Morning Update

Gains Shed as Street Waits for Fed

Stocks are lower in early action as the Street is treading cautiously ahead of the Federal Reserve's monetary policy announcement, due out this afternoon at the conclusion of its two day meeting. Traders seem to be a little bit more uncertain about what the Fed will divulge as it has already deployed all of its fed funds interest rate easing ammunition and has launched more unconventional methods to stem the financial crisis. In equity news, IBM is reported to be in talks to buy Sun Microsystems for at least $6.5 billion, Bank of America's CEO offered upbeat comments, while General Mills missed EPS forecasts but raised its fiscal year guidance. Treasuries are mixed as traders wait for the Fed announcement, and following a larger-than-expected rise in inflation at the consumer level, a jump in mortgage applications, and a narrowed current account balance. Overseas, world markets are mixed.

As of 8:47 a.m. ET, the June S&P 500 Index Globex futures contract is 5 points below fair value, the Nasdaq 100 Index is 7 points below fair value, and the DJIA is 63 points below fair value. Crude oil is down $0.33 to $48.83 per barrel, and gold is down $10.70 at $906.10.

The Wall Street Journal reported that Dow member IBM (IBM $93) is in talks to buy Sun Microsystems (JAVA $5) for at least $6.5 billion-or about a 100% premium over JAVA's closing price on Tuesday. The report, which cited people familiar with the matter, said the deal could bolster IBM's computer server products versus its rivals. Both firms did not comment.

Bank of America's (BAC $6 ¹) CEO Ken Lewis told the Charlotte Observer that the company could pay back the $45 billion TARP money by late this year or early next year depending on the economy. He added that he expects the bank to be profitable in 2009, absent an "unexpected meltdown," and the Dow component could pay back the TARP money now if it were not maintaining higher-than-normal capital cushion amid the "fragile" state of the financial system.

General Mills (GIS $54) reported fiscal 3Q EPS ex-items of $0.79, below the Reuters estimate of $0.88, as revenues grew 4% to $3.54 billion, just shy of analysts' estimate. The company said the results reflect "significantly higher input costs," but it expects 4Q input cost inflation will be well below its estimated inflation rate. As a result the company said it expects to finish the year on a strong note as it raised its fiscal year EPS ex-items guidance.

Consumer inflation rises, mortgage apps jump

After a 3.3% gain in energy prices, the Consumer Price Index rose 0.4% in February, above the Bloomberg forecast of 0.3%. The core rate, which strips out food and energy, was up 0.2%, topping the forecast of 0.1%. Year-over-year (y/y), core inflation rose from 1.7% to 1.8%. The headline rate increased from 0.0% to 0.2%. Treasuries are mixed following the report

The US MBA Mortgage Application Index rose 21.2% to 876.9 for the week ending March 13, on top of the previous week's 11.3% increase. The Refinance Index advanced 29.6% to 4497.6, and the Purchase Index also rose, gaining 1.5% to 257.1. The Mortgage Bankers Association said the jump in mortgage applications was fueled by a spike in demand for refinancing as the 30-year fixed-rate mortgages, excluding fees, fell to 4.89%, tying the record low rate since the weekly MBA survey began in 1990.

The housing data may provide some guarded optimism toward some relief to the battered market as home affordability has increased through a combination of falling prices and lower mortgage rates, and sales of existing homes have turned up in some markets where the steepest declines in prices have occurred. However, inventories of homes on the market remain elevated and will have to be chewed through before the housing market can recover, and the combination of a weakening job market and future declines in home prices implied by high inventories have consumers paralyzed to make long-term commitments.

Elsewhere, the current account deficit narrowed from a downwardly revised $181.3 billion in 3Q to $132.8 billion in 4Q, below Bloomberg estimate of $137.1 billion.

Fed announcement due out in afternoon action

The Federal Open Market Committee (FOMC) will conclude its two day monetary policy later today, and will announce the FOMC rate decision and accompanying policy statement at about 2:15 p.m. ET. With the fed funds rate already targeted at a rate near zero, no action is expected on that front.

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 relinquishes gains after UK employment data dampens enthusiasm

Stocks in Europe were higher in afternoon action on the continued run in financials but gains were relinquished following a disappointing reading of the labor market in the United Kingdom, and shares are slightly lower. UK unemployment increased at the fastest pace since 1971, according to Bloomberg. The Office for National Statistics said in a report today that jobless claims rose 138,400 to 1.39 million in February, much more than the consensus estimate that called for an increase of 84,800. Trading in Europe is also a bit tentative ahead of the US Federal Reserve's monetary policy announcement later today. Helping stoke optimism in the financials, Italy's largest bank, UniCredit (UNCFF $1) is up over 10% after it reported net profits above analysts' expectations and said it is seeking up to 4 billion euros from Austria, Italy, and other investors aimed at boosting its tier 1 capital ratio-a key measure of financial strength.

Asian shares advance as BoJ stimulus enhanced

Stocks in Asia were in the green for the fourth session in a row as optimism from the rally resumption on Wall Street and continued upbeat sentiment toward financials helped boost the major indices. The Bank of Japan provided the bulk of the boost for the banking sector after it increased its purchase of government bonds from 1.4 trillion yen to 1.8 trillion yen ($18.3 billion) each month, in addition to its announcement yesterday that it plans to purchase of up to 1 trillion yen ($10 billion) of subordinated loans to banks. On the equity front, shares of China Huiyuan Juice Group (CYUNF $1) tumbled almost 20% after the Chinese government rejected Coca-Cola's (KO $41) more than $2.0 billion bid for the beverage company, citing a negative impact the acquisition would have on the country's drinks market. The Shanghai Composite Index managed to eke out a gain despite the pressure on the Chinese beverage firm. Also, Sony Corp (SNE $20) announced after the close of trading that it will cut its dividend by 15% to $0.43 per share, reflecting the "the deterioration of the global business environment."