Morning Market Update

Broad-Based Advance as Fed Eases Policy Stance

The US equity markets are near the best levels of the day solidly above the unchanged mark in the wake of yesterday’s announcement from the US Federal Reserve of an additional $600 billion in asset purchases, to try to further stimulate the economy. Materials are one of the best performers, with gold prices surging and crude oil solidly in the green, as the US dollar is under broad-based pressure among major currencies. Stocks are showing little reaction to a larger-than-forecasted increase in weekly initial jobless claims and Treasuries are nearly unchanged, except for the mid range of the curve, which are gaining solid ground. In other economic news, 3Q nonfarm productivity rose more anticipated and unit labor costs unexpectedly declined. In other equity news, Qualcomm Inc and Whole Foods Market Inc both exceeded the Street’s earnings expectations, while DIRECTV matched analysts’ projections. Overseas, Europe was nicely higher led by materials and financials and as traders digested unchanged monetary policy announcements from the Bank of England and the European Central Bank.

At 12:57 p.m. ET, the Dow Jones Industrial Average is 1.7% higher, the S&P 500 Index is up 1.5%, and the Nasdaq Composite is advancing 1.2%. Crude oil is up $1.54 at $86.23 per barrel, wholesale gasoline is up $0.03 at $2.17 per gallon, and the Bloomberg gold spot price is up by $33.13 at $1,381.68 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.5% at 75.89.

The nation’s retailers are reporting October same-store sales—sales at stores open at least a year—headlined by Target Corp. (TGT $56), which posted a 1.7% gain in sales year-over-year (y/y), above the 1.5% increase that analysts surveyed by Reuters were expecting. The company said its sales came in at the low end of its expectations, primarily due to softness in the first two weeks of the month, but guest traffic “remains healthy,” and sales of non-discretionary items continue to outpace other categories. TGT is nicely higher.

Also, Costco Wholesale Corp. (COST $65) reported a 6% increase in total same-store sales, above the 4.6% growth that the Street had forecasted, while excluding the “positive” impact of strengthening foreign currencies and gasoline inflation, sales were 5% higher. COST is trading higher.

Meanwhile, department store Macy’s Inc. (M $25) announced that it achieved a 2.5% y/y rise in its October same-store sales, above the 1.6% growth that was anticipated. The company said it experienced some softness in sales early October given unseasonably warm weather, but it ended the month with a strong trend going into the holiday selling season. M also increased its earnings and sales guidance for the second half of 2010. M is solidly higher.

Other reports from the major department stores were mixed with Saks Inc. (SKS $11) posting a 8.1% gain in October, well above the 2.0% growth that was expected, while J.C. Penney Co. Inc. (JCP $32) reported a 1.9% decline in sales, versus the gain of 1.0% that was anticipated, and Kohl’s Corp. (KSS $49) achieved a 2.5% decline in sales, compared to the 2.3% increase that was forecasted. KSS also lowered its full-year EPS guidance. SKS and JCP are higher, while KSS is under some pressure.

Inside the mall, Gap Inc. (GPS $21) posted a 2.0% increase in same-store sales for October compared to last year, and versus the 2.4% decline that analysts were expecting. GPS also raised its guidance. Also, Limited Brands Inc. (LTD $31) reported a 9% jump in sales, compared to the 6.1% increase that was forecasted. However, there were some reports that disappointed, as Abercrombie & Fitch Co. (ANF $45) reported a 2.0% increase in sales for the month, compared to the 5.6% growth forecast on the Street, and Aeropostale Inc. (ARO $24) recorded a 2.0% decline in sales, compared to the 3.1% increase that was expected. Nonetheless, shares of all these companies are higher, led by a solid gain in GPS.

Outside of the retail sales reports pouring in, DIRECTV (DTV $43) reported 3Q EPS of $0.55, inline with the Street’s forecasts, with revenues increasing 10% y/y to $6.0 billion, roughly inline with analysts’ expectations. The satellite TV service provider said its Latin American unit lead the way with 206,000 net subscriber additions, while the US continued its “strong momentum,” as a net 174,000 subscribers were added. Shares are lower.

Moreover, Qualcomm Inc. (QCOM $48) announced fiscal 4Q EPS ex-items of $0.68, above the $0.59 that the Street had anticipated, as revenues rose 10% y/y to $3.0 billion, compared to the $2.9 billion that analysts had forecasted. The digital wireless telecom firm issued 1Q EPS and full-year 2011 guidance that exceeded analysts forecasts, saying it expects continued strong growth in CDMA-based device shipments, including smartphones and other data-centric devices, driven by the global adoption of 3G and accelerating consumer demand for wireless data. QCOM is solidly higher.

Elsewhere, Whole Foods Market Inc. (WFMI $47) reported fiscal 4Q EPS of $0.33, above the $0.29 that analysts were forecasting, with revenues increasing 15% y/y to $2.1 billion, roughly inline with the Street’s forecast. Same-store sales rose 8.7% y/y and the natural food grocer attributed its performance to its relative price positioning and its initiatives in areas such as healthy eating, animal welfare and sustainable seafood. WFMI increased its full-year 2011 EPS outlook. WFMI is sharply higher.

Jobless claims rise more than expected, 3Q productivity increases, but labor costs decline

Weekly initial jobless claims rose by 20,000 to 457,000, versus last week's figure which was upwardly revised by 3,000 to 437,000, and versus the consensus estimate of economists surveyed by Bloomberg, which called for claims to rise to 442,000. The four-week moving average, considered a smoother look at the trend in claims, increased by 2,000 to 456,000, and continuing claims fell by 42,000 to 4,340,000, compared to the 4,378,000 that was anticipated by economists.

Elsewhere, the preliminary reading on 3Q nonfarm productivity was 1.9% higher on an annual basis, compared to the 1.0% increase that economists expected, and following the 1.8% decrease seen in 2Q. Unit labor costs were 0.1% lower, versus a gain of 0.6% that was estimated, and the upwardly revised 1.3% increase that was reported in the previous quarter.

Treasuries are mostly flat following the jobless claims and productivity readings. But the yield in the 10-year bond is down solidly in the wake of Tuesday’s US midterm elections, which saw the Republicans gain control of the House, and yesterday’s conclusion of the US Federal Reserve’s monetary policy meeting, in which it announced an additional $600 billion in purchases of longer-term Treasury securities.

Meanwhile, Federal Reserve Chairman Ben Bernanke penned an op-ed piece in the Washington Post today following yesterday’s actions, saying the job market remains “quite weak” and most measures of inflation are running somewhat below 2%, or a bit lower than the rate most Fed policymakers see as being most consistent with healthy economic growth in the long run. The Fed has a dual mandate—set by Congress—to promote a high level of employment and low, stable inflation. Bernanke said that even in the absence of deflation risks, low and falling inflation indicate that the economy has considerable spare capacity, implying that there is scope for monetary policy to support further gains in employment without risking economic overheating. The Fed Chief noted that although asset purchases are relatively unfamiliar as a tool of monetary policy, some concerns about this approach are “overstated,” and the Fed will take all measures necessary to keep inflation low and stable. Bernanke concluded that the Federal Reserve cannot solve all the economy’s problems on its own, and that will take time and the combined efforts of may parties, including the central bank, Congress, the administration, regulators, and the private sector.

Europe finishes solidly higher as central banks in focus

Stocks in Europe closed nicely higher with materials leading the way as the US dollar is under broad-based pressure on the heels of the US Fed’s additional stimulus efforts and upbeat economic data in the US, highlighted by stronger-than-expected readings on service sector activity and factory orders. Also, a strong advance in shares of BHP Billiton Ltd. (BHP $90) helped the materials sector following the announcement that the Canadian government blocked its proposed takeover of Potash Corp. of Saskatchewan Inc. (POT $140).

Meanwhile, the broad-based advance was maintained even as traders reacted to key monetary policy meetings across the pond, with the Bank of England and European Central Bank both leaving their respective benchmark interest rates unchanged at 0.5% and 1.0%. Also, the BoE kept its asset purchase program unchanged as expected, but minutes from its previous meeting showed policy makers broached the subject of adding to its purchases. Traders also paid attention to the customary press conference following the announcement by European Central Bank President Jean-Claude Trichet, where he said, “All the non-standard measures are fully consistent with our mandate and temporary in nature,” and the governing council will monitor all developments “very closely,” per Dow Jones Newswires. Moreover, the ECB head noted that it continues to expect price development to remain moderate and the economic momentum in the euro region is “positive,” though “uncertainty is prevailing,” per Bloomberg.

Additional support for the advance in Europe came from the financial sector, which was among the leading advancers after upbeat profit reports from BNP Paribas (BNPQY $39) and Swiss Reinsurance Co. (SWCEY $52). Shares of both companies were solidly higher.

The economic calendar also aided the advance in Europe, with a report on UK home prices increasing more than economists’ forecasts, and a report that showed the deceleration in euro-zone service sector activity slowed by a smaller amount than previously expected. However, separate reads on service sector activity in Italy, France, and Germany—Europe’s largest economy—all were revised to lower paces of expansion than originally reported. In other economic news in the region, euro-zone producer prices rose inline with expectations.

The UK FTSE 100 Index and France’s CAC-40 Index traded up 1.9%, Germany’s DAX Index advanced 1.7%, and Italy’s FTSE MIB Index gained 1.4%.