Evening Market Update

Stocks Tread Higher Despite Rise in Wholesale Inflation

Stocks finished in the green today as traders were met with a plethora of economic reports, as well as a full plate of earnings releases from the corporate sector. Inflation concerns continue to be a hot topic, as the Producer Price Index showed prices at the wholesale level rose more than expected, ahead of a read on consumer prices tomorrow. Other releases on the economic front included a sharp increase in housing starts, which helped to offset drops in building permits, industrial production, capacity utilization and mortgage applications. Additionally, the minutes from the January FOMC meeting were released, revealing some questions as to the effects of QE2, but not enough to shift the program off course. In equity news, sentiment was boosted by better-than-expected earnings reports from Dell, Comcast and Deere, while the M&A front was also active, with Family Dollar Stores receiving an offer to be acquired by activist investor Nelson Peltz and Sanofi-Aventis announcing the completion of a long-awaited deal to acquire Genzyme for $20 billion. Treasuries finished the day modestly lower.

The Dow Jones Industrial Average rose 62 points (0.5%) to 12,288, the S&P 500 Index gained 8 points (0.6%) to 1,336, and the Nasdaq Composite was 21 points (0.8%) higher at 2,826. In moderate volume, 929 million shares were traded on the NYSE and 2.3 billion shares changed hands on the Nasdaq. Crude oil rose $0.69 to $85.01 per barrel, wholesale gasoline gained $0.05 to $2.54 per gallon, while the Bloomberg gold spot price rose $1.17 to $1,374.98 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was 0.3% lower at 78.61.

Dell Inc. (DELL $16) reported 4Q EPS ex-items of $0.53, well above the $0.37 that analysts surveyed by Reuters had forecasted, with revenues increasing 5% year-over-year (y/y) to $15.7 billion, roughly inline with the Street’s projections. The company said expanding strength as an enterprise solutions provider helped drive results, while revenue for commercial laptop and desktop computers grew 10% y/y. DELL issued full-year 2012 guidance that exceeded the Street’s expectations. Shares were sharply higher.

Comcast Corp. (CMCSA $25) posted 4Q earnings ex-items of $0.35 per share, above the $0.32 that analysts were anticipating, with revenues increasing 7% y/y to $9.7 billion, topping the $9.6 billion that the Street had estimated. The media company said revenue from its cable segment rose 6.9% y/y and customers for its video, high speed internet and voice services rose by 414,000. CMCSA increased its annual dividend by 19% to $0.45 per share and reported a 75% y/y acceleration of its share repurchases program by the end of 2011. CMCSA finished solidly higher.

Deere & Co. (DE $96) announced fiscal 1Q EPS of $1.20, exceeding the $0.99 that was expected by analysts, with revenues rising 27% y/y to $6.1 billion, compared to the $5.8 billion that was anticipated on the Street. The construction and farm equipment maker said its results reflect improving demand for its lines of equipment, with sales of large farm machinery in the US and Canada continuing to “make a major impact,” while construction equipment shipments are experiencing some degree of recovery. Shares traded higher.

In M&A news, shares of Family Dollar Stores Inc. (FDO $53) moved sharply higher after activist investor Nelson Peltz’s hedge fund Trian Fund Management LP—a subsidiary of Wendy’s/Arby’s Group Inc. (WEN $5)—proposed an unsolicited offer to acquire the remaining 92.1% stake in the discount retailer for about $55-60 per share in cash, or as much as $7.6 billion. FDO said it will review the offer.

On the international front, France’s largest drugmaker Sanofi-Aventis (SNY $35) finally reached an agreement to acquire US-based biotechnology firm Genzyme Corp. (GENZ $75) for $74 per share or about $20.1 billion, ending a nine-month attempt to reach a deal. The announcement came as GENZ reported solid 4Q earnings ex-items of $0.82 per share, with revenue rising 23% y/y to $1.15 billion. Shares of both firms traded higher.

Producer prices rise and housing starts jump

The Producer Price Index showed prices at the wholesale level rose 0.8% month-over-month (m/m) in January, after December was downwardly revised to a 0.9% increase, matching the forecast of economists surveyed by Bloomberg. Energy prices rose 1.8% m/m and food costs gained 0.3%. However, the core rate, which excludes food and energy, rose more than expected, gaining 0.5% m/m, compared to economists’ forecasts of a 0.2% increase. The government said that nearly 40% of the advance was due to a 1.4% increase in pharmaceuticals, as well as higher prices for plastic products. On a year-over-year basis, headline producer prices were 3.6% higher and the core rate was up 1.6%. Tomorrow, we will get a look at the price pressures facing consumers in the form of the Consumer Price Index, forecasted to rise 0.3% on the headline rate, and a rise of 0.1% for the core rate.

Meanwhile,  housing starts for January came in well above expectations, jumping 14.6% m/m from a downwardly revised 520,000 annual rate of units in December, to a rate of 596,000 units, and compared to expectations of economists, which called for starts to come in at 539,000. However, building permits fell, dropping 10.4% m/m in January to an annual rate of 562,000, after December’s downwardly revised 627,000 rate. The expectation was for permits to fall to 559,000 units. Volatility in the multi-family sector impacted the results, as single-family starts fell 1.0%, hitting their lowest level in 20 months, and single-family permits declined 4.8% after jumping 6.0% the prior month.

Elsewhere, industrial production in January unexpectedly fell 0.1% m/m, while the expectation was for a rise of 0.5%, but December’s reading was upwardly revised by 0.4% to a gain of 1.2%. January’s decline was driven by a 1.6% fall in utility output and 0.7% decline in mining, while manufacturing gained 0.3%, and December’s manufacturing production was upwardly revised by 0.5% to a 0.9% rise. Within manufacturing, automotive production was particularly strong, rising 3.0%, and business equipment continued its strength, up 0.9%, gaining in each of the past 11 months, and up 11.4% y/y. Capacity utilization unexpectedly fell to 76.1% from an upwardly adjusted 76.2%, remaining 4.4% below its average rate from 1972 to 2009.

In other housing news, the MBA Mortgage Application Index fell by 9.5% last week, after the index that can be quite volatile on a week-to-week basis, decreased 5.5% in the previous week. The decline came as an 11.4% drop in the Refinance Index was accompanied by a 5.9% decrease in the Purchase Index. The drop in the overall index came despite the average 30-year mortgage rate dipping 2 basis points to 5.12%, above the record low of 4.21% on October 8.

Treasuries moved lower, with the yields on the two-year and 10-year notes rising 1 bp to 0.83% and 3.62%, respectively, while the 30-year bond yield also increased 1 bp to 4.68%.

Although the minutes from the January Federal Open Market Committee (FOMC) meeting produced a modest reaction in the markets, partly due to the speeches delivered by Fed Chairman Ben Bernanke since the meeting, there were some areas of the report that were worth noting. The minutes revealed that a few Members remained unsure of the likely effects of the Fed’s $600 billion asset purchase program (QE2) on the economy, “but felt that making changes to the program at this time was not appropriate.” Moreover, inline with Bernanke’s recent speeches, the FOMC expressed greater confidence that the economic recovery would be sustained and would gradually strengthen over coming quarters, but Members were disappointed by the pace and the unevenness of the improvements in the labor markets, making no big changes to its unemployment outlook. Also, although they acknowledged that headline inflation had been boosted by higher prices for energy and other commodities, Members noted that with significant slack in resource markets and longer-term inflation expectations stable, measures of core inflation would remain close to current levels in coming quarters. But one interesting note was that the importance of resource slack as a factor influencing inflation was debated, and some Participants suggested that other variables, such as current and expected rates of economic growth, could be useful indicators of inflation pressures. Finally, the FOMC increased its economic growth forecast for 2011, while lowering the high-ends of its core inflation projections for the current year and 2012.
BoE projects high rate of inflation on the horizon 

The economic calendar in Europe was dominated by data out of the UK, as reports showed consumer confidence fell more than economists’ forecasted, jobless claims unexpectedly rose, and traders digested the Bank of England’s quarterly inflation report. The BoE projected that inflation will “likely remain high over the next year,” after reaching 4.0% in January—above its 2% target—before regressing next year, while saying its economic growth outlook deteriorated from its November report. BoE Governor King noted that the economic recovery is “unlikely to be smooth,” and according to Bloomberg, King said policymakers have not preannounced an interest-rate increase and may need to keep borrowing costs at a record low to support the recovery.

In economic news outside of Europe, South Korea’s unemployment rate came in below expectations, while Australia’s leading indicators increased 0.8% in December. Additionally, Canadian leading indicators rose 0.3% in January, after increasing 0.4% in the previous two months.

US Leading Indicators and Philly Fed report to join CPI on tomorrow’s docket

The highlight of tomorrow’s US economic reports will be the release of the aforementioned Consumer Price Index. Additionally, the Conference Board’s Index of Leading IndicatorsPhiladelphia Fed’s Business Activity Index is expected to increase to 21.0 in February from a January reading of 19.3. Finally, economists are looking for weekly initial jobless claims to increase from 383,000 to 400,000. will be released, with economists expecting a 0.2% increase in January, after a 1.0% rise in December. The
The international calendar will yield Japan’s leading index, Canadian wholesale sales, euro-zone consumer confidence, and 4Q GDP readings from Singapore and Taiwan.