Morning Market Update

Stocks Gain Ground, But Wholesale Inflation Tops Expectations

US stocks continue to move higher in afternoon action as the bulls are showing some resilience in the face of a mostly hotter-than-forecasted read on wholesale inflation and an unexpected drop in industrial production. Sentiment is being supported by better-than-expected earnings from Dell Inc, Comcast Corp, and Deere & Co, along with a sharp jump in housing starts, which is also helping offset drops in building permits, capacity utilization, and mortgage applications. However, the equity markets are off of the best levels of the day as crude oil prices jumped on geopolitical concerns in the Middle East, as Iran is reportedly sending warships through the Suez Canal, evoking a warning from Israel that it cannot ignore these “provocations for eternity.” Treasuries are nearly unchanged after erasing losses that followed the data, but the release of the minutes from the Federal Reserve’s January monetary policy meeting is on the horizon. Meanwhile, Family Dollar Stores Inc is sharply higher after activist investor Nelson Peltz offered as much as $7.6 billion to acquire the discount retailer. Overseas, European markets gained solid ground, riding a plethora of favorable news out of the corporate front, highlighted by the long-awaited announcement of a deal for Sanofi-Aventis to acquire Genzyme Corp for over $20 billion.

At 12:52 p.m. ET, the Dow Jones Industrial Average is 0.3% higher, the S&P 500 Index is gaining 0.4%, and the Nasdaq Composite is rising 0.5%. Crude oil is up $0.86 at $85.18 per barrel, wholesale gasoline is increasing $0.04 to $2.53 per gallon, and the Bloomberg gold spot price is declining $0.04 to $1,373.76 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.3% at 78.34.

Dell Inc. (DELL $15) 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 are 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 is 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 are higher.

In M&A news, shares of Family Dollar Stores Inc. (FDO $54) are 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.

Producer prices rise, housing starts and building permits mixed, Fed report later today

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%.

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 have given up early losses that followed the data, and are nearly unchanged with the yields on the two-year and 10-year notes flat at 0.82% and 3.60%, respectively, while the 30-year bond yield is declining 2 bps to 4.65%.

Meanwhile, 2:00 p.m. ET will bring the release of the minutes from the January Federal Open Market Committee (FOMC) meeting, where investors will be monitoring any changes to the economic forecast. Due to the annual turnover of FOMC members, traders may be looking for any changes in the tone of the discussions in regard to the Fed’s $600 billion asset purchase program (QE2), as well as its outlook for monetary policy in light of the recent increase in inflationary pressures.

Europe gains ground amid a flood of corporate news

Stocks in Europe finished higher as traders digested a plethora of news out of the corporate sector, with financials leading the way on the heels of a steep jump in 4Q earnings from French lender Societe Generale (SCGLY $14), which topped analysts’ expectations, sending shares solidly higher. Also helping sentiment across the pond, shares of Heineken NV (HINKY $26) posted respectable gains after the world’s third-largest brewer, per Bloomberg, reported full-year earnings that exceeded estimates. Meanwhile, some M&A news garnered attention, headlined by the announcement that 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, and shares of both firms were higher. Moreover, shares of Clariant AG (CLZNY $16) moved sharply lower after it announced that it will acquire privately-owned Sued-Chemie AG for about 2 billion euros ($2.7 billion).

Elsewhere, 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.

The UK FTSE 100 Index was 0.8% higher, France’s CAC-40 Index gained 1.0%, and Germany’s DAX Index rose 0.2%.