Morning Market Update

Markets Mixed Following Data and German Vote

After disappointingly giving up early gains and finishing lower yesterday, most US stocks are rebounding somewhat in late-morning action, supported by some upbeat US economic data and a key vote in Germany to approve expanding the capabilities of the eurozone’s bailout mechanism. However, some weakness in semiconductor stocks is hamstringing the Nasdaq Composite Index as Advanced Micro Devices Inc lowered its 3Q revenue and gross margin outlooks on manufacturing issues in Germany and smaller-than-forecasted supply of its chips. Treasuries are mixed amid the gains in stocks and following reports that showed jobless claims fell much more than expected and the final read on 2Q GDP was revised to a higher rate of growth than forecasted, while pending home sales declined by a smaller rate than anticipated. Meanwhile, Federal Reserve Chairman Ben Bernanke noted that further monetary policy action could be needed if inflation and/or expectations fall. Crude oil is trading higher and gold is modestly to the upside, while the US dollar is under some pressure. Overseas, Asia finished mixed ahead of the German vote, which is helping European stocks trade mostly higher, along with the aforementioned US data.

At 11:00 a.m. ET, the Dow Jones Industrial Average is rising 1.3% and the S&P 500 Index is gaining 0.8%, while the Nasdaq Composite is declining 0.2%. WTI crude oil is advancing $1.30 at $82.51 per barrel, wholesale gasoline is gaining $0.01 to $2.59 per gallon, and the Bloomberg gold spot price is rising $1.64 to $1,610.80 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.6% at 77.67.

Advanced Micro Devices Inc. (AMD $5) lowered its 3Q revenue forecast from a projected increase of 10% quarter-over-quarter (q/q), plus or minus 2%, to an increase of between 4-6%, and reduced its 3Q gross margin to a range of 44-45%, from a previous estimate of about 47%. AMD posted 2Q revenues of $1.57 billion, and analysts surveyed by Reuters were expecting the chipmaker to report revenues of $1.71 billion in 3Q.

The company said its updated revenue outlook is primarily due to yield performance of its 32 nanometer (nm) chips, manufacturing issues in its facility in Dresden, Germany, and supply of its 45nm chips that was less than expected. Also, its lowered gross margin outlook was attributed to lower-than-expected supply of its Llano chips and associated products with higher selling prices, and shipments of its next-generation server processor that occurred later in 3Q than originally expected. AMD is trading sharply lower.

Jobless claims fall, 2Q GDP revised higher, pending home sales drop less than expected

Weekly initial jobless claims fell by 37,000 to 391,000, following a 5,000 upward revision to last week's figure to 428,000, and well below the 420,000 level that economists surveyed by Bloomberg had expected. Also, the four-week moving average, considered a smoother look at the trend in claims, dropped by 5,250 to 417,000, and continuing claims declined by 20,000 to 3,729,000, slightly below the forecast of economists, which called for a 3,730,000 reading. However, a Labor Department official did note that the sizeable drop in initial claims came amid a “slight mistiming” in the seasonal factors used to adjust the figures, per Bloomberg.

Meanwhile, the final look at 2Q Gross Domestic Product, the broadest measure of economic output, showed a larger-than-forecasted upward adjustment to the rate of expansion reported in the first revision as q/q annualized growth was revised from a rise of 1.0%, to a pace of 1.3%. This compared to the modest 0.4% increase in 1Q, and the 1.2% growth that was forecasted by economists. Personal consumption was unexpectedly revised higher to a gain of 0.7%, helping the favorable read on output, from the previous 0.4% increase that economists expected it to remain, but still down from the 2.1% that was posted in 1Q.

The GDP Price Index was unexpectedly adjusted upward to a rise of 2.5%, compared to the unrevised 2.4% increase that economists anticipated, and the core PCE Index, which excludes food and energy, was also surprisingly revised higher to a gain of 2.3%, compared to the unchanged increase of 2.2% that was expected.

Elsewhere, pending home sales fell slightly less than expected in August, declining 1.2% month-over-month (m/m), compared to the 2.0% decrease that economists had projected, and July’s 1.3% drop was unadjusted. However, compared to last year, sales were up 13.1% in August, after increasing 10.1% in July, compared to the 6.4% gain that was forecasted. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which rose more than anticipated in August.

Finally, Federal Reserve Chairman Ben Bernanke delivered a speech in Cleveland yesterday and noted during the Q&A session that “If inflation itself falls too low or inflation expectations fall too low, that would be something we’d have to respond to because we don’t want deflation.” Also, the Fed Chief added that the high unemployment rate, which has been close to 10% for a number of years now was “a national crisis,” needing attention from the White House and Congress. Last week, the Fed characterized the downside risks to its economic outlook as “significant” in their latest monetary policy statement, while announcing that it will purchase longer-term Treasuries and sell the same amount in shorter-term Treasury securities, known as “Operation Twist.” The Fed’s action is an attempt to further reduce borrowing costs and push money via lending out into the real economy.

Treasuries are mixed in late-morning action following the employment and GDP data, with the yield on the 2-year note up 1 bp to 0.25% and the yield on the 10-year note 3 bps higher at 2.01%, while the 30-year bond rate is declining 2 bps to 3.05%.

Europe supported by positive German vote and US data, but Greek concerns remain

The equity markets in Europe have pared early losses and are mostly higher in choppy late-day action, following a key vote in German in favor of the expansion of the eurozone’s bailout fund and the favorable US data. However, gains are being limited by some cautious trading as Greece is set to meet with the troika of the International Monetary Fund, European Commission and the European Central Bank (ECB) to discuss its progress on its deficit reduction efforts. Greece is set to review its austerity measures and if it is deemed that the troubled nation is making sufficient progress on reducing its deficit, it will receive the next installment of bailout aid to help it cover its debt obligations that come due next month as Greece is running low on cash.

Meanwhile, Germany’s Parliament approved the ratification of the expansion of the scope of the European Financial Stability Facility (EFSF), as expected, helping ease concerns about debt contagion in region, but more eurozone members still have to vote in the coming weeks to fully ratify the EFSF. The ratification of the EFSF is needed to allow the fund to purchase bonds in the secondary market, possibly helping stabilize Europe’s financial markets, and lend support the region’s banking sector. There have been proposals made by EU officials recently regarding leveraging the EFSF. Elsewhere, the German vote and the US data are overshadowing Italy’s bond auction today, which saw borrowing costs rise and the capital raised come in smaller than the maximum target.

In economic news, UK home prices unexpectedly rose m/m in September and the nation’s mortgage approvals rose more than expected for August, while the German unemployment rate unexpectedly fell in September. Elsewhere, eurozone consumer confidence and a read on economic sentiment came in below forecasts for September.

The UK FTSE 100 Index is down 1.0%, France’s CAC-40 Index is gaining 0.2%, Germany’s DAX Index is rising 0.3%, Italy’s FTSE MIB Index is 0.9% higher, Switzerland’s Swiss Market Index is advancing 0.6%, and Greece’s Athex Composite Index is declining 0.9%.

Asia mixed ahead of German vote

Stocks in Asia finished mixed following yesterday’s declines in Europe and the US in cautious trading ahead of a key eurozone bailout vote in Germany, while lingering global economic concerns weighed on sentiment. Australia’s S&P/ASX 200 Index fell 0.8% and China’s Shanghai Composite Index dropped 1.1% on the aforementioned economic uneasiness, while South Korea’s Kospi Index rallied 2.7%, led by strong gains in technology and financials. Elsewhere, Japanese stocks reversed early losses in late-day action, supported by some resiliency in banking issues, and the Nikkei 225 Index gained 1.0%. The advance in Japan came even as a report showed the nation’s retail sales fell much more than economists had forecasted for August. However, volume was lighter than usual as markets in Hong Kong were closed due to Typhoon Nesat.