Evening Market Update

Fed Steady, Focus Remains on Japan

US equities managed to bounce well off the lows of the day, courtesy of a modest upgrade of the Fed’s economic outlook following its monetary policy meeting. However, anxiety over the threat of nuclear radiation leaks in Japan continued to hamper sentiment and stocks closed lower. As expected, the Federal Reserve left its benchmark interest rate and $600 billion asset purchase program—known as QE2—unchanged, while noting that recent data suggests the economic recovery is “on a firmer footing” and acknowledging gradual improvement in the job market. Meanwhile, Treasuries finished mostly higher, paring some of the flight-to-safety gains that occurred as a result of the events in Japan. Elsewhere on the economic front, a read of manufacturing activity in New York improved, import prices came in higher than expected, and homebuilder sentiment ticked slightly upward. Equity news continued to take a back seat to the unfolding events in Japan, with Dow member Hewlett-Packard bumping its quarterly dividend by 50%, while Texas Instruments warned that first-half sales will suffer as a result of damage to one of its plants in Japan.

The Dow Jones Industrial Average fell 138 points (1.2%) to 11,855, the S&P 500 Index lost 15 points (1.1%) to 1,282, and the Nasdaq Composite declined 34 points (1.3%) to 2,667. In moderately heavy volume, 1.3 billion shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq. WTI crude oil dropped $4.01 to $97.18 per barrel, wholesale gasoline tumbled $0.16 to $2.80 per gallon, while the Bloomberg gold spot price fell $29.65 to $1,396.75 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies— was flat at 76.35.

Dow member Hewlett-Packard Co. (HPQ $41) announced that its Board of Directors has authorized a 50% increase in the company’s quarterly dividend to $0.12 per share, effective in May. The company’s previously announced dividend, which is payable on April 6, to stockholders of record on March 16, will not be increased and will remain at $0.08 per share. Shares were lower amid the broad-based sell-off in the equity markets.

Elsewhere, Texas Instruments Inc. (TXN $34) was lower after the second largest US chipmaker, per Bloomberg said “substantial damage” to one of its plants in Japan will negatively impact sales in its fiscal first and second quarters. Technology issues are among the day’s biggest decliners with chipmakers finding pressure on concerns about the impact of the disaster in Japan on demand, manufacturing activity, and production disruptions.

Fed leaves policy unchanged, talks inflation, and slightly upgrades economic outlook

As expected, the Federal Open Market Committee (FOMC) concluded its one-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 modestly upgraded its assessment of the economy, saying the recovery was on a “firmer footing” and also acknowledged gradual improvement to the job market, omitting the previous language that progress toward its objectives was “disappointingly slow.” Business and household spending continue to expand, and despite noting the housing market “continues to be depressed,” the Fed dropped prior language detailing the headwinds to consumers. There was no mention of events in Japan in the Fed’s statement.

The Fed increased the commentary regarding rising commodity prices, noting the “sharp run up in oil prices in recent weeks” and noted that recent increases in the prices of energy and other commodities are “putting upward pressure on inflation.” However, the Committee expects these effects to be transitory and said it will pay close attention to the evolution of inflation and inflation expectations, but that longer-term inflation expectations thus far have remained stable.

To 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.” Voting on today’s decision was unanimous.

Treasuries pared gains following the Fed’s meeting but finished mostly higher as the situation in Japan garnered some flight-to-safety buying. The yield on the two-year note was flat at 0.61%, the yield on the 10-year note lost 4 bps to 3.32%, and the 30-year bond yield declined 8 bps to 4.46%.

New York manufacturing activity improves, import prices and homebuilder sentiment rise

The Empire Manufacturing Index, a measure of manufacturing in the New York region, increased in March to a level of 17.50, compared to the estimates of economists surveyed by Bloomberg, which expected an increase to 16.10, from the previous month’s level of 15.43. The index moved further into expansionary territory depicted by a reading above zero. The report is the first major piece of data looking at manufacturing conditions in March, while on Thursday the Philly Fed Manufacturing Index will be released, expected to decline from 35.9 in February to 30.0 in the current month, providing further insight into the health of the sector.

Elsewhere, the Import Price Index rose 1.4% month-over-month (m/m) for February, compared to the expectation of economists, which called for the index to increase by 0.9%. This was the fifth-straight monthly increase of over 1%. Year-over-year (y/y), import prices are higher by 6.9%—the largest y/y increase since May 2010—versus the 6.3% forecast of economists. Fuel contributed to the larger-than-forecasted increase in import prices, with petroleum prices increasing 3.7%, while prices for industrial supplies and materials, as well as for foods, feeds, and beverages all were higher.

In other economic news, the NAHB Housing Market Index a gauge of homebuilder sentiment, rose inline with expectations, increasing from 16—it had remained at this level since November—in February to 17 in March. The index sits at the highest level since May 2010, but remains depressed, as any reading below 50 indicates more respondents feel conditions are poor.

Growing nuclear concerns in Japan rattle investors

Sentiment in Asia remained solidly negative as concerns about a nuclear meltdown in Japan sparked heavy selling pressure in the region. Two new explosions at the nuclear facility in Fukushima resulted in reports of rising radiation levels in the area, exacerbating concerns about the devastation caused by Friday’s earthquake and tsunami that hit the northeast region of nation. As a result, Japan’s Nikkei 225 Index tumbled by more than 10%, its largest drop since October 2008, per Bloomberg, but finished off of the worst level of the day after trading curbs were implemented. In response, the Bank of Japan (BoJ) committed to deploying an additional 8 trillion yen in funds to try to stabilize the financial system. The move follows the decision yesterday, when the BoJ held a shortened policy meeting and announced that it will double the size of its asset purchase program to 10 trillion yen and will pump 15 trillion yen into money markets.

The downbeat tone spread to the equity markets in Europe, which posted solid broad-based losses, overshadowing data from the economic front, which showed consumer prices in France rose at a rate that was below economists’ forecasts, and an unexpected drop in the German ZEW Survey of Economic Sentiment. The gauge of investor confidence in Germany—Europe’s largest economy—fell for the first time in five months.

Readings on inflation and housing up

Tomorrow begins with the Producer Price Index (PPI) expected to show prices at the wholesale level rose 0.7% month-over-month (m/m) in February, down from January’s 0.8% increase while the core rate, which excludes food and energy, is expected to gain 0.2%, down from January’s 0.5%. The release precedes Thursday’s Consumer Price Index (CPI) report, which is forecasted to advance 0.4%, the same rate as in January, while ex-food and energy, it is expected to gain 0.1%, down from January’s 0.2%. On a y/y basis, the CPI is expected to increase 2.0% at the headline level and 1.0% at the core level.

Meanwhile, housing starts will also be reported, expected to fall 5.0% m/m in February after jumping 14.6% in January to an annual rate of 567,000 units, while building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, are forecasted to increase a modest 1.2% m/m after falling 10.7% in January to 570,000 units.

MBA Mortgage Applications is the only other release scheduled for tomorrow’s US.

International releases include Japan’s department store sales, Australia’s leading index and dwelling starts, China’s leading index, euro-zone and Italian CPI, and Canada’s manufacturing sales. In central bank action, the Bank of Norway meets, where no change in policy is expected.