Morning Update

Housing Data Drives Early Enthusiasm

Stocks have overcome early pressure and are looking higher after a better-than-expected report on housing starts and building permits is helping reinstate the relative optimism that vanished in late-day action yesterday to snap the four-day winning streak on Wall Street. The relatively upbeat housing data is helping offset the announcement from Dow component Alcoa that it slashed its dividend and announced a common stock and convertible notes offering, expected to bring in proceeds of $1.1 billion. Treasuries are mixed after the housing data and a subdued wholesale inflation report, while traders await the Fed's monetary policy announcement tomorrow as it begins its meeting today. Overseas, markets are mixed as central bank news boosted Asia, while Europe's five-session wining streak is in jeopardy.

As of 8:47 a.m. ET, the June S&P 500 Index Globex futures contract is 4 points above fair value, the Nasdaq 100 Index is 8 points above fair value, and the DJIA is 26 points above fair value. Crude oil is down $0.25 to $47.10 per barrel, and gold is down $7.40 at $914.60.

Dow member Alcoa (AA $46) announced a series of operational and financial actions to significantly improve the company's cost structure and liquidity. Included in the actions, the aluminum producer reduced its quarterly common stock dividend from $0.17 per share to $0.03 per share-saving $400 million annually-while launching a public offering of common stock and convertible notes planned to yield proceeds of approximately $1.1 billion. AA said by taking quick and decisive actions, it has been able to stay ahead of the evolving economic crisis, and today's actions better prepare it to manage through a prolonged downturn and position the company for the future. The company also announced that by the second half of 2009, it expects a 50% reduction of capital spending to a sustaining level of $850 million annually.

Readings of housing horizon improves, wholesale inflation remains subdued

Kicking off a busy economic day, housing starts and building permits came in better than expected. Starts in February rose 22.2% to an annual rate of 583,000, well above the Bloomberg estimate of 450,000. Building permits also stoked some relative optimism for homebuilders as the more forward-looking indicator of homebuilding gained 3.0% to an annual rate of 547,000, above the forecast of 500,000. Additionally, January's figures for both starts and permits were revised higher.

The housing data added some hope for the struggling housing market and there are some very modest signs of an uptick in activity in the most beaten-down housing markets. However, there are still multiple headwinds posing major challenges for any sustainable stabilization.

The Producer Price Index increased 0.1% in February, below an expected increase of 0.4%, according to Bloomberg. The core rate, which removes food and energy, gained 0.2%, slightly above the estimate of 0.1%. Year-over-year (y/y), the headline rate is down 1.3%, and the core rate edged down from 4.2% y/y to 4.0%. Treasuries are mixed and showed little reaction to the housing and inflation data.

The Federal Open Market Committee (FOMC) will begin its two day monetary policy meeting today, concluding tomorrow, with the FOMC rate decision and accompanying policy statement. With the fed funds rate already targeted at a rate near zero, no action is expected on the targeted interest rate.

However, the Fed will likely update the market with regard to the unconventional measures it is taking to stabilize the economy and credit markets. Of particular interest will be any details regarding the status of the Term Asset-backed Securities Loan Facility (TALF), which is expected to be put into action soon, but has been undergoing start-up issues of structure and operation. By committing up to $1 trillion to this program, the Fed is hoping to bring down interest rates and increase the availability of funds for auto, student and consumer loans-which should aid spending and the process of renormalizing credit markets. While this is another step in the right direction, we're watching to see how effective it is in practice. There's some concern that the plan may be too restrictive to have a mass impact.

Additionally, investors will be monitoring progress on the Fed's purchases of mortgage-backed securities and any indications of moving forward with the idea of buying Treasuries. At the last FOMC meeting held in January, Jeffery Lacker expressed dissent with using targeted credit programs, preferring to expand the monetary base by purchasing Treasuries.

Europe under pressure

Stocks in Europe are under pressure in afternoon action and are poised to finish in the red for the first time in six sessions as technology shares are under pressure, while basic materials and oil and gas issues are leading the decline across the pond. Shares of Royal Dutch Shell (RDS $46) are under some pressure after Europe's largest oil company by market cap reported its reserve replacement ratio, including oil sands, fell from 124% the previous year to 95% in 2008. The company's chief executive said these are testing times in the oil and gas industry and while short-term measures are important, it keeps its long-term perspective, and continues to believe that energy needs over the long term provide a positive context for its investments programs today.

However, a good portion of early losses were recovered after a report on investor confidence in Germany-Europe's largest economy-improved for a fifth consecutive month. The ZEW Economic Sentiment Survey rose from -5.8 in February to -3.5 in March, unexpectedly improving as the Bloomberg consensus called for an -8.0 reading.

Financials gain to help Asian advance

Stocks in Asia were higher again as another solid run in financials led the way amid optimism central banks in the region stand ready to intervene to help stem the banking crisis and help support the global economy. Shares in Japan posted solid gains as the Nikkei 225 Index and the broader Topix Index rose 3.2% and 2.6%, respectively, as the Bank of Japan began its two-day policy meeting and speculation grew that the BoJ was set to announce more stimulus efforts. The Japanese central bank made a late-day announcement that it was considering the purchase of up to 1 trillion yen ($10 billion) of subordinated loans to banks. The BoJ said the action is aimed at ensuring the smooth functioning of financial intermediation and the stability of the financial system, by enabling Japan's banks to maintain sufficient capital bases even in severe financial and economic environments.

Elsewhere, Australian shares gained over 3% after the minutes from the central bank's last monetary policy meeting were it left its key lending rate unchanged at 3.25% in early March. The report injected some optimism that the Australian government might cut rates in the near term after it said the decision to leave the cash rate unchanged this month "would leave adequate flexibility for policy at future meetings."