Morning Update

In the Green Before Fed Report Hits the Scene

Stocks are higher in morning action following a tame reading of inflation at the consumer level and as housing starts and building permits both gained ground, preserving early gains that came from a lift in the global financial sector on reports that stricter capital adequacy requirements may be delayed. Treasuries moved slightly lower after the economic reports in the US, but traders are treading cautiously ahead of the afternoon monetary policy announcement from the US Federal Reserve. In equity news, Adobe Systems topped the Street’s EPS and revenue forecasts, while the Abu Dhabi Investment Authority announced that it is seeking to scrap an investment deal with Citigroup. Overseas, Japanese stocks were higher on the aforementioned banking report, while Europe is advancing amid a plethora of economic data.

As of 8:52 a.m. ET, the March S&P 500 Index Globex future is 5 points above fair value, the DJIA is 51 points above fair value, while the Nasdaq 100 Index is 7 points above fair value. Crude oil is higher by $0.55 at $71.24 per barrel, and the Bloomberg gold spot price is up $5.75 at $1,130.95 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.2% at 76.85.

Adobe Systems (ADBE $36) 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.

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 $4) 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 withheld, 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 from 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.” Shares of Citigroup are lower.

Consumer inflation remains subdued, housing starts and building permits gain

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. On a year-over-year 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%.

Elsewhere, 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 revealed an increase, as they rose about 6% 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. Treasuries moved slightly lower after the inflation and housing reports.

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.

However, the keynote event of the day and possibly the week will come in afternoon action as the two-day Federal Open Market Committee (FOMC) meeting concludes with the release of the Committee’s monetary policy statement. While no changes are expected to interest rate policy, market participants continue to watch for any clues that indicate the timing of when the Fed expects to contemplate tightening its interest rate policy, focusing on the language used by the Fed with regard to the “extended period” for keeping rates at an exceptionally low rate.

Economic data and financials lifting European markets

Stocks in Europe are broadly higher in afternoon action as traders digest a plethora of data out of the eurozone. 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 PMI’s 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. Meanwhile, financials are pacing the advance in European trading, on 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. However, 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.

Financials lift Japan but weigh on China

Stocks in Asia were mixed in cautious trading ahead of today’s monetary policy announcement from the US Federal Reserve. Financials were in focus today, as the sector led a 0.9% increase in Japan’s Nikkei 225 Index on the speculation that global banking regulators may delay the enforcement of new capital requirement rules. The optimism for Japanese banks came as the Nikkei newspaper reported that a banking supervision committee has agreed to delay stricter capital requirement enforcement for large banks, giving them at least 10-years to comply with the capital adequacy rules. However, the financial sector was not as kind to stocks in China, with Hong Kong’s Hang Seng and the Shanghai Composite indexes falling 0.9% and 0.6%, respectively, after an official with the China Banking Regulatory Commission warned that banks in the region will face risks from bad loans. Meanwhile, Australia’s S&P/ASX 200 Index declined 0.3% after a report showed the country’s 3Q GDP rose 0.2% quarter-over-quarter (q/q), down from the 0.6% q/q gain in 2Q, and short of the 0.4% advance that economists surveyed by Bloomberg had forecast. Elsewhere, South Korea’s Kospi Index dipped 0.1% and Taiwan’s Taiex Index fell 0.7%, while India’s BSE Sensex 30 Index increased 0.2%.