Morning Market Update

Stocks Escaping the Red Ahead of the Fed

The US equity markets are higher in early action with traders waiting for the afternoon conclusion of the US Federal Reserve’s two-day monetary policy meeting, looking for any changes to its economic outlook and if the current environment warrants any tweaks to its $600 billion asset purchase program, known as quantitative easing, or QE2. Treasuries are lower in morning action ahead of the announcement and a key report on new home sales, and following a drop in US mortgage applications. Meanwhile, earnings season continues to roll on, with Dow member Boeing Co offering a disappointing 2011 EPS outlook, while fellow Dow component United Technologies Corp topped the Street’s profit projections. Elsewhere, internet search engine Yahoo Inc reported better-than-expected profits. Overseas, Asia finished mixed, while Europe is advancing solidly on a rebound in basic materials.

As of 8:49 a.m. ET, the March S&P 500 Index Globex future is 4 points above fair value, the Nasdaq 100 Index is 5 points above fair value, while the DJIA is 3 points above fair value. Crude oil is $0.37 higher at $86.56 per barrel, and the Bloomberg gold spot price is down $0.47 at $1,331.85 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is flat at 77.90.

Dow member Boeing Co. (BA $72 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, saying that the outlook reflects the revised schedule of its 787 Dreamliner and the current defense contracting environment.

Fellow Dow member United Technologies Corp. (UTX $82) 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.

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, YHOO issued 1Q revenue guidance that missed analysts’ estimates.

Mortgage applications fall, new home sales and Fed monetary policy decision set to come

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.

Treasuries are lower in morning action following the housing data, with the yield on the two-year note advancing 3 bps to 0.60%, the 10-year note rising 5 bps to 3.38%, and the 30-year bond yield gaining 3 bps to 4.52%.

After the opening bell, the housing data will continue to pour in, with the release of new home sales, forecasted to increase 3.5% month-over-month (m/m) for December to an annual rate of 300,000 units, after rising 5.5% to 290,000 units in November.

Europe nicely higher ahead of the Fed

The equity markets are moving higher in afternoon action, ahead of the US Federal Reserve’s monetary policy statement later today, with basic materials and technology issues posting solid gains to pace the advance across the pond. Meanwhile, shares of Porsche (POAHY $9) and Volkswagen (VLKAY $30) are both posting solid advances to contribute to the upward move, after Porsche noted that the expected merger between the automakers is on “the right track,” per Reuters, who cited a senior family member of the luxury carmaker. The advance in Europe is coming despite some 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.

The FTSE 100 Index is gaining 1.3%, France’s CAC-40 Index and Germany’s DAX Index are rising 1.1%, and Italy’s FTSE MIB Index advancing 0.8%.

Asia mixed in short-handed session

Stocks in Asia finished mixed, with Japan’s Nikkei 225 Index falling 0.6% amid some profit-taking following the recent advance in the equity markets. Commodity-related issues led the decline in the Japanese equity markets amid exacerbated concerns about rising inflationary pressures, especially in the emerging markets, and the potential impact on economic growth and demand for resources as central banks may be forced to tighten monetary policy to try to ensure price stability. Some cautiousness ahead of today’s conclusion of the US Federal Reserve meeting may have exacerbated the pressure on stocks, along with a solid drop in shares of Toyota Motor Corp. (TM $84) after it announced that it will recall about 1.7 million vehicles globally due to faulty fuel pipes and pumps, along with other defects. However, shares in China managed to gain ground, with the Hong Kong Hang Seng Index advancing 0.2% and the Shanghai Composite Index rising 1.2%, led by strength in water companies on a report that investment in water conservation projects would hit 2 trillion yuan over the next five years, according to Reuters. Also, South Korea’s Kospi Index rose 1.1% following the release of the nation’s 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.