Morning Market Update

Flat Before Fed

After receiving some support following a better-than-expected read on housing starts and building permits, stocks are loitering around the flatline, on the heels of yesterday’s steep advance. Traders are treading with some caution ahead of the afternoon release of the Federal Reserve’s monetary policy announcement and statement to see where the Fed stands given the recent mixed picture that has been painted of the economic front. In equity news, AutoZone Inc and Carnival Corp beat the Street’s earnings forecasts, while ConAgra Foods Inc missed, and Dow member Hewlett-Packard Co and Oracle Corp reached an agreement pertaining to Oracle’s hiring of former HP CEO Mark Hurd. Overseas, Asia was mixed in a subdued session, while Europe is gaining ground on successful debt auctions across the pond.

At 11:02 a.m. ET, the Dow Jones Industrial Average is down 0.1%, while the S&P 500 Index and the Nasdaq Composite are declining 0.2%. Crude oil is down $0.68 at $75.51 per barrel, wholesale gasoline is off $0.01 at $1.94 per gallon, and the Bloomberg gold spot price is down by $3.45 at $1,274.90 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.3% at 81.04.

ConAgra Foods Inc. (CAG $21) reported fiscal 1Q EPS ex-items of $0.34, below the $0.39 Reuters estimate, with revenues declining 2.4% year-over-year (y/y) to $2.8 billion, also missing the Street’s forecast, which called for revenues at the agriculture firm to come in at $3.0 billion. The company said its margins and EPS were lower than planned because of “an intense promotional environment and inflation that outpaced cost savings.” Additionally, the company lowered its full-year EPS guidance, but raised its annual dividend by 15% to $0.92 per share. CAG is down solidly.

AutoZone Inc. (AZO $217) reported fiscal 4Q EPS of $5.66, compared to the $5.45 that analysts were expecting, with revenues growing 9.5% y/y to $2.4 billion, roughly inline with the Street’s expectations. Domestic same-store sales—sales at stores open at least a year—at the auto parts retailers rose 6.7% y/y during the quarter. Despite the results, shares are under some pressure.

Carnival Corp. (CCL $38) announced 3Q EPS $1.62, compared to the $1.47 that analysts were expecting, with revenues increasing 7% y/y to $4.4 billion, matching the consensus estimate of the Street. The cruise line company said despite ongoing economic concerns, cruise ticket prices remained strong. CCL is higher.

Meanwhile, Dow member Hewlett-Packard Co. (HPQ $40) and Oracle Corp. (ORCL $27) announced that they have resolved litigation pertaining to ORCL’s hiring of former HPQ CEO Mark Hurd. The terms of the agreement were not disclosed but the companies said Mark Hurd “will adhere to his obligations to protect HP’s confidential information while fulfilling his responsibilities at Oracle.” The companies also said the agreement reaffirms HPQ and ORCL’s commitment to work together. HPQ is higher but ORCL is lower.

Housing starts and permits rise, Fed decision looms on the horizon

Housing starts for August came in above expectations, rising 10.5% month-over-month (m/m) from a downwardly revised 541,000 annual rate of units in July to a rate of 598,000 units, and compared to expectations of economists surveyed by Bloomberg, which called for starts to come in at 550,000. Additionally, building permits rose more than expected m/m in August, increasing 1.8% to an annual rate of 569,000, while July’s figure was downwardly revised by 6,000 to 559,000. The expectation was for permits to dip to 560,000 units. Treasuries are higher, adding modestly to early gains following the release.

Today’s report easily exceeded expectations and stocks received some support as the outlook for housing market activity had been matted down by a warning of a new home orders shortfall from Beazer Homes USA Inc. (BZH $4) on lackluster resilience following the expiration of the Federal homebuyer tax credit, and a double-digit drop in orders at Lennar Corp. (LEN $15). Also, the National Association of Home Builders noted yesterday that homebuilders in general, “haven’t seen any reason for improved optimism in market conditions over the past month,” which painted a pessimistic picture of the housing front. However, some of the infusion of optimism toward the health of the housing sector that came initially following today’s report may have been a bit overblown after taking a deeper look into the data. The US Census Bureau revealed that the driver of the solid increases in both starts and permits was multi-family structures. Housing starts for structures with more than one unit jumped over 32% m/m, and permits of these structures were aided by a near 10% increase. Meanwhile, single family starts rose 4.3% m/m but permits decreased 1.2%.

Today’s housing report showed the growing need for more multi-family structures, suggesting that the fallout from the recently ended recession continues turn out more property renters at the expense of owners, possibly helping keep the Fed on the offensive. We will get a glimpse of where the Fed stands later today as the headlining economic event for the week will likely be the afternoon conclusion of the one-day Federal Open Market Committee (FOMC) meeting and statement release. No changes are expected to the fed funds target rate, currently at a level between 0-0.25%. At the last FOMC meeting held August 10, the Fed downgraded its economic outlook and made a slight policy change to prevent its balance sheet from shrinking. The Fed noted that with the pace of economic recovery more modest than previously anticipated, and to support further recovery, they would keep the balance sheet constant by reinvesting proceeds of principal payments from mortgage-backed securities into Treasuries, as prepayment of mortgage-backed securities threatened to shrink the balance sheet, a defacto form of tightening.

There has been ample discussion about the Fed possibly taking the next step and entering a new asset purchase program, dubbed “QE2,” or quantitative easing part two, by the Street. Some view this step as necessary to jump-start growth from low expected levels, while others fret about the Fed’s ability to control rates with a bloated balance sheet when it eventually comes time to tighten. Also, it will be interesting to see how many of the Fed Members on are the same page, given the increased chatter about more easing and the fact that Thomas Hoenig has voted against the monetary policy decision to keep “exceptionally low levels of the federal funds rate for an extended period,” for five-straight meetings.

While it's typically beneficial to the market and the economy to know that the Fed is going to stay stimulative, there may be a somewhat opposite affect this time around. First, there appears to plenty of cash in the system at present—the problem is that it isn't going anywhere. Companies are largely sitting on their cash, which leads to potential problem number two. With rate expectations anchored at zero, there's little incentive for companies (or consumers, for that matter) to spend or invest while the economic environment remains uncertain. The cost of inactivity is low. Perhaps, if there were an expectation that rates would be going up soon, consumers would be more confident that their savings would earn interest and thus be more comfortable spending, while companies may look to borrow while rates are low and invest that money. Finally, with one of the major issues facing the economy being a lack of confidence, a Fed that feels 0% interest rates and potentially another trillion-dollar infusion of cash are necessary doesn't exactly engender confidence in the recovery.

Europe higher as debt auctions, M&A chatter lift shares ahead of Fed announcement

Stocks in Europe are higher in late-day action, but are off the best levels of the day amid some cautious trading before today’s monetary policy announcement from the US Federal Reserve. Oil & gas issues are receiving a boost on M&A speculation, and financials are also helping pace the advance on favorable analyst comments about the banking sector’s ability to comply with the newly agreed upon Basel III capital requirements for the group. Also, a successful debt auction in Ireland, as well as in Spain and Greece, are soothing sovereign debt concerns, which is aiding the backdrop of European trading. Shares of Wellstream Holdings Plc.(WSHOY $46) are sharply higher to help lift the oil & gas sector after the oil services firm said it received a plethora of takeover offers. However, Nokia Corp. (NOK $10) is under some pressure to keep the advance across the pond in check after it announced that it will delay the shipment of its newest flagship smartphone, the N8 model.

The economic calendar in Europe is relatively light, but a report showed the UK budget deficit widened by an amount that exceeded economists’ estimates, and was the largest for any month of August since records began in 1993, per Bloomberg. Other reports out today included: Spain’s trade deficit narrowing, Switzerland’s trade surplus shrinking, and Ireland’s producer prices increasing.

The UK FTSE 100 Index is 0.2% higher, France’s CAC-40 Index is up 0.6%, Germany’s DAX Index is advancing 0.3%, and Spain’s IBEX 35 Index is rising 0.9%, while Ireland’s Irish Overall Index and Greece’s Athex Composite Index are up 1.0%.

Another subdued session in Asia

Stocks in Asia were mixed but moves in the region were again modest amid caution ahead of the US Fed’s monetary policy meeting and ahead of a long holiday in China. The Japanese Nikkei 225 Index declined 0.3% after returning from a holiday, which closed markets yesterday. Export issues came under some pressure as the Japanese yen gained ground compared to the US dollar—to dampen the outlook of sales of companies that rely on business abroad—amid speculation continuing surrounding whether the Fed will announce more stimulus to boost the economy.

Meanwhile, stocks in China moved modestly higher, with the Shanghai Composite Index and the Hong Kong Hang Seng Index both inching 0.1% higher, while Australia’s S&P/ASX 200 Index dropped 0.3% following the release of the Reserve Bank of Australia’s minutes from its most recent monetary policy meeting earlier this month, which showed that further rate increases could be in the offing. The RBA kept its benchmark interest rate unchanged at 4.5% for the fourth month in a row, but RBA members noted that the Australian economy has solid momentum, due to significant increased investment spending expected over the period ahead and positive prospects in the resource sector. They concluded that high levels of resource utilization were likely to put pressure on inflation and the likely scenario is that the Australian economy will grow at trend pace, or a bit above, over the next few years, and if this scenario should come to pass, it was likely that higher interest rates would be required.

Elsewhere, Taiwan’s Taiex Index increased 0.1% and India’s BSE Sensex 30 Index gained 0.5%, while South Korean markets were closed. In other economic news in the region, Japan’s Leading Index improved from its initial reading for July, and the nation’s machine tool orders remained at a y/y growth rate of 170.0% for August, while Hong Kong’s consumer prices rose by a smaller amount than expected for August.