Evening Update

Early Uneasiness Sets Tone for the Day

An unexpected increase in industrial production, a smaller-than-expected decline in manufacturing activity in the New York region, and two major M&A announcements were unable to spark any strong upside momentum as concern over possible monetary policy changes in China and their impact on the global recovery laid the foundation for negative sentiment in today’s session. However, stocks were able to bounce off their lows in the last half-hour of trading and finish mixed. In equity news, Dominion Resources Inc agreed to sell its natural gas and oil exploration and production business to a unit of Consol Energy Inc. for $3.5 billion, private-equity firm Apax Partners announced that it will sell Tommy Hilfiger to Phillips-Van Heusen Corp. for $3 billion, Boston Scientific Corp stopped shipment of certain defibrillators, PepsiCo Inc raised its dividend, OSI Pharmaceuticals rejected a hostile takeover bid for the company, and a number of credit card firms reported key metrics. Treasuries finished the day mostly unchanged.

The Dow Jones Industrial Average rose 17 points (0.2%) to close at 10,642, the S&P 500 Index was steady at 1151, while the Nasdaq Composite lost 5 points (0.2%) to 2,362. In light volume, 926 million shares were traded on the NYSE and 1.9 billion shares were traded on the Nasdaq. Crude oil was $1.44 lower at $79.80 per barrel, wholesale gasoline fell $0.03 to $2.22 per gallon, and the Bloomberg gold spot price gained $4.89 to $1,106.79 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was up 0.4% to 80.24.

Boston Scientific Corp. (BSX $7) was down sharply after the company announced that it has stopped shipment and is retrieving field inventory of all its implantable cardioverter defibrillators (ICDs) and cardiac resynchronization therapy defibrillators (CRT-Ds). BSX said it has determined that some manufacturing process changes were not submitted for approval to the US Food and Drug Administration (FDA). The company said it has informed the FDA and plans to work closely with the agency to resolve this situation as soon as possible, and it has no indication that the manufacturing process changes pose any risk to patient safety.

PepsiCo Inc. (PEP $66) announced that its Board of Directors approved an increase in the company’s annual dividend, raising the payout by 7% to $1.92 per share. The beverage company also authorized the repurchase of up to $15 billion of its common stock through June 2013. Shares were higher.

In M&A news, Dominion Resources Inc. (D $40) announced that it has agreed to sell its natural gas and oil exploration and production business to a newly-formed subsidiary of Consol Energy Inc. (CNX $49) for a total of $3.5 billion. D said the transaction is accretive to EPS, reduces commodity sensitivity, and eliminates the need to issue new equity in 2010 and 2011. D reaffirmed its 2010 operating earnings guidance of between $3.20-3.40 per share. CNX said the deal will “substantially increase” its natural gas reserves and production capacity and the deal includes the rights to about 491,000 acres in the Marcellus Shale area in Pennsylvania and West Virginia. Shares of D fiinished flat and CNX was lower.

Also, private equity firm Apax Partners announced a definitive agreement to sell Tommy Hilfiger Group to Phillips-Van Heusen Corp. (PVH $52) for about $3.0 billion, which includes $2.6 billion in cash and $380 million in PVH common stock. PVH finished the day nearly 10% higher on the news.

The board of OSI Pharmaceuticals Inc. (OSIP $58) rejected the $52 per share hostile takeover offer from Japan’s Astellas Pharama Inc. (ALPMY $37) and has moved forward with preliminary discussions with other companies that may present a better price for the company. In an interview, OSIP’s CEO reiterated that the offer from ALPMY didn’t reflect “the unique scarcity value in the bio-tech space,” after several companies in the sector have been able to seize large premiums in their deals. ALPMY responded, saying the offer expresses “full and fair value” for the firm and that it will nominate a full group of directors for OSIP in its upcoming shareholder meeting. OSIP finished higher, while ALPMY was lower.

Capital One Financial Corp. (COF $40) announced that its US loan charge-off rate—the percentage of loans that it does not expect to collect—declined from 10.41% in January to 10.19% in February, while its US credit card 30-day delinquencies—a gauge of future charge-offs—fell from 5.8% in January to 5.51% in February. Elsewhere, Dow member Bank of America (BAC $17 1) reported that its charge-off rate increased to 13.51% from 13.25% but its delinquency rate fell to 7.23% from 7.35%. Meanwhile, JPMorgan Chase & Co. (JPM $43) announced that its charge-offs declined to 9.21% from 10.91% and its delinquency rate dipped from 4.75% to 4.67%. Moreover, Discover Financial Services (DFS $15) said its charge-off rate increased to 9.11% from 8.58% and its delinquency rate slid to 5.5% from 5.55%. Moreover, American Express (AXP $40) reported charge-offs rose to 7.4% from 7.0%, while delinquencies were flat from the month prior at 3.6%. Shares of JPM and AXP were slightly lower, BAC was unchanged, while DFS and COF moved higher.

Industrial production unexpectedly gains, NY activity declines smaller than forecasted

Industrial production(chart) was released this morning, and showed a 0.1% month-over-month (m/m) increase in February, above the Street estimate, which called for a flat reading, while January’s strong 0.9% gain was left unrevised. Capacity utilization rose to 72.7%, from January’s 72.6%, better than the forecasted decline to 72.5%. The Federal Reserve, who issues the report, noted that “production was likely held down by winter storms in the Northwest.” Within the report, manufacturing fell 0.2%, with durables falling 2.3%, led by a 4.4% decline in automotive, while non-durables edged up 0.1%. Elsewhere, the output of mines rose 2.0% and the index for utilities moved up 0.5%.

The rate of utilization remains 7.9% below the longer-term average, and combined with little upward pressure on wages due to high unemployment, restrained housing costs, and low velocity of money (the rate that money multiplies through the economy as it is lent out), there is little threat of inflation in the near-term, and as such, there isn’t much pressure on the Fed to raise rates.

Meanwhile, the Empire Manufacturing Index, a measure of manufacturing in the New York region, declined in March to a level of 22.86, but still well above the level of zero that suggests conditions are neither contracting nor expanding. Economists surveyed by Bloomberg expected a decline to 22.00, following the previous month’s level of 24.91. The report is the first major piece of data looking at manufacturing conditions in March, and later this week, the Philly Fed Manufacturing Index will be released on Thursday, expected to increase from 17.6 in February to 18.0 in the current month, providing further insight into the health of the sector.

In other economic news, the NAHB’s Housing Market Index—a gauge of homebuilder confidence—fell from 17 in February to 15 in March. Economists surveyed by Bloomberg expected the index to remain at 17. A reading below 50 means most respondents still view conditions as poor.

Treasuries were nearly unchanged on the day with the yield on the 2-year note falling 1 bp to 0.94%, while the yield on the 10-year note was flat at 3.71%, and the 30-year bond yield gained 1 bp to 4.63%.

China monetary policy, European meetings in focus

Increased speculation that the Chinese government will announce new measures to prevent the overheating of the economy was in the forefront of investors’ minds, as another increase in the nation’s bank reserve requirement—the amount of capital banks must keep on hand instead of lending out— was suggested as the most likely possibility. China has raised the rate twice this year as it has pledged to rein in excess liquidity, and last week’s stronger-than-expected inflation report exacerbated the concerns that the nation will increase its actions and possibly hamper the global economic recovery. In other economic news in China, the country’s foreign direct investment rose for a seventh month in February to 1.1% year-over-year (y/y), down from 7.8% in January and far short of the 10.7% increase that economists polled by Bloomberg had expected.

Elsewhere in the Asia/Pacific region, Japanese consumer confidence improved from 39.4 in January to 40.0 in February, while India’s wholesale prices rose 9.89% y/y in February compared to the 9.69% that was expected and versus the 8.56% rise that was seen in January.

In Europe, focus was on meetings between European finance ministers, expected to discuss today and tomorrow the best course regarding the debt crisis in Greece, as well as other issues regarding the euro-area financial system. EU leaders are expected to submit a type of “framework” for the debt-ridden nation to conquer its financial issues, however reports suggest optimism by German and French officials that Greece’s recent austerity plans to tighten its belt may be enough to tackle its deficit problems. Economic and Monetary Commissioner Olli Rehn said the European Commission is set to “table a proposal for a coordinated framework” if necessary. Meanwhile, economic news in the region was light with the euro-zone reporting that employment declined 0.2% quarter-over-quarter (q/q) in 4Q, compared to the 0.5% decline in 3Q, while year-over-year, employment contracted by 2.0%. Elsewhere, a separate report showed UK home prices rose 0.1% m/m to 229,614 pounds ($346,000) in March, the smallest increase for the month of March since data was first collected in 2002 according to Bloomberg, compared to the 3.2% m/m increase that was seen in February.

FOMC meeting, housing data on tap

Tomorrow, the economic calendar will yield what will most likely be the headlining data points for the week, beginning with key readings on the housing market, with the releases of housing starts and building permits. Starts are expected to decline 3.6% to an annual rate of 570,000 and permits are forecasted to decline 3.4% to an annual rate of 601,000. The reports are considered leading indicators of housing activity, which has a large impact on economic prosperity. However, this report has been volatile in recent months, distorted by the initial expiration of the buyer tax credit, as well as seasonality and weather.

Meanwhile, the housing market will likely remain in focus throughout the day, culminating with the Federal Open Market Committee (FOMC) meeting tomorrow afternoon. With the Federal Reserve’s policy statement, which will follow the meeting, expected to offer no surprises on the fed funds rate policy, traders will likely closely scrutinize the Fed’s language for signs of changes to the looming expiration of the mortgage-backed security (MBS) purchase program at the end of the month.

The Import Price Index will also be released in the US, forecasted to fall 0.2% in February after gaining 1.4% in January.

The international economic calendar will include CPI figures out of France, Italy and the euro-zone, the Zew Economic Sentiment survey in Germany, manufacturing data in Canada, and the Tertiary Industry Index in Japan. As well, the Bank of Japan will hold its monetary policy meeting.