Morning Update

Wholesale Inflation Data Dampens Sentiment

Already under pressure as the Federal Reserve is set to begin its two-day monetary policy meeting later today, stocks have extended losses following an unexpected jump in prices at the wholesale level. Treasuries moved lower and the dollar gained ground following the inflation data. Moreover, sentiment was exacerbated by a separate report, which showed growth in New York manufacturing activity slowed much more than expected. The economic data is overshadowing the announcement from Wells Fargo that it plans to payback US taxpayers the money it borrowed from the Treasury's Troubled Asset Relief Program (TARP). In other equity news, Best Buy posted better-than-expected 3Q earnings, and Capital One Financial reported some key credit card metrics deteriorated. Overseas, markets are lower as Europe is being pressured by the third-straight monthly drop in German investor confidence.

As of 8:51 a.m. ET, the March S&P 500 Index Globex future is 6 points below fair value, the DJIA is 55 points below fair value, while the Nasdaq 100 Index is 9 points below fair value. Crude oil is higher by $0.54 at $70.05 per barrel, and the Bloomberg gold spot price is down $12.25 at $1,114.45 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-is up 0.9% at 77.00.

Wells Fargo & Co. (WFC $25) is the latest major financial firm to announce intentions to exit the Treasury's Troubled Asset Relief Program (TARP), reporting that it will redeem the $25 billion in preferred stock issued to the government, upon successful completion of a $10.4 billion common stock offering. WFC added that it will also raise $1.35 billion through the issuance of common stock to the company's benefit plans in lieu of a portion of 2009 incentive cash and other compensation to certain WFC team members. The company said it also intends to increase equity by $1.5 billion through asset sales and that repaying the TARP will eliminate $1.25 billion in annual preferred stock dividends, and will be "slightly accretive" to EPS in 2010.

Best Buy (BBY $45) reported 3Q EPS of $0.53, ten cents above the consensus estimate of Wall Street analysts, with revenues increasing 4.5% versus last year to $12.02 billion, slightly above the $11.98 billion that the Street forecasted. BBY's same-store sales for the quarter increased by 1.7%, led by a 4.6% increase in sales from its domestic segment on increased traffic and an improvement in the average ticket, as a result of growth in sales of notebook computers, flat panel TVs, mobile phones, and appliances, partially offset by decreases in gaming, movies and music. BBY raised its full-year revenue and EPS guidance, but shares are under pressure in morning action.

Capital One Financial (COF $41) is under pressure after the consumer lender reported that its US credit-card net charge-off rate-loans the company does not anticipate being repaid-increased from 9.04% October to 9.60% in November. Additionally, COF said accounts that are at least 30 days delinquent-a gauge used to forecast of future loan losses-increased from 5.72% to 5.87%.

Wholesale prices jump, New York manufacturing activity disappoints

The Producer Price Index showed prices at the wholesale level jumped month-over-month (m/m) in November, rising 1.8% after advancing 0.3% in October. The average economist forecast was for prices to increase by 0.8%. Meanwhile, the core rate, which excludes food and energy, rose by 0.5% compared to the forecast for a 0.2% increase. On a year-over-year basis, headline producer prices were 2.4% higher, and the core rate was 1.2% higher. Treasuries moved lower following the wholesale inflation data.

In other economic news, the Empire Manufacturing Index, a measure of manufacturing in the New York region, deteriorated much more than expected in December to a level of 2.55, but remains well above the level of zero that suggests conditions are neither contracting nor expanding. Economists surveyed by Bloomberg expected a slight improvement to 24.00, following the previous month level of 23.51. The report is the first major piece of data looking at manufacturing conditions in December, and later this week, the Philly Fed Manufacturing Index, expected to decrease from 16.7 in November to 16.0 in the current month, will be released on Thursday and compliment the New York activity report, providing further insight into the health of the sector.

Later this morning, industrial production and capacity utilization will be released, forecast to rise 0.5% and improve to 71.1%, respectively, for the month of November. As the sun of the government's "Cash-for-Clunkers" has set, traders will be looking to see if signs emerge that show whether or not the economic recovery continues to gain traction. The report will be released by the Federal Reserve as the Federal Open Market Committee (FOMC) begins its two-day monetary policy meeting and could have an impact on the language of the FOMC's monetary policy statement on Wednesday, possibly cluing traders in on when the Committee may begin the difficult task of raising interest rates in a matter timely enough to stave off inflation without sacrificing its other dual mandate of promoting full employment. The employment implications of the production aspect of the report will likely be in focus as growing production could foreshadow future hiring as companies will need to higher more workers if any late-year or holiday demand induces production growth, as productivity is surging-one of the factors that that could lead to actual job gains by early 2010. The capacity component of the report will be worth watching for its implications on inflation, as the Fed noted in its last policy statement that "substantial resource slack" will likely continue to dampen cost pressures, keeping inflation subdued for some time.

In afternoon action, the NAHB Housing Market Index for December will be reported and is anticipated to tick slightly higher to 18.

Europe remains under pressure as German investor confidence falls for a third time

Stocks in Europe are lower in afternoon action, led by financials amid festering fears about the health of the banking sector in the eurozone, exacerbated by Moody's Investor Services reiterating that its outlook for the Irish banking sector remains negative. Moreover, continuing concerns about the health of the financial system of Greece-which last week had its credit rating downgraded by Fitch-are applying pressure on the banking sector. Losses across the pond remain in the wake of a report on investor confidence out of Germany-Europe's largest economy. The German ZEW Survey declined from 51.1 in November to 50.4 in December-the third-consecutive monthly deterioration-but a slightly smaller drop than the decline to 50.0, which was forecasted by economists surveyed by Bloomberg. In other economic news, consumer prices in France and Spain both rose by a smaller amount than anticipated, while prices at the consumer level in the UK rose more than forecast for November. In equity news, shares of British Airways (BAIRY $33) are lower as a strike during the industry-critical holiday season could impact the number-three European airline.

China leads lackluster action in Asia

Stocks in Asia were mostly lower in lackadaisical action, with markets in China leading the decline on persistent fears that the government may step in to cool a surge in property values. China's Shanghai Composite Index declined 0.9% and Hong Kong's Hang Seng Index fell 1.2% as the real estate concerns were exacerbated by a report from the Xinhua news that the government decided to curb the trend of soaring housing prices in some cities. Elsewhere, Japan's Nikkei 225 index dipped 0.2%, Taiwan's Taiex Index declined 0.2%, and India's BSE Sensex 30 Index fell 1.3%. Meanwhile, South Korea's Kospi Index rose a modest 0.1% and Australia's S&P/ASX 200 Index gained 0.4%. The advance in Australia came as traders dissected the release of the Reserve Bank of Australia's minutes from its December monetary policy meeting, where it raised its main lending rate for a third-consecutive month. The RBA's release dampened expectations that the central bank will increase rates again at its next meeting in February after the report revealed that the "question for members was whether it was more appropriate to take a further step at this meeting or to hold the cash rate steady pending a further evaluation of developments at the February meeting."