Morning Update

Ahead of the Fed, Bulls Trying to Escape the Red

After a late-day slide yesterday, which erased an advance and took the major equity markets below the flatline, stocks are nearly unchanged in cautious early action ahead the afternoon release of the Federal Reserve’s interest rate announcement and monetary policy statement. The earnings front is providing some news for traders to chew on as they wait for the Fed’s announcement, with Dow members Boeing and United Technologies both topping the Street’s estimates, while fellow Dow component Caterpillar missed on the top line, which is overshadowing its better-than-expected bottomline. Outside of the Dow, Yahoo posted profits that exceeded analysts’ forecasts. Treasuries are flat in morning action ahead the Fed’s report and after mortgage applications fell. New home sales will be released just after the opening bell. Overseas, markets are under pressure amid lingering concerns about China’s efforts to control asset bubbles.

As of 8:53 a.m. ET, the March S&P 500 Index Globex future is at fair value, the Nasdaq 100 Index is 2 points above fair value, and the DJIA is 11 points below fair value. Crude oil is up $0.15 at $74.86 per barrel, and the Bloomberg gold spot price is lower by $4.43 at $1,093.13 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.1% at 78.47.

Dow component Caterpillar (CAT $56 ¹) reported 4Q EPS ex-items of $0.41, compared to the $0.28 that Wall Street analysts had forecasted, while revenues fell 39% year-over-year (y/y) to $7.9 billion, missing the Street’s consensus estimate of $8.1 billion. The company said it expects EPS for 2010 to be about $2.50 at the mid-point of it sales range, which are expected to be up 10-25% from $32.4 billion in 2009. Analysts are expecting the company to report 2010 EPS of $2.71 and revenues of $36.1 billion.

Boeing (BA $58 ¹) announced 4Q EPS of $1.75, compared to the $1.36 that analysts had forecasted, led by a 9.4% y/y increase in revenues to $17.9 billion, above the $17.6 billion that the Street had forecasted. The Dow member issued 2010 EPS guidance that missed analysts’ expectations, “reflecting the previously announced 777 production rate reduction reduced scope of on Army modernization and missile defense programs, and some consideration for development program and market risks.”

Dow member United Technologies Corp. (UTX $68) posted 4Q EPS ex-items of $1.23, compared to the consensus estimate of analysts, which called for the company to report $1.14. Revenues at the industrial conglomerate fell 5% y/y to $14.1 billion, but above the $13.8 billion that the Street had expected. UTX also affirmed its 2010 outlook of 7-13% earnings growth.

Yahoo (YHOO $16) reported 4Q EPS ex-items of $0.15, four cents above the Street’s forecast, as revenues came in at $1.3 billion, an 8.5% y/y decline, excluding traffic acquisition costs, just above the consensus forecast of $1.2 billion.

Mortgage applications fall, but major economic news is on the way

Treasuries are flat in morning action ahead of some key economic reports. Meanwhile, the US MBA Mortgage Application Index fell 10.9% last week, after the index, which can be quite volatile on a week-to-week basis, advanced 9.1% in the previous week. The decrease came amid a 2 basis-point increase in the average 30-year mortgage rate to 5.02% versus the previous week, and as the Refinance Index fell 15.1%, pressuring the overall application gauge. Meanwhile, the Purchase Index also contributed to the decrease, declining 3.3%. The average 30-year mortgage rate remains above the record low of 4.61% that was reached at the end of March.

Just after the opening bell, the economic calendar will yield the last in the series of housing data for the last month of 2009, with new home sales forecasted to increase 3.0% month-over-month (m/m) in December to an annual rate of 366,000 units, after falling in three of the past four months, highlighted by an 11.3% decline in November. Existing home sales, which reflect closings from contracts entered one to two months earlier, tumbled 16.7% m/m in December to an annual rate of 5.45 million units, while new home sales are a more current reading on activity in the housing market, reflecting contract signings. The extension and expansion of the home buyer tax credit may have spurred demand during December, but the month is typically slow while consumers are busy with holiday activities, and the buying process typically takes several weeks before a contract is signed. Housing market data will likely be volatile for several months with the Fed tapering off purchases of mortgage-backed securities (MBS) ahead of a March conclusion, which may result in rising mortgage rates, as well as the end of the tax credit this spring.

And in the afternoon, the keynote report on the US economic front will be statement released upon the conclusion of the two-day Federal Open Market Committee (FOMC) meeting. No changes are expected to interest rate policy at the meeting, but the focus for investors is any clues about the timing of when the Fed expects to begin increasing rates, focusing on the language used by the Fed with regard to the “extended period” for keeping rates at an exceptionally low rate. Additionally, at the December meeting, several FOMC participants indicated support for increasing the size of the MBS purchase program, so any changes in language regarding this program will also be scrutinized, and there is talk of the potential for the Fed to increase the rate paid on excess reserve balances.

Ben Bernanke’s term as Chairman of the Federal Reserve is scheduled to expire January 31, and fervor over his reappointment has been on the mind of traders. While it is unclear when a vote by Congress will take place, if he is not confirmed by January 31, then the Vice Chair, Donald Kohn, would serve as the acting Chair. However, Bernanke is likely to be reappointed as Chair of the FOMC, which is determined by a vote of the FOMC committee.

Europe modestly lower ahead of US central bank meeting

Stocks in Europe are under pressure in afternoon action as concerns about China’s growth, amid government intervention to slow down the economy to prevent asset bubbles from forming, are weighing on energy and mining and metals issues. Financials are also under pressure to bog down trading across the pond as Spanish financial firm BBVA (BBVA $17) is solidly lower after the nation’s second-largest lender reported that 4Q net profits tumbled 94% on loan losses, missing analysts’ estimates, per Bloomberg. However, some losses across the pond are being limited by slight strength in technology issues on the heels of a report from German software maker SAP (SAP $46) that it expects to return to growth in 2010. Trading may be cautious in front of the US Federal Reserve’s interest rate decision, which will come after the European markets close. On the economic front, France’s consumer confidence unexpectedly improved in January, while a report on German consumer prices is expected later today. Britain’s FTSE 100 and France’s CAC-40 indexes are both 0.7% lower, Spain’s IBEX 35 Index is off 2.0%, while Germany’s DAX Index is 0.3% in the red.

Asia under pressure again as China concerns continue to stymie sentiment

Stocks in Asia were broadly lower again, led by mining and energy shares as worries about the impact of China’s government-induced slowdown of its economy on the overall global recovery. China’s Shanghai Composite Index fell 1.1%—the fifth decline in six sessions—and Hong Kong’s Hang Seng Index was 0.4% lower. Meanwhile, Japan’s Nikkei 225 Index fell for the seventh session out of eight, declining 0.7%, exacerbated by a stronger yen versus the dollar, which dampened optimism about revenues of firms that rely heavily on sales in the US. A solid decline in shares of Toyota Motor Corp. (TM $87) added to the pressure on Japanese trading as the world’s largest automaker announced that it will suspend production and US sales of eight models tied to a part that led to the company recalling over 2 million vehicles recently. TM will temporarily stop selling the RAV4, Highlander, Sequoia, Corolla, Camry, Avalon, Matrix, and Tundra vehicles. On the Japanese economic front, Japanese exports increased for the first time in 15 months. Elsewhere, South Korea’s Kospi Index was down 0.7% even after the nation reported a current account surplus for the 11th consecutive month, as shares of LG Electronics came under pressure amid the weakness in tech issues despite the world’s second-largest maker of LCD TVs reporting a better-than-expected profit.

Australia’s S&P/ASX 200 Index fell 1.6%—after returning to trading from yesterday’s holiday, pressured by expectations that the country’s central bank will increase rates for a fourth-straight time in February following a report that showed consumer prices rose more than anticipated in 4Q. Rounding out the day in Asia, India’s BSE Sensex 30 Index fell 2.9% after being off yesterday, and Taiwan’s Taiex Index was down 0.5%, marking the eighth-straight session of losses.