Morning Update

Inflation Data Soothes Some Uneasy Reaction to Fed Action

The equity markets have come off of the worst levels of the day, which came from a surprising rate increase from the Federal Reserve, after the Consumer Price Index came in cooler than most had expected, especially after yesterday’s hotter-than-anticipated Producer Price Index. Treasuries added to modest gains after the inflation report, while the dollar is nicely higher on the Fed’s move. Early losses for stocks also came from the tech sector as Dell’s better-than-expected profit report is being overshadowed by worries about its gross margins. In other equity news, J.C. Penney reported earnings that exceeded analysts’ expectations. Overseas, Asia came under broad-based pressure following the Fed’s rate action, while Europe has pared early losses along with the US markets.

As of 8:51 a.m. ET, the March S&P 500 Index Globex future is 3 points below fair value, the Nasdaq 100 Index is 4 points below fair value, and the DJIA is 20 points below fair value. Crude oil is down $0.08 at $78.98 per barrel, and the Bloomberg gold spot price is higher by $4.50 at $1,113.20 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.9% at 81.10.

Dell Inc. (DELL $14) reported 4Q EPS ex-items of $0.28, one penny above the consensus estimate of Wall Street analysts, with revenues increasing 11% year-over-year to $14.9 billion, versus the $13.8 billion that analysts had anticipated. DELL said its product shipments rose 16% y/y, with notebook shipments up 32% y/y. However, shares are under pressure as traders are reacting negatively to the company’s gross margin performance, which came in at 17.4% of revenue ex-items, pressured by seasonal strength in consumer demand, which has lower margins the company said.

J.C. Penney (JCP $26) reported 4Q EPS of $0.84, two cents above the Street’s expectation, with revenues declining 3.6% y/y to $5.6 billion, compared to the $5.5 billion that analysts were anticipating. JCP said its strongest merchandise results were in women’s apparel and shoes, while the best geographical performance came in the central region of the country.

Fed hikes rate sooner than expected

Just after yesterday’s closing bell, the US Federal Reserve announced, along with other measures intended as a further normalization of its lending facilities, that it will increase its discount interest rate—a primary credit rate for banks to obtain short term loans from the Fed—from 0.5% to 0.75%, “in light of continued improvement in financial market conditions,” the Fed’s statement read. The vote was unanimous and although last week’s testimony from Fed Chief Ben Bernanke and this week’s release of the Fed’s monetary policy meeting minutes noted that the Fed was going to take this action soon, the reaction by traders has been to the downside, suggesting the increase came sooner than some had expected. The Fed added that these modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy. The Fed maintained its outlook that “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

Consumer prices subdued

The Consumer Price Index showed prices at the consumer level rose 0.2% in January month-over-month (m/m), below the forecast of economists surveyed by Bloomberg, which called for the index to rise 0.3%. Meanwhile, the core rate, which strips out food and energy, unexpectedly fell, declining by 0.1% m/m for January, versus the Street’s forecast of a 0.1% advance. While food and energy is the smallest component in the CPI basket, it tends to be the most volatile and often explains a majority of changes in the index at the headline level. On a year-over-year basis, consumer prices were up 2.6% in January, compared to the forecast of 2.8%, and the core CPI was 1.6% higher year-over-year, compared to the 1.8% forecast. Treasuries added to modest gains following the report.

Europe under some pressure amid flood of data and Fed’s rate surprise

Stocks in Europe are under some pressure in afternoon action, led by financials and basic materials issues as traders digest the Fed’s interest rate increase, a slew of earnings news, and a plethora of economic data in the Eurozone region. But stocks have come off of the worst levels of the day on the US inflation data. Shares of Anglo American (AAUKY $20) are down solidly after the UK mining firm announced that it will not pay a dividend for a second year in a row, after posting a more than 50% drop in full-year net profit, but it said it expects to resume its dividend payout in 2010. In other equity news, shares of Carrefour (CRERF $48) are lower after the large French retail firm reported that its profits fell, Thales (THLEY $49) is down 15% after the French defense electronics firm forecasted lower new orders in 2010 and posted a full-year loss, and the world’s largest cement maker Lafarge (LFGEF $70) is lower after it announced an unexpected 4Q loss. However, losses are being limited by a solid gain in Nestle (NSRGY $47) after its full-year profits exceeded analysts’ estimates and it provided an upbeat outlook for sales this year.

The Eurozone economic calendar is also plentiful today, as several PMI results were reported for February, with French manufacturing and services both missing economists’ forecasts, while German PMI manufacturing exceeded expectations but its service activity came up short, and the overall Eurozone PMI’s showed that service activity missed forecasts and manufacturing exceeded estimates. Outside of the PMI reports, German producer prices rose more than expected m/m in January, Italian industrial orders unexpectedly jumped m/m in December, while UK retail sales dropped more than forecasted m/m in January.

The UK FTSE 100 is 0.1% lower, France’s CAC-40 Index is down 0.4%, Germany’s DAX Index is 0.2% in the red, and Italy’s FTSE MIB Index is declining 0.8%.

Asia slides after Fed’s action

Stocks in Asia were mostly lower in reaction to the US Federal Reserve’s interest rate action with Japan’s Nikkei 225 Index dropping 2.1%, Hong Kong’s Hang Seng Index falling 2.6%, and South Korea’s Kospi Index losing 1.7% to pace the broad-based decline in the region. Chinese and Taiwanese markets remained closed for holidays. Meanwhile, Australia’s S&P/ASX 200 Index faired relatively well, declining 0.4%, in the face of the uneasy reaction to the Fed’s action and amid some data out of the region from its central bank and a large financial firm. Shares of National Australian Bank (NABZY $23) was solidly lower after the nation’s fourth-largest bank posted flat 1Q cash earnings, which disappointed some as the results were below the firm’s peers, and the company’s CEO said loan growth was tempered and competition weighed on margins. Moreover, the Reserve Bank of Australia Governor Glenn Stevens noted that the economy has less room for growth without stoking inflation, saying, “Monetary Policy must therefore b careful not to overstay a very expansionary setting,” he told a parliamentary committee hearing today per Bloomberg News. The comments may have increased the outlook for further rate hikes by the RBA, which has raised its benchmark lending rate three out of the four previous monetary policy meetings, after surprising some earlier this month by keeping its main lending rate unchanged at 3.75%.

In other economic news, Singapore reported that its 4Q GDP contracted at a slower pace quarter-over-quarter than expected, and the y/y GDP rate showed a larger expansion than forecasted. Singapore’s Straits Times Index declined 0.4%. Elsewhere, India’s BSE Sensex 30 Index finished down 0.8%.