Evening Update

Fed Preserves Language, Slightly Ups Economic Assessment

The equity markets were able to maintain gains following the Federal Reserve’s monetary policy announcement, in which it offered no surprises by reiterating its “extended period” language when referring to the low level of the fed funds rate, and ended near the highs of the day. The Fed also slightly upgraded its view of the economy, saying that the labor market is “stabilizing” while reiterating that economic activity has continued to strengthen. Prior to the release, equities enjoyed strength supported by the housing starts and building permits reports that showed annual rates fell to levels that were above economists’ forecasts, while import prices declined by a larger amount than expected. On the equity front, Dow member Intel Corp unveiled its new line of processors, fellow Dow component General Electric’s CFO offered upbeat comments regarding its dividend, Limited Brands Inc announced a special dividend and a share repurchase program, and Microchip Technology Inc upped its 4Q guidance. However, DSW Inc, reported earnings that missed analysts’ forecasts. Treasuries extended gains following the Fed’s report and finished higher.

The Dow Jones Industrial Average rose 44 points (0.4%) to close at 10,686, the S&P 500 Index gained 9 points (0.8%) to 1159, and the Nasdaq Composite was 16 points (0.8%) higher at 2,378. In moderately light volume, 1.0 billion shares were traded on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil was $1.90 higher at $81.70 per barrel, wholesale gasoline jumped $0.05 to $2.27 per gallon, and the Bloomberg gold spot price gained $18.70 to $1,127.15 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.5% to 79.69.

Dow member Intel Corp. (INTC $22) launched its Intel Xeon Processor 5600 series, which are the first server and workstation chips based on the Intel 32nm logic technology to increase speed and decrease energy consumption. The company said the chips deliver 60% greater performance than the previous generation processor. INTC traded higher.

Fellow Dow member General Electric (GE $18 ¹) extended early gains that came from an upbeat analyst report from JPMorgan Chase and finished higher after the conglomerate’s CFO said that it would like “to grow the dividend in 2011,” at an investor conference in Boston. The finance chief also noted that 1Q earnings could come up short of what it reported a year ago, due to losses from broadcasting the Olympics.

Limited Brands Inc. (LTD $25) announced that its Board of Directors has declared a special dividend of $1.00 per share and has authorized a $200 million share repurchase program. The dividend will be paid on April 19, 2010 to shareholders of record at the close of business on April 5, 2010. LTD was nicely higher.

However, footwear retailer DSW Inc. (DSW $27) was solidly lower after it reported 4Q EPS of $0.30, two cents shy of analysts’ forecasts, but revenues rose about 16% year-over-year (y/y) to $403 million, topping the $385 million that the Street expected. DSW issued full-year EPS guidance was inline with forecasts.

Microchip Technology Inc. (MCHP $28) said it expects 4Q EPS ex-items to come in at $0.42, compared to its previous guidance, which called for earnings to be between $0.39-0.41, and the Street’s forecast of $0.36. Also, MCHP said it expects revenues to grow 8% versus 3Q, versus its previous forecast calling for a 3-7% sequential improvement in revenues, which would exceed current analyst forecasts. The analog semiconductor company said the improved outlook is a result of strong bookings and sales activities quarter to date. Shares were higher.

Fed leaves rates unchanged, extended period language maintained

The Federal Open Market Committee (FOMC) concluded its one-day monetary policy meeting and as expected, the Committee kept the fed funds target rate unchanged at a level between 0-0.25%. The Committee’s accompanying policy statement reiterated that the Fed continues to anticipate that “economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” Also, the Committee did not change the size or the timing of its asset purchase programs, saying that “The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.” On the overall economy, the Fed said information received since it last met in January suggests that economic activity has continued to strengthen and that the labor market is stabilizing. On inflation, the Fed said with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time. Thomas M. Hoenig was the lone dissenter for the second meeting, continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability.

Treasuries extended gains following the announcement and finished higher with the yields on the 2-year note, 10-year note, and 30-year bond all down by 4 bps to 0.91%, 3.65%, and 4.59%, respectively.

Housing starts and building permits decline, import prices fall, Fed decision lies ahead

Housing starts for February were reported, showing starts fell 5.9% month-over-month (m/m) to an annual rate of 575,000 units, from an upwardly revised 611,000 last month, and compared to economists’ expectations of an decline to 570,000. Meanwhile, building permits declined, falling about 1.6% m/m to an annual rate of 612,000 from last month’s upwardly revised 622,000. The expectation was for a decrease to 601,000 units.

The report evoked a modest response from the equity markets as the data prompted mixed feelings regarding the housing front, along with uncertainty regarding the impact of the severe winter weather on the figures. Housing starts were revised about 3.4% higher in January and February’s annual rate came in above expectations, suggesting some increased activity in the new home building sector, possibly lending some support to homebuilder firms. However, new home sales account for a small portion of overall sales in the housing sector, and the elevated level of inventories in existing homes—which make up the lion’s share of total sales—on the market, coupled with well over 2 million foreclosures that are forecasted to hit the market this year, a meaningful improvement still seems well out grasp for the new home market. But building permits—one of the leading indicators tracked by the Conference Board as they are a gauge of potential future construction and economic growth—may have been the brightest spot of the report as they fell by less than half of what economists were anticipating and January’s number was revised slightly higher.

In other economic news, the Import Price Index declined 0.3% m/m for February, compared to the expectation of economists, which called for the index to decrease by 0.2%. Year-over-year, import prices are higher by 11.2%, versus the 11.3% forecast of economists.

Greece plan solidified, German investor confidence declines

European finance ministers announced that they have agreed upon the “technical modalities” for providing coordinated action in the case of need to the debt-ridden nation of Greece. However, no details of the plan were made available. A statement from the euro-zone meeting of finance ministers said, “The objective would not be to provide financing at average euro-zone interest rates, but to safeguard financial stability in the euro-area as a whole.” The Greece concerns were further soothed after Standard & Poor’s affirmed the nation’s BBB+ credit rating, while removing it from “creditwatch negative,” citing its view that the Greek government’s total package of deficit-reduction measures are appropriate to achieve its 2010 fiscal target.

In economic news in the region, the German ZEW Survey of Economic Sentiment was released today, showing that the index fell for a sixth-straight month to 44.5 in March from 45.1 in February, but above the decline to 43.5 that was forecasted. The current conditions component of the report rose to -51.9 in March from the -54.8 reading in February. Other economic data in the euro-area was geared toward inflation, headlined by a report that showed consumer prices in the euro-zone increased 0.3% m/m in February from -0.8% in January. Elsewhere, separate reports showed French consumer prices rose 1.4% m/m in February, above the 1.1% expected by economists, while Italian consumer prices were unchanged from the prior month at an increase of 0.1% m/m in February, inline with forecasts.

Further east, Australia’s central bank released the minutes from its last monetary policy meeting—where it hiked its benchmark interest rate for the fourth time in five meetings—which showed policymakers were not as upbeat about the economy as some anticipated.

Wholesale inflation in focus tomorrow

Tomorrow will bring the release of the Producer Price Index, forecasted to decrease 0.8% m/m in February, while excluding the more volatile components of food and energy, the core rate is expected to tick higher by 0.1%. On a year-over-year basis the headline rate is expected to be up 4.9%—and this rate could continue to climb in the short-term mainly due to the relatively low comparable prices of crude oil as the economy bottomed out last year—while the core rate is expected to be 1.0% higher y/y, at the bottom end of the Federal Reserve’s implied inflation target of between 1-2%.The Fed noted today that inflation is “low” and tomorrow’s report is likely not going to change inflation expectations as the backdrop of high unemployment and excess capacity continue to suggest the prospect of higher prices beginning at the wholesale level and eventually being passed on through and eventually showing up on the receipts of the consumer still appear to be nonexistent. Also on tap for tomorrow will be the MBA Mortgage Applications Index.

Internationally, employment numbers will come from the UK and Canada will report trade figures. As well, the Bank of Japan will conclude its two-day monetary policy meeting, and the Bank of England will release the minutes from the March 3-4 meeting.