Morning Market Update

Stocks Slip Slightly Despite Favorable Jobs Read

After posting a late-day rally on eased concerns about the European banking sector, US stocks are under modest pressure in early trading despite the ADP Employment Change Report showing more private sector jobs were added in September. Also, the equity markets are slipping in morning trading despite a rebound in European equity markets on yesterday’s late-day reports that EU finance ministers were examining ways of recapitalizing banks. Treasuries are lower following the employment data, showing little reaction to a decrease in mortgage applications, and ahead of the release of the ISM Non-Manufacturing Index after the opening bell. In equity news, Costco Wholesale Corp posted mixed quarterly results, while its same-store sales rose, and Yum Brands Inc reported inline earnings but its revenues exceeded expectations. Elsewhere overseas, Asian stocks finished mixed in light trading as Chinese markets were closed for holidays.

As of 8:44 a.m. ET, the December S&P 500 Index Globex future is 1 point below fair value, the Nasdaq 100 Index is 7 points below fair value, and the DJIA is 31 points below fair value. WTI crude oil is increasing $2.03 to $77.70 per barrel, and the Bloomberg gold spot price is up $1.72 at $1,625.55 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.2% at 79.09. 

Costco Wholesale Corp . (COST $82) reported fiscal 4Q earnings of $1.08 per share, two cents below the consensus estimate of analysts surveyed by Reuters, but revenues grew 17% year-over-year (y/y) to $28.2 billion, compared to the $27.8 billion that the Street had forecasted. The retailer said its 4Q same-store sales—sales at stores open at least a year—rose 12% y/y, including inflation in gasoline prices and strengthening foreign currencies, while same-store sales for September were also 12% higher. COST also announced that it will increase annual membership fees by $5.

Yum Brands Inc. (YUM $49) posted 3Q EPS ex-items of $0.83, inline with the Street’s forecast, as revenues rose 14% y/y to $3.3 billion, above the $3.1 billion that analysts had anticipated. The parent of Taco Bell, Pizza Hut, and KFC said its same-store sales during the quarter grew 19% y/y in China and 3% for the rest of its international segment, while US same-store sales fell 3%. YUM said as a result of strong performance in China and other emerging markets, it reaffirmed its full-year EPS guidance.

ADP jobs data stronger than expected, mortgage apps fall, service sector data to come

The ADP Employment Change Report showed private sector payrolls rose by 91,000 jobs in September, versus the forecast of economists surveyed by Bloomberg, which called for a 75,000 increase, and August’s 91,000 job gain was revised to a rise of 89,000 jobs. The release, which does not include government hiring and firing, comes ahead of Friday’s broader nonfarm payrolls report, where economists expect an increase of 60,000 jobs in September, after posting a disappointingly flat reading in August. Excluding government hiring, September private sector payrolls are expected to increase 90,000, after expanding by 17,000 in August. The unemployment rate is forecasted to remain at 9.1% and average hourly earnings are anticipated to rise 0.2% month-over-month (m/m), after declining 0.1% in August.

Elsewhere, the MBA Mortgage Application Index fell 4.3% last week, after the index that can be quite volatile on a week-to-week basis, rose by 9.3% in the previous week. The decrease came as a 5.2% fall in the Refinance Index was accompanied by a 0.8% decline in the Purchase Index. Meanwhile, the decline in mortgage activity came despite a drop in the average 30-year mortgage rate by 6 basis points (bps) to 4.18%.

Treasuries are mostly lower in morning trading following the employment data, with the yield on the 2-year note flat at 0.25%, while the yields on the 10-year note and the 30-year bond are gaining 3 bps to 1.85% and 2.84%, respectively.

Later this morning, we will get the release of the ISM Non-Manufacturing Index, forecasted to decelerate from 53.3 in August to 52.8 for September, with a reading above 50 depicting expansion in service sector activity.

Europe gaining ground on banking optimism

The equity markets in Europe are nicely higher in afternoon trading amid eased concerns about the region’s banking sector on the heels of a report from the Financial Times yesterday that EU finance ministers were examining ways of recapitalizing banks. Also, shares of Dexia SA (DXBGF $2) are rebounding from yesterday’s sharp drop that came on concerns about its exposure to Greek debt and “structural problems” at the lender. Dexia is receiving a boost from a report that it would set toxic assets into a bad bank backed by guarantees from the French and Belgian governments. Meanwhile, shares of European Aeronautic Defence and Space Co. (EADSY $27) are solidly higher to help the rise in stocks after a company executive of the parent of planemaker Airbus said the company will have a “very good” 2011, per Bloomberg. The advance across the pond comes despite a downgrade of Italy’s credit rating by Moody’s Investors Service, which said it saw a “material increase” in funding risks for eurozone countries with high levels of debt, per Reuters.

Elsewhere on the economic front, the eurozone PMI Composite Index, which includes data from the manufacturing and service sectors, was revised slightly lower from 49.2 in the preliminary reading to 49.1 for September, as services data from France and Germany were adjusted lower. Also, UK 2Q GDP was revised lower, from a 0.2% quarter-over-quarter (q/q) pace of output to a 0.1% rate of growth, led by larger-than-expected declines in the nation’s private consumption and exports. Finally, eurozone retail sales fell 0.3% m/m in August, inline with expectations, after rising 0.2% in July.

The UK FTSE 100 Index is gaining 2.2%, France’s CAC-40 Index is rising 2.6%, Germany’s DAX Index is advancing 3.1%, Switzerland’s Swiss Market Index is trading 0.5% higher, and Greece’s Athex Composite Index is increasing 1.2%.

Asia mixed following late-day US resiliency

Stocks in Asia finished mixed following the late-day rally in the US yesterday amid reports out of Europe that suggested support for the region’s banking sector is being discussed. However, eurozone debt concerns lingered and Japan’s Nikkei 225 Index fell 0.9%, exacerbated by Moody’s downgrade of Italy’s credit rating and a solid decline in shares of Fast Retailing (FRCOY $18) after it reported disappointing same-store sales results. Elsewhere, South Korea’s Kospi Index dropped 2.3% as growing economic growth concerns amplified the aforementioned eurozone debt uneasiness, weighing on construction and automaker stocks. However, Australia’s S&P/ASX 200 Index gained 1.4% led by resource-related issues and a report that showed that nation’s retail sales rose 0.6% m/m in August, compared to the 0.2% rise that economists had expected. Trading remained lighter than usual this week as the Chinese markets were closed for holidays.