Morning Market Update

Jump in Private Sector Payrolls Unable to Fully Awake the Bulls

Despite a much larger-than-forecasted increase in the ADP Employment Change report, which showed private sector payrolls rose by nearly three times what economists had expected, US equity markets are lower but have come off of the worst levels of the morning. Broad-based losses in Asian and European markets on disappointing data and continued weakness in commodities are setting the negative tone, but a key reading on the US service sector remains on the horizon, which could help change the bulls’ fortunes. Meanwhile, equity news is mixed, with Mosaic Co topping the Street’s profit projections, while Family Dollar Stores Inc missed earnings estimates. However, there was an M&A announcement that is garnering attention as Qualcomm Inc reached an agreement to acquire Atheros Communications Inc for about $3.1 billion in cash. Treasuries are lower after erasing early gains on the upbeat employment report, while showing little reaction to a modest rise in MBA Mortgage Applications.

As of 8:47 a.m. ET, the March S&P 500 Index Globex future is 5 points below fair value, the Nasdaq 100 Index is 10 points below fair value, while the DJIA is 40 points below fair value. Crude oil is $0.80 lower at $88.58 per barrel, and the Bloomberg gold spot price is down $5.40 at $1,375.33 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.8% at 80.11.

Mosaic Co. (MOS $75) reported fiscal 2Q EPS ex-items of $1.01, one penny above the consensus estimate of analysts surveyed by Reuters, with revenues jumping 56% year-over-year (y/y) to $2.7 billion, topping the $2.4 billion that the Street had expected. The fertilizer firm said it benefitted from “significantly higher phosphate selling prices and potash sales volumes,” partially offset by higher sulfur and ammonia costs y/y. Looking ahead, the company said the market environment “remains robust,” driven by increasingly strong demand prospects, underpinned by profitable farm economics, record low producer inventories, a lean global distribution pipeline and strong farmer economics.

Meanwhile, Family Dollar Stores Inc. (FDO $49) announced fiscal 1Q EPS of $0.58, below the $0.61 that analysts were anticipating, with revenues rising 9.5% y/y to $2.0 billion, roughly inline with what was expected on the Street. The discount retailer said its same-store sales—sales at stores open at least a year—increased 6.9% y/y as customer traffic increased, while average transaction value was approximately flat.

In M&A news, Qualcomm Inc. (QCOM $51) reached an agreement to acquire wireless technology firm Atheros Communications Inc. (ATHR $44) for $45 per share in cash, or about $3.1 billion. The transaction has been approved by the boards of both companies and is expected to close in the first half of 2011. QCOM said it expects the deal to be “modestly accretive” to EPS in fiscal year 2012, and is intended to help accelerate the expansion of QCOM’s technologies and platforms to new businesses beyond cellular and provide access to significant new growth opportunities.

Private sector payrolls jump, mortgage apps rise, read on service sector after opening bell

The ADP Employment Change Report showed private sector payrolls rose by 297,000 jobs in December, almost tripling the forecast of economists surveyed by Bloomberg, which called for a 100,000 increase, and November’s 93,000 job gain was revised to 92,000 jobs. The release does not include government hiring and firing and comes ahead of Friday’s broader nonfarm payrolls report, where economists expect an increase of 140,000 jobs in December, after posting a disappointing 39,000 in November. Excluding government hiring, December private sector payrolls are expected to increase 150,000, after expanding by a smaller-than-forecasted 50,000 in November.

Treasuries erased early gains and are lower in morning action following the employment data, with the yield on the two-year note up 4 bps to 0.66%, the yield on the 10-year note is 6 bps higher at 3.39%, and the 30-year bond yield is gaining 4 bps to 4.45%.

In other economic news, the MBA Mortgage Application Index increased by 2.3% last week, after the index that can be quite volatile on a week-to-week basis, declined 3.9% in the previous week. The increase came as a 3.9% gain in the Refinance Index offset a 0.8% decline in the Purchase Index. The advance in the overall index also came as the average 30-year mortgage rate fell 11 basis points to 4.82%, above the record low of 4.21% on October 8.

One of the highlights of today’s US economic calendar will be the release of the ISM Non-Manufacturing Index, forecasted to improve from 55.0 in November to 55.7 in December, posting the twelfth-straight month of expansion in the service sector, which accounts for the lion’s share of economic activity. On Monday, the ISM Manufacturing Index depicted the manufacturing sector grew for the seventeenth-consecutive month, which helped foster a strong global rally in the equity markets. Underlying components of the report such as new orders, production, and inventories are likely to garner attention, but the biggest focus among traders will probably lie on the components pertaining to the Federal Reserve’s dual mandate of inflation and employment. Prices paid will likely remain high and could foster some inflationary concerns as seen in Monday’s manufacturing read by the ISM, as this could foreshadow diminished purchasing power for consumers, who are the heart of the economy, and illustrate that corporate profits could get squeezed as the current economic environment threatens pricing power among businesses. Also, the employment component could foster some attention ahead of Friday’s US Labor Report and as the jobs market remains a key headwind noted by the Federal Reserve that is keeping the economy from firing on all cylinders.

Europe lower amid a flurry of disappointing data

Stocks in Europe are solidly lower in afternoon action, with materials finding pressure from yesterday’s fall in commodity prices and a plethora of disappointing economic data across the pond. Meanwhile, a debt auction in Portugal, which saw the nation’s cost of capital rise meaningfully from a previous auction, brought euro-area debt concerns back to forefront to exacerbate sentiment. A slew of PMI Services reports were released and the data depicted diverging economic prosperity, with reads on Ireland, Spain, and Italy showing lackluster activity, while euro-zone heavyweight economies such as France and Germany saw better-than-expected service-sector activity. Adding to the pessimism in the region, separate reports revealed the UK PMI Construction declined more than expected to a level depicting contraction, and euro-zone industrial orders rose at a smaller-than-expected rate. Other economic reports in Europe included: euro-zone PMI Services unexpectedly improving, while euro-zone producer prices rose at a rate that was inline with expectations. However, the favorable employment report out of the US is helping lift markets off of the worst levels of the day.

Elsewhere, shares of UK music and DVD retailer HMV Group Plc. (HMVMF $0.50) are down sharply after the company warned that its full-year profit would be near the low end of previous forecasts.

The UK FTSE 100 Index is 0.3% lower, France’s CAC-40 Index is down 1.0%, Germany’s DAX Index is declining 1.3%, Spain’s IBEX 35 Index is falling 2.0%, Italy’s FTSE MIB Index is decreasing 0.9%, Ireland’s Irish Overall Index is off 1.1%, and Portugal’s PSI 20 Index is dropping 0.9%.

Asia mostly lower amid weakness in commodities

The equity markets in Asia finished mostly lower as stocks were bogged down by yesterday’s broad-based sell-off in commodities and traders grappled with the US Federal Reserve’s assessment that the improvement in the economy was not sufficient to change its asset purchase program. Japanese markets were engulfed in a choppy session as the Nikkei 225 Index swung between gains and losses throughout the day but finished 0.2% lower, while Chinese markets were mixed, with the Hong Kong Hang Seng Index gaining 0.4% and the Shanghai Composite Index closing 0.5% lower. Meanwhile, the aforementioned weakness in commodities negatively impacted stocks in the resource-rich nation of Australia, as the S&P/ASX 200 Index declined 0.6%, with massive flooding in the region exacerbating the pressure on mining issues. Elsewhere, South Korea’s Kospi Index dipped 0.1% after closing near a record high yesterday, and India’s BSE Sensex 30 Index fell 1.0% after a report showed growth in the nation’s Services PMI slowed in December.