Evening Market Update

Dow Teeters at 12,000, Fed Leaves Rates and QE2 Unchanged

Stocks finished modestly higher as the Dow fell just shy of closing above the 12,000 mark, after crossing above it for the first time since June of 2008, while the S&P closed just below the 1,300 level. Focus today was on the conclusion of the first monetary policy meeting for the Federal Reserve in 2011, where it voted to leave the fed funds rate unchanged and made no changes to the size or duration of the $600 billion asset purchase program. The decision was unanimous, as consistent-dissenter Thomas Hoenig is no longer a voting Committee member. Housing data was also on the minds of traders, as new home sales surged in December, led by strong increases in the West region, while mortgage applications decreased. Treasuries moved lower early in the day, and fell even further following the Fed release, especially at the long end of the curve. In equity news, Dow member Boeing and search giant Yahoo both matched analysts’ earnings expectations, but traded lower on disappointing revenue and guidance. Additionally, Dow component United Technologies Corp beat on the top and bottom lines, ConocoPhillips matched analysts' EPS forecasts but exceeded revenue projections, and RF Micro Devices was under pressure on lackluster 4Q results.

The Dow Jones Industrial Average gained 8 points (0.1%) to 11,985, the S&P 500 Index was 5 points (0.4%) higher at 1,297, and the Nasdaq Composite advanced 20 points (0.7%) to 2,740. In moderate volume, 1.2 billion shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq. Crude oil rose $1.46 to $87.65 per barrel, wholesale gasoline advanced $0.07 to $2.44 per gallon, while the Bloomberg gold spot price moved $11.67 higher to $1,344.00 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—fell 0.1% to 77.82.

Dow member Boeing Co. (BA $70 ¹) announced 4Q EPS ex-items of $1.11, matching the consensus estimate of analysts surveyed by Reuters, with revenues falling 8% year-over-year (y/y) to $16.6 billion, below the $16.9 billion that the Street had expected. The defense and aerospace firm said it saw “solid performance” across the company’s core programs, but it issued full-year 2011 EPS guidance that missed analysts’ projections. The company said the outlook reflects the frequently delayed schedule of its 787 Dreamliner—last week BA said it expects to deliver its first 787 in 3Q 2011—and the current defense contracting environment. Shares were down solidly.

Fellow Dow member United Technologies Corp. (UTX $81) posted 4Q earnings ex-items of $1.34 per share, compared to the $1.29 that analysts were anticipating, as revenues rose 6% y/y to $14.9 billion, exceeding the $14.7 billion that was forecasted on the Street. The technology and services company said the quarter reflected strong sales growth, particularly in the commercial aerospace aftermarket and shorter cycle Carrier businesses. UTX traded lower.

ConocoPhillips (COP $69) achieved 4Q EPS ex-items of $1.32, matching the consensus estimate of analysts, with revenues jumping 21.8% y/y to $53.2 billion, topping the $46.2 billion that the Street had anticipated. The energy firm said its upstream—exploration and production—output declined due to normal field declines, but earnings in the segment rose on higher oil prices. Meanwhile, COP’s downstream—refining—earnings were higher due to increased global refining margins. Shares finished higher.

Yahoo Inc. (YHOO $16) reported 4Q EPS of $0.24, one penny above the expectation of analysts, with revenues excluding traffic acquisition costs (TAC)—expenses paid to its marketing partners—declining 4% y/y to $1.2 billion, roughly inline with the Street’s forecast. The internet search engine said its operating margin ex-items expanded from 9% to 17%, and it completed a “very encouraging” quarter and year. However, shares were solidly lower as the company issued 1Q revenue guidance that missed analysts’ estimates.

RF Micro Devices Inc. (RFMD $7) was down sharply after the radio frequency and semiconductor technology firm reported fiscal 3Q revenue of $279 million, below the $286 million that the Street had expected, while issuing fiscal 4Q revenue guidance that came in below expectations, due to the demand environment in its end markets. The disappointing revenue and guidance is overshadowing the company’s fiscal 3Q earnings report, in which it posted profits of $0.19 per share, a penny above estimates, and announced an additional $200 million to its share repurchase program.

Fed leaves rates and QE2 unchanged, new home sales surge, mortgage apps fall

As expected, the Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting by making no changes to the fed funds rate and the size or duration of the asset purchase program. The Fed offered little changes to its statement, reiterating that since the last meeting in December, the economic recovery is continuing, but at a rate that is insufficient to significantly bring down unemployment. Moreover, they continued to view that longer-term inflation expectations have remained stable, while measures of underlying inflation have been trending downward.

The Fed also reiterated that unemployment is elevated and measures of underlying inflation are low relative to levels it judges to be consistent over the longer run with its dual mandate, and that progress towards its objectives has been “disappointingly slow.” Also in concert with prior language, the Committee decided that to help promote a stronger pace of recovery and help ensure inflation over time is consistent with its mandate, the asset purchase program, which consists of $600 billion of longer-term Treasuries by the end of 2Q 2011, will continue. The Committee will regularly review the pace of securities purchases and overall size of the program in light of incoming information and will adjust the program as needed to best “foster maximum employment and price stability.”

The major change from previous meetings was that there were no dissenting votes cast, as the lone dissenter, Thomas M. Hoenig, is no longer a voting Committee member as a new slate of members were added to the Committee earlier this month.

Treasuries finished lower, as the long end of the curve saw a significant drop off following the Fed announcement. The yield on the two-year note advanced 2 bps to 0.59%, the 10-year note was 9 bps higher at 3.42%, and the 30-year bond yield gained 10 bps to 4.59%. Yields have risen recently despite the Federal Reserve’s stimulative measures aimed at lowering interest rates to help ease financial conditions.

New home sales increased far more than expected, jumping 17.5% month-over-month (m/m) in December to an annual rate of 329,000 units, above the 300,000 rate forecasted and November’s figure was downwardly revised to a 280,000 annual unit rate. The median home price rose 8.5% y/y and 12.1% m/m to $241,500. Inventory of new homes for sale fell to 190,000 units, the lowest level since January 1968, per Bloomberg. At the current sales pace, it would take 6.9 months to exhaust the supply of homes on the market, down solidly from November’s 8.4 rate. New home sales are considered a more timely indicator of conditions in the housing market than existing home sales—which also jumped over 12% m/m in December—as they are based on signings instead of closings.

In other housing sector news, the MBA Mortgage Application Index fell by 12.9% last week, after the index that can be quite volatile on a week-to-week basis, rose 5.0% in the previous week. The decrease came as a 15.3% drop in the Refinance Index accompanied an 8.7% decline in the Purchase Index. The decline in the overall index also came as the average 30-year mortgage rate rose 3 basis points to 4.80%, above the record low of 4.21% on October 8.

BoE releases monetary policy meeting minutes

European economic news was highlighted by disappointing economic data out of the euro-zone, with import prices in Germany—Europe’s largest economy—rising by almost twice the m/m rate that economists had expected, while retail sales in Italy unexpectedly fell in November. Meanwhile, the Bank of England released the minutes from its most recent monetary policy meeting earlier this month, which showed policy makers remained split between keeping its monetary policy unchanged and raising its benchmark interest rate. Of the nine BoE policy members, six voted to maintain its current monetary policy stance and interest rate at 0.5%, while two members voted in favor of increasing its interest rate—with one suggesting a 25 bp increase and the other calling for a rate hike of 50 bps—and the final member voting for an increase to the central bank’s asset purchase program. The UK is in a tough spot as inflation has exceeded its 2% target rate for more than a year, per Bloomberg, while its economic growth has waned, with yesterday’s release of its 4Q GDP showing an unexpected contraction in its economy.

In the Asia/Pacific, South Korea released its 4Q GDP report, which showed the country’s output rose 0.5% quarter-over-quarter (q/q), above the 0.4% rate of expansion that economists had expected, while rising 4.8% y/y, above the 4.6% that was expected. Volume was lighter than usual in Asia, as markets in India and Australia were closed for holidays.

Durable goods orders on tap for tomorrow

The highlight of tomorrow’s US economic calendar will be the durable goods orders report, which can be quite volatile and is expected to increase 1.5% in December after falling 1.3% in November, while ex-transportation, orders are forecasted to have grown 0.9% m/m, after gaining 2.4% in November. Other releases on the domestic front tomorrow include pending home sales, expected to increase 1.0% in December after rising 3.5% in November, and weekly initial jobless claims, which economists predict will tick slightly higher to 405,000.

International releases will include French consumer confidence, German CPI, euro-zone consumer confidence, the Brazilian unemployment rate and Australia’s leading index.