Morning Market Update

Durable Goods Report Dulls the Bears’ Bite

After coming under solid pressure following yesterday’s strong advance, US stocks have pared a large portion of early losses and are modestly lower in morning action, aided by a better-than-expected read on US durable goods orders and favorable revisions to the previous month’s figures. Treasuries pared early gains and are mixed following the data, despite a near 15-year low in home purchase activity, which pressured the MBA Mortgage Application Index. In equity news, luxury homebuilder Toll Brothers Inc reported a larger-than-expected profit in fiscal 3Q, but revenues came in below forecasts as cancellations rose. Overseas, Asia moved broadly lower after Moody’s Investors Service downgraded Japan’s debt rating, while European stocks are modestly higher amid some favorable corporate news and the US economic data.

As of 8:51 a.m. ET, the September S&P 500 Index Globex future is 4 points below fair value, the Nasdaq 100 Index is 7 points below fair value, and the DJIA is 21 points below fair value. WTI crude oil is $0.56 higher at $86.00 per barrel, and the Bloomberg gold spot price is up $3.68 at $1,832.30 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.2% at 73.71.

Toll Brothers Inc. (TOL $15) reported fiscal 3Q earnings of $0.25 per share, above the $0.02 consensus estimate of analysts surveyed by Reuters, but revenues decreased 13% year-over-year (y/y) to $394 million, below the $404 million that the Street had projected. The luxury homebuilder said 3Q results indicated some “continued stabilization in the upscale housing market,” as its buyers have strong financial profiles, enabling them to secure mortgage financing. TOL posted a 2% y/y increase in 3Q net signed contracts, with the average price roughly flat, while order backlog for the period was 9% higher. However, the company’s 3Q contract cancellation rate increased from 6.2% a year ago to 7.4%, and deliveries fell 14% y/y. TOL said the recent stock market volatility, the US budget impasse and credit rating downgrade “are certainly not helping consumer confidence.”

Durable goods orders come in better than expected, while mortgage applications declined

Durable goods orders exceeded expectations, rising 4.0% month-over-month (m/m) in July, compared to the 2.0% increase that was expected by economists surveyed by Bloomberg, and June’s figure was revised from a 2.1% drop to a 1.3% decrease. Meanwhile, ex-transportation, orders also topped forecasts, surprisingly increasing 0.7% in July, compared to the expectation of a 0.5% decline, and June’s figure was adjusted favorably to a 0.6% gain, after the 0.1% rise that was originally reported. Elsewhere, orders for non-defense capital goods excluding aircraft, considered a good proxy for business spending, came in better than anticipated, falling by 1.5% in July, compared to the 1.6% decrease that was projected, after rising by a revised 0.6% in June, from the initial report of a 0.4% decline.

Elsewhere, the MBA Mortgage Application Index fell 2.4% last week, after the index that can be quite volatile on a week-to-week basis, rose by 4.1% in the previous week. The decline came as a 1.7% decrease in the Refinance Index was accompanied by a 5.7% drop in the Purchase Index to the lowest level since December 1996. Elsewhere, the average 30-year mortgage rate moved higher by 7 basis points (bp) to 4.39%.

Treasuries pared early gains and are mixed in morning trading following the data, with the yield on the 2-year note down 1 bp to 0.22%, the yield on the 10-year note 2 bps higher at 2.17%, and the 30-year bond rate declining 1 bp to 3.49%.

Europe higher as US data and corporate news offset eurozone concerns

The equity markets in Europe are higher in choppy afternoon action as some favorable reports from the corporate front and the US economic data are offsetting lingering eurozone debt concerns and another round of disappointing European economic data. Shares of BHP Billiton (BHP $81) are moving higher after the world’s largest mining company, per Bloomberg, reported record second-half profits on higher prices for copper, iron ore, and coal. Also, shares of Ageas (AGESY $2) are sharply higher after the insurer announced a share repurchase plan after posting a narrower-than-expected loss. However, Heineken (HINKY $26) is falling sharply after reporting profits that missed expectations.

The UK FTSE 100 Index is 0.7% higher, France’s CAC-40 Index is gaining 1.0%, and Germany’s DAX Index is rising 2.1%.

Asia declines following Japanese credit rating downgrade

Stocks in Asia finished broadly lower despite the solid gains in the US yesterday, with Japan’s Nikkei 225 Index giving up an early advance and finishing 1.1% lower on the heels of Moody’s Investors Service downgrading the nation’s government debt rating. Moody’s cut its rating on Japan by one notch to Aa3 from Aa2, as “several factors make it difficult for Japan to slow the growth of debt-to-GDP,” but it said Japan’s outlook was stable. Standard & Poor’s downgraded Japan’s rating in January.

Elsewhere, stocks in China finished lower, led by weakness in insurers, as China Life Insurance (LFC $42) moved sharply lower after posting disappointing earnings late yesterday, with the Shanghai Composite Index declining 0.5% and Hong Kong’s Hang Seng Index falling 2.1%. Meanwhile, South Korea’s Kospi Index declined 1.2%, led by decreases in the financial sector, while Australia’s S&P/ASX 200 Index erased early gains and finished 0.1% lower following the Japanese downgrade. Finally, Thailand’s SET Index dropped 1.0% amid the broad-based declines in the region, and as the nation’s central bank expectedly increased its benchmark interest rate by 25 basis points to 3.50%.