Morning Market Update

Economic Concerns Pressure Stocks to End 3Q

The US equity markets are under solid pressure in early action of the last trading session of a difficult 3Q for stocks, with data out of China and Europe exacerbating already skittish sentiment and fostering growing concerns of a global recession. Treasuries are higher amid the declines in the equity markets and following a report that showed US personal income unexpectedly fell, while spending rose, and core consumer prices came in cooler than anticipated. Meanwhile, traders are awaiting reports after the opening bell on consumer sentiment and regional manufacturing activity. In equity news, Micron Technology posted an unexpected loss in fiscal 4Q due to “significant declines” in DRAM chip prices. Overseas, Asia finished mostly flat, but China fell on a report that showed a third-straight monthly contraction in manufacturing, while Europe is under pressure following a steep drop in German retail sales and a hotter-than-projected read on eurozone consumer prices.

As of 8:52 a.m. ET, the December S&P 500 Index Globex future is 13 points below fair value, the Nasdaq 100 Index is 28 points below fair value, and the DJIA is 109 points below fair value. WTI crude oil is declining $1.57 to $80.57 per barrel, and gold is up $4.90 at $1,622.20 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.6% at 78.34.

Micron Technology Inc. (MU $6) reported a fiscal 4Q net loss of $0.14 per share, versus the $0.01 per share profit that analysts surveyed by Reuters had anticipated, as revenues fell 14.2% year-over-year (y/y) to $2.1 billion, roughly inline with the Street’s forecast. The chipmaker said its gross margin decreased during the quarter due primarily to “significant declines” in the average selling price of DRAM chips—processors used in PCs and video game consoles—partially offset by an increase in sales volume. However, sales volume for its NAND Flash chips—used in digital cameras and smartphones—rose 40%, partially offset by a decrease in average selling prices.

Personal income and spending mixed, consumer sentiment and manufacturing data later

Personal income declined 0.1% month-over-month (m/m) in August, compared to the 0.1% increase that economists surveyed by Bloomberg had projected, and July’s 0.3% gain was revised to a rise of 0.1%. However, personal spending rose 0.2% m/m in August, inline with expectations, while July’s 0.8% increase was revised to a 0.7% gain. The savings rate as a percentage of disposable income fell to 4.5% in August, from a downwardly revised 4.7% in July.

Also, the PCE Price Index, which is released with the income and spending data, was up 2.9% y/y in August, matching expectations, after July’s 2.8% rise was unrevised. But the core PCE Price Index, which excludes food and energy, was up 0.1% m/m, below forecasts of a 0.2% increase, and y/y, core prices were 1.6% higher, versus the 1.7% gain that was expected.

Treasuries remain higher in morning action following the data and the pressure on the equity markets, with the yield on the 2-year note down 1 bp to 0.25%, the yield on the 10-year note decreasing 7 bps to 1.93%, and the 30-year bond rate 9 bps lower at 2.97%.

Later this morning, the US economic calendar will yield the release of the final University of Michigan Consumer Sentiment Index for September, expected to remain at its preliminary reading of 57.8, but up from 55.7 in August. Also, we will get a look at manufacturing activity in the Midwest region, with the release of the Chicago Purchasing Manager Index, anticipated to decelerate from 56.5 in August to 55.0 in September, with a reading above 50 depicting expansion.

Europe under pressure as global economic concerns exacerbate sentiment

The equity markets in Europe are solidly lower in afternoon action, led by industrials and financials as resurfacing global economic concerns are adding to already injured sentiment amid the festering eurozone sovereign debt crisis, and the stock markets across the pond are poised to post their worst quarterly performance since 2008. The flare-up in economic concerns comes as an early report that showed China’s manufacturing activity contracted for a third-straight month was met with the largest decline in German retail sales in more than four years, per Bloomberg, and a hotter-than-anticipated reading on eurozone consumer prices. German retail sales fell 2.9% m/m in August, after being flat in July and compared to the 0.5% decline that economists had expected. On inflation, eurozone consumer prices were 3.0% higher y/y in September, above the 2.5% rise that was forecasted and the rate that was posted in August. However, other reports showed UK consumer confidence unexpectedly improved and French consumer spending rose more than expected m/m.

The UK FTSE 100 Index is down 1.4%, France’s CAC-40 Index is declining 2.1%, Germany’s DAX Index is falling 2.6%, and Switzerland’s Swiss Market Index is 1.4% lower.

Asia mostly flat to finish out a tough quarter

Stocks in Asia finished mostly flat in the final trading session of the quarter, which saw the major markets in the region rack up double-digit losses, as traders grappled with a plethora of data that did little to spark conviction on the buy side. Japan’s Nikkei 225 Index, South Korea’s Kospi Index, and Australia’s S&P/ASX 200 Index all finished nearly unchanged on the day, but closed out 3Q with losses north of 10%, with Korean equities leading the way, falling nearly 16% for the period. Meanwhile, Chinese stocks found some pressure on the day, with the Shanghai Composite Index declining 0.3% and the Hong Kong Hang Seng Index falling 2.3%, as sentiment was dampened by a report that confirmed Chinese manufacturing activity contacted for the third straight month in September. The HSBC Manufacturing PMI Index came in at 49.9 during the month, up slightly from last week’s preliminary reading of 49.4, matching the level seen in August and compared to the 49.3 reading posted in July. A reading below 50 depicts contraction in the manufacturing sector, and the three-month string of data is the longest contraction since 2009, per Bloomberg, as new orders and export demand declined.

In other economic news in the region, Japanese industrial production rose at a smaller rate than forecasted in August, and South Korean industrial production fell much more than expected during August. Also, Japan’s consumer prices came in hotter than anticipated in August, Japanese household spending dropped more than projected in August, and South Korea’s Leading Index rose 2.0% in August. Finally, New Zealand’s NZX 50 Index rose 1.3%, despite credit rating downgrades of the nation’s top rating at Standard & Poor’s and Fitch Ratings.