with the minutes from the last BoE meeting showing mixed views among members, which prompted some expectations that further stimulus may be in the offing, while some members of the ECB have noted that an exit strategy should be being discussed.

The economic front in Europe is contributing to the mixed sentiment, as a read on UK home prices fell the most since January 2009, per Bloomberg, while a separate report showed UK manufacturing activity unexpectedly moved further into expansion territory.

The UK FTSE 100 Index is flat, France’s CAC-40 Index is down 0.3%, and Germany’s DAX Index is 0.2% higher.

Manufacturing reports lift Chinese stocks

Equity markets in Asia were mostly higher, led by solid gains in China following favorable manufacturing readings, which also lifted materials issues. China’s Shanghai Composite Index rose 2.5% and Hong Kong’s Hang Seng Index increased 2.4% after the PMI Manufacturing report unexpectedly rose from 53.8 in September to 54.7 in October, versus the expectation of economists, which called for the index to remain unchanged. Moreover, the HSBC Manufacturing PMI improved from 52.9 in September to 54.8 in October. A reading above 50 denotes expansion in manufacturing activity. The reports supported stocks in the resource-reliant nation of Australia, with the S&P/ASX 200 Index gaining 0.8%. Meanwhile, South Korea’s Kospi Index rose 1.7%, led by solid strength in the nation’s automakers on some favorable analyst recommendations on last week’s upbeat earnings reports from the sector, and on the heels of a much stronger-than-forecasted export report. Also, Taiwan’s Taiex Index gained 1.1%, aided by the aforementioned data and a steep advance in shares of mobile-device maker HTC Corp. (HTCXF $20) after it issued a favorable sales outlook.

However, Japanese equities lagged behind, as the Nikkei 225 Index declining 0.5% following some disappointing earnings reports. Shares of Honda Motor Co. (HMC $36) declined 5% after the automaker issued disappointing earnings guidance, while shares of Nomura Holdings Inc. (NMR $5) also fell 5% below the flatline after Japan’s’ largest brokerage firm in reaction to its sharp drop in quarterly profit.