Evening Update

Fed Offers No Surprises

Stocks were mixed, with the Dow finishing slightly in negative territory and the S&P 500 and Nasdaq posting only minor gains, following the Federal Reserve’s monetary policy announcement, in which it kept its target for the fed funds rate unchanged, as expected, while slightly upgrading its outlook on the labor market and reiterating the end date of its quantitative easing measures. The markets started the day with modest gains that came from a tame reading of inflation at the consumer level, advances in housing starts and building permits, and optimism in the global financial sector on a report that banking regulators could delay the implementation of stricter capital requirements. In equity news, the FTC filed suit against Intel for anticompetitive practices, while the European Commission settled its lawsuit against Microsoft. Elsewhere, Honeywell provided a mixed 2010 outlook, Adobe Systems topped the Street’s EPS and revenue forecasts, Broadcom raised 4Q revenue guidance, while the Abu Dhabi Investment Authority announced that it is looking to abandon an investment deal with Citigroup. Treasuries finished mixed.

The Dow Jones Industrial Average fell 11 points (0.1%) to close at 10,441, the S&P 500 Index added 1 point (0.1%) to 1,109, while the Nasdaq Composite gained 6 points (0.3%) to 2,207. In moderate volume, 1.2 billion shares were traded on the NYSE and 2.0 billion shares were traded on the Nasdaq. Crude oil was $1.97 higher at $72.66 per barrel, wholesale gasoline was unchanged at $1.87 per gallon, and the Bloomberg gold spot price increased $12.18 to $1,137.38 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was flat at 76.95.

Dow member Intel Corp. (INTC $19) was lower after the Federal Trade Commission announced that it is suing the chipmaker, charging that INTC has “illegally used its dominant market position for a decade to stifle competition and strengthen its monopoly.” The FTC’s complaint charges that the company carried out its anticompetitive campaign using threats and rewards aimed at the world’s largest computer makers to coerce them not to buy rival computer chips. The FTC said the Commission’s action seeks to remedy the damage that INTC has done to competition, innovation, and, ultimately, the American consumer.” An INTC spokesman said it has received the lawsuit and is evaluating it and commented that the case “could have and should have been settled.”

In related Dow member and tech legality news, the European Commission announced that it settled its remaining antitrust issues with Microsoft (MSFT $30) without levying further fines on the company. The EC agreed to stop pursuing its case against MSFT, which alleged the company was illegally abusing its dominance in the internet browser markets, in exchange for MSFT’s commitment to allow consumers improved access to rival internet browsers alongside its Internet Explorer browser in the company’s Windows operating system. MSFT’s general council said the EC’s decision is a “final resolution of several longstanding competition law issues in Europe.” Shares of MSFT were modestly higher.

Honeywell International (HON $40) reaffirmed its 2009 guidance and issued an outlook for 2010 that disappointed some analysts. The diversified tech and manufacturing company said it expects revenues for next year to come in a range of $31.3-32.2 billion and EPS between $2.20-2.40, compared to the consensus of Wall Street analysts, which called for revenues of $31.6 billion and earnings of $2.50 per share. The company’s CEO said, “We are seeing signs of improvement in the global economy and stabilization in a number of our end markets.” HON added that excluding pension expenses, EPS will be between $3.00-3.20. Shares were lower.

Adobe Systems (ADBE $38) reported fiscal 4Q EPS ex-items of $0.39, two pennies above the consensus of Wall Street analysts, with revenues growing 8.6% versus 3Q to $757.3 million, above the $747 million that the Street expected, but down 17% versus the same period last year. The software company said it experienced an improvement in customer demand for its products during the quarter, and the company forecasted revenues for 1Q that came in above analysts’ forecasts. ADBE also said it expects 1Q EPS ex-items to be between $0.34-0.39, compared to the Street’s expectations of $0.37. Shares were higher.

Broadcom Corp (BRCM $32) was nicely higher after increasing its 4Q revenue forecast from $1.25 billion to an expected sequential increase of 5% to $1.32 billion, compared to the Street’s forecast of $1.26 billion. The semiconductor firm said the increased guidance reflects stronger-than-expected demand for products in its broadband and enterprise networking markets versus its initial expectations entering the quarter. BRCM also boosted its gross margin forecast from being up between 20-50 basis points sequentially, to now rising 100 basis points from 3Q.

Abu Dhabi Investment Authority, the Middle East’s largest sovereign wealth fund also known as ADIA, announced that it is seeking to terminate a deal with Citigroup (C $3) for ADIA to purchase $7.5 billion of Citigroup stock, which according to the agreement would result in a severe loss for the fund. ADIA is seeking more than $4 billion in damages if the deal is upheld, alleging “fraudulent misrepresentations” of the original agreement. ADIA agreed in 2007 to invest in Citigroup in exchange for equity units that could be converted into common stock at a price of more than $30 per share beginning in 2010. Citigroup said it will “vigorously” defend itself and a spokesperson at ADIA said, “It is the policy of ADIA to pursue its legal rights fully.”

Separately, Citigroup, which is looking to raise $20.5 billion in order to exit the government’s Troubled Asset Relief Program (TARP), is expected to price its stock offering tonight, and forecasts have suggested that shares will fetch between $3.30-3.35 per share. Citigroup traded lower. The pricing will follow Wells Fargo’s (WFC $26) stock offering that fetched over $12 billon yesterday—versus expectations of raising $10.4 billion—and Bank of America’s (BAC $15 ¹) more than $19 billion offering a couple weeks ago.

Fed meeting produces no changes and no surprises

concluded its two-day meeting mid-day today and, as widely expected, kept its fed funds target at a range of 0.00-0.25% and maintained the language of an “extended period” expected for the “exceptionally low” level of the federal funds rate, citing economic conditions and the trio of “low rates of resource utilization (the unemployment rate), subdued inflation trends and stable inflation expectations.”

The Fed noted that economic activity has continued to pick up and that the deterioration in the labor market is abating. The Fed observed some improvement in the housing sector and that consumer spending is expanding at a moderate rate, though households remain constrained. Businesses are still cutting back on investment and the Fed noted that they “remain reluctant to add to payrolls,” while continuing to make progress bringing inventories into better alignment with sales.

With regard to the program to purchase mortgage-backed securities (MBS), there was no change in the amount of the program of $1.25 trillion in agency mortgage-backed securities and “about $175 billion” in agency debt or the date of expected completion of the program in the “first quarter of 2010.” The Fed said that it would continue to evaluate the timing and overall amounts of purchases in light of the evolving economic outlook and conditions in financial markets. Additionally, the committee said it anticipates that most of the Fed’s special liquidity facilities will expire on February 1, 2010, as previously announced on June 25, 2009. The Fed said it is prepared to modify these plans to support financial stability and economic growth.

Price increases not showing up at consumer level, housing starts higher than expected

Treasuries pared modest gains following the Fed’s statement to end the day mixed with the short-end of the yield curve showing a modest gain. The yield on the 2-year note fell 2 bps to 0.84%, the yield on the 10-year note gained 1 bp at 3.60%, while the yield on the 30-year bond was 1 bp higher at 4.53%.

Housing starts for November were reported, and the release showed starts rose 8.9% month-over-month (m/m) to an annual rate of 574,000 units, inline with expectations, from a downwardly revised 527,000 last month. Meanwhile, building permits also increased, by 6.0% m/m to an annual rate of 584,000 from last month’s modest downward revision to 551,000. The expectation was for a gain to 570,000 units. Within the report, both single-family and multi-family bounced back in November, likely due to a combination of the extension of the buyer tax credit in November, as well as much better weather.

The Consumer Price Index showed prices at the consumer level rose 0.4% in November, matching the forecast of economists surveyed by Bloomberg. The core rate, which strips out food and energy, came in flat for November, versus the 0.1% increase that the Street had expected. While food and energy is the smallest component in the CPI basket, it tends to be the most volatile and often explains a majority of changes in the index at the headline level. The headline level was boosted by a 4.1% increase in the energy index. On a year-over-year (y/y) basis, consumer prices were up 1.8% in November, as expected, and the core CPI was 1.7% higher year-over-year, just below expectations of 1.8%. The y/y increase in the core is the first positive change since December 2008.

Year-over-year comparisons to the $140 per barrel level of crude have been lapsed and headline inflation numbers are likely to start ticking up. However, prices at the core level are unlikely to get overheated near-term as businesses have been unable to push through price increases to consumers, as consumers are in no mood to accept higher prices – they will simply postpone purchases in a time of high unemployment, deleveraging, and increased savings. In addition to excess slack in factory utilization, there is an overhang of supply of employees and housing – which will likely keep a lid on wages and housing costs.

In other economic news, the US MBA Mortgage Application Index, ticked 0.3% higher last week, after the index, which can be quite volatile on a week-to-week basis, gained 8.5% in the previous week. The increase came despite a 4 basis-point gain in the average 30-year mortgage rate to 4.92% versus the previous week, as the Refinance Index rose 0.9%, to offset a modest decline in the Purchase Index, which dipped 0.1%. The average 30-year mortgage rate remains above the record low of 4.61% that was reached at the end of March.

Meanwhile, crude oil prices moved to session highs well above the unchanged mark following the US Energy Information Administration’s (EIA) report on inventories in the energy sector. The EIA announced that crude oil inventories fell by 3.7 million barrels, a much larger drop than the drop of 1.8 million barrels that Reuters had forecasted. Moreover, distillate stockpiles fell by 2.9 million barrels, also larger than the drop of 600,000 barrels that was expected, while gasoline inventories rose by 900,000 barrels, but fell short of the 1.3 million build that was anticipated.

Tomorrow’s economic calendar brings weekly initial jobless claims, expected to rise to 518,000, a 0.7% forecasted jump in the Conference Board’s November Index of Leading Economic Indicators, and the Philadelphia Fed’s Business Activity Index, which is anticipated to fall to 16.0 in December.

Economic data and regulation delay lift sentiment

Purchasing managers indexes (PMI), depicting business conditions in the manufacturing and service sectors, in both the eurozone and Germany—Europe’s largest economy—rose by larger amounts than economists surveyed by Bloomberg had expected, headlining the slew of economic reports in Europe to lift sentiment across the pond. Other reports included PMIs for the manufacturing and service sectors in France, which both came in below economists’ expectations, eurozone consumer prices rose at a smaller amount than forecast, and UK jobless claims unexpectedly declined.

Elsewhere, reports that global banking regulators will delay the enforcement of stricter capital rules that were drafted by the Basel Committee on Banking Supervision, comprised of central bankers and regulators from about 30 countries added to the positive mood. A spokesperson at the Financial Services Agency said no agreement has been made and talks are continuing, per Bloomberg news, while the Basel Committee has not commented on the reports.

Second blow to Greece’s debt

Standard & Poor’s (S&P) downgraded the sovereign debt of the nation of Greece by one notch to BBB+ from A-, citing, that “the measures the Greek authorities have recently announced to reduce the high fiscal deficit are unlikely, on their own, to lead to a sustainable reduction in the public debt burden.” S&P also said its outlook remains at negative as the government’s efforts for reform face a number of headwinds that would likely take a number of years to overcome. The move follows Fitch Rating’s downgrade of country last week.