Morning Market Update

Equity Markets Plunge on Heightened Japanese Nuclear Fears

Stocks finished solidly lower after being taken for a wild ride today, as updates on the status of the Japanese nuclear crisis guided the volatile selloff. Comments from the European Union’s energy chief that the nuclear situation was “out of control” caused an early drop, although a spokeswoman for the energy minister said he had no specific or privileged information on the matter. Later in the day, U.S. Energy Secretary Steven Chu said he believed there had been a “partial meltdown” at the Fukushima Power Plant, which further dampened sentiment, although late reports of the near completion of a power line to the plant to restore electricity provided a glimmer of hope. US economic data provided little support for the fragile markets, as prices at the wholesale level rose more than expected, housing starts and building permits came in well below expectations, mortgage applications fell and the US current account deficit saw a smaller-than-forecasted improvement. On the equity front, Rambus announced a licensing extension with Toshiba and NVIDIA reported the resignation of its CFO. Treasuries finished higher.

The Dow Jones Industrial Average fell 242 points (2.0%) to 11,613, the S&P 500 Index lost 25 points (1.9%) to 1,257, and the Nasdaq Composite declined 51 points (1.9%) to 2,617. In heavy volume, 1.4 billion shares were traded on the NYSE and 2.6 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.16 to $98.34 per barrel, wholesale gasoline advanced $0.05 to $2.85 per gallon, while the Bloomberg gold spot price rose $1.08 to $1,396.78 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies— was 0.3% higher at 76.68.

Technology licensing company Rambus Inc. (RMBS $20) announced that it has renewed a patent license agreement with Toshiba Corp. (TOSYY $25). The agreement is for five years covering Toshiba’s products with DRAM memory controllers—used in PCs, video game consoles, and laptops—which RMBS will receive royalty payments based on the shipment of these memory controllers. RMBS was solidly higher, while Toshiba traded lower in US action.

In related industry news, chip maker  NVIDIA Corp. (NVDA $18) reported that its Chief Financial Officer (CFO) David White has resigned from the company for “personal reasons.” White will remain an employee of the company through May 31, 2011, and Karen Burns will serve as interim CFO. NVDA finished lower.

Food and energy prices jump, housing starts and building permits depressed

The Producer Price Index showed prices at the wholesale level rose 1.6% month-over-month (m/m) in February, after increasing an unrevised 0.8% in January, well above the forecast of economists surveyed by Bloomberg, calling for a 0.7% increase. However, the core rate, which excludes food and energy, increased inline with forecasts, gaining 0.2% m/m. On a year-over-year (y/y) basis, headline producer prices were 5.6% higher, versus the 4.7% increase that was projected, and the core rate was up 1.8%, matching expectations.

The jump in PPI at the headline level was driven by a 3.9% rise in food prices, the biggest monthly gain since 1974, per Bloomberg, as well as a 3.3% increase in energy prices. Seventy percent of the increase in food prices was due to a 48.7% spike in prices for vegetables. While rising prices at the headline level can negatively impact consumers’ wallets and ability to spend, the lack of rising broad-based prices while longer-term inflation expectations are contained gives the Federal Reserve the ability to maintain an easy monetary policy.

Tomorrow, the inflation picture for February will develop further with a look at pricing pressures facing the consumer in form of the Consumer Price Index, forecasted to rise 0.4% m/m on the headline level, while the core rate is expected to increase 0.1%. Y/Y, the rates are anticipated to show increases of 2.0% and 1.0% on the headline and core rates, respectively.

Meanwhile, housing starts for February came in well below expectations, falling 22.5% m/m to an annual rate of 479,000 units, the slowest pace since April 2009 and biggest monthly drop since March 1984, from a favorably revised 618,000 rate in January, and compared to expectations of economists, which called for starts to come in at 566,000. Also, building permits dropped, falling 8.2% m/m in February to an annual rate of 517,000, after January’s slight upward revision to a 563,000 rate. The expectation was for permits to increase to 570,000 units. The volatile multi-family sector impacted the results, but even the single-family sector fell as starts declined 11.8%, and single-family permits lost 9.3% to a record low 382,000 per Bloomberg. While starts can be impacted by weather, the decline in permits was unexpected heading into the stronger spring selling season and given a modest uptick in homebuilder sentiment reported by the National Association of Home Builders. New home sales have struggled to compete relative to the discounted prices offered by foreclosures.

In other economic news, the MBA Mortgage Application Index fell by 0.7% last week, after increasing 15.5% in the previous week. The decline came as the Purchase Index decreased 4.0% and despite the average 30-year mortgage rate dropping 14 basis points to 4.79%. Moreover, the 4Q current account deficit declined to $113.3 billion, from a favorably revised $125.5 billion in 3Q, and compared to the decrease to $110.0 billion that was anticipated by economists.

Treasuries finished higher, as the yield on the two-year note fell 5 bps to 0.55%, the yield on the 10-year note lost 9 bps to 3.21%, and the 30-year bond yield declined 7 bps to 4.38%.

International markets whipsawed by updates to Japanese nuclear crisis 

The international markets continued to be focused on concerns about the nuclear situation in Japan, as traders were at the mercy of rapidly changing headlines, including comments from the European Union (EU) energy commissioner, who said the damaged nuclear facility in Japan “is effectively out of control.” However, an EU spokesperson said the energy commissioner had no specific or privileged information on the situation and the International Atomic Energy Agency (IAEA) said it will not call the situation out of control, per CNBC. Also, concerns were amplified by the US Energy Secretary noting that he believed a “partial meltdown” had occurred at the Japanese nuclear facility. However, some hope emerged on reports that Tokyo Electric Power has almost completed a power line that could restore electricity to the nuclear power plant.

Finally, there were some economic reports that deserve a mention even as the attention continues to be focused on the disaster in Japan, with China’s Leading Index increasing, the unemployment rate in South Korea unexpectedly rising, manufacturing activity in Japan declining in 1Q, and the Australian Leading Index deteriorating.

Some attention in Europe shifted back to the euro-area debt crisis in the region, courtesy of Moody’s Investors Service downgrading Portugal’s sovereign debt rating by two notches to A3, while keeping its outlook on the peripheral euro-zone nation negative. Moody’s cited the impact of high borrowing costs and the difficulty of meeting tough fiscal targets that is facing the debt-laden nation, per Reuters. Finally, there were some mixed economic data to decipher in Europe, with y/y core euro-zone consumer prices rising at a slightly smaller rate than economists forecasted, while headline consumer prices, which include food and energy, increased to 2.4% in February from 2.3% in January. Elsewhere, UK jobless claims unexpectedly fell, and Italian consumer prices rose inline with expectations. 

CPI and industrial production on tap for tomorrow

Tomorrow will bring a plethora of economic reports for traders to digest alongside the read on consumer prices, with the releases of industrial production and capacity utilization, weekly initial jobless claims, the Philly Fed Manufacturing Index, and Index of Leading Economic Indicators. The manufacturing reports are forecasted to show continued expansion in activity, jobless claims are expected to decline further below the 400,000 mark, and leading indicators are expected to show the ingredients remain for a continuation in economic prosperity in the US.

International economic releases will be light tomorrow, with the only releases being UK consumer confidence and Canadian wholesale sales.