Evening Update

Surprising Rate Hike in India Ignites Bout of Profit-Taking

The Dow ended an eight-day winning streak on Friday after the central bank of India made an intra-meeting move to increase interest rates, reminding traders that with strong economic growth comes the possibility of rate hikes, opening the door for profit-taking and sending stocks lower to end the week. Volume was expectedly heavy, as it was "quadruple-witching" day, where both index and stock futures and option contracts were set to expire, and the S&P 500 Index made some rebalancing adjustments at the close. In light equity news, Dow component Boeing said it will increase production for several planes earlier than expected, Palm reported a loss and issued disappointing guidance, SunPower announced an earnings shortfall and concluded its internal accounting probe, while Google will reportedly announce its plans for China on Monday. There were no US economic reports scheduled for release today and Treasuries finished mixed.

The Dow Jones Industrial Average fell 37 points (0.4%) to close at 10,742, the S&P 500 Index lost 6 points (0.5%) to 1160, and the Nasdaq Composite was 17 points (0.7%) lower at 2,374. In expectedly heavy volume, 2.0 billion shares were traded on the NYSE and 2.9 billion shares were traded on the Nasdaq. Crude oil was $1.52 lower at $80.68 per barrel, wholesale gasoline fell $0.04 to $2.26 per gallon, and the Bloomberg gold spot price lost $21.27 to $1,106.09 per ounce. Elsewhere, the Dollar Index-a comparison of the US dollar to six major world currencies-was up 0.6% to 80.73. For the week, the DJIA rose 1.1%, the S&P 500 Index advanced by 0.9%, and the Nasdaq Composite gained 0.3%.

Dow component Boeing Co (BA $71) was higher after it said it will raise production for its 777 and 747 airliners to meet increasing demand. The company said that "We see 2010 as the year of overall economic recovery within the industry and 2011 a year where airlines return to profitability." As a result, the company said "we anticipate an increase in demand for airlines in 2012 and beyond." The increase in production for the 777 program moves from early 2012 to mid-2011, while the 747 program production boost moves ahead by a year, to start in mid-2012.

Palm Inc. (PALM $4) announced a 3Q loss of $0.13 per share on revenue of $349.9 million, after the company a month ago said that its Pre and Pixi smart phones were not selling as well as hoped. Shares ended nearly 30% lower after Palm said the quarter ending May would see sales falling to less than $150 million, much weaker than the $305.8 million consensus estimate. In commenting on the results, management said that 4Q is an "exceptional situation" that will be driven by the need to reduce elevated inventory, as the company shipped 960,000 smart phones in 3Q but only sold 408,000 devices, leaving 552,000 in stores that the company still needs to sell. Management added that the performance was "deeply disappointing" and that the company plans on strengthening its sales and marketing strategies.

Shares of SunPower Corp. (SPWRA $19) were lower after the company announced the conclusion of its internal accounting probe, saying prior results were overstated due to the understatement of expenses in its Philippines operations, and announced disappointing EPS for 4Q. Earnings per share ex-items for 4Q of $0.47 were below the analyst estimate of $0.49, while revenues of $547.9 million were ahead of the $491 million forecast.

Google (GOOG $560) is reportedly set to make an announcement on Monday about whether it will pull out of China, according to the China Business News, quoting a source. Google did not comment on the report and shares were slightly lower.

All quiet on the US economic front

Treasuries were mixed as there were no economic reports released in the US. The yield on the 2-year note rose 3 bp to 0.93%, the yield on the 10-year note gained 1 bp to 3.69%, while the 30-year bond yield lost 1 bp to 4.58%.

India bumps interest rates

After markets in Asia closed, the Reserve Bank of India (RBI) raised rates in an unscheduled meeting, the first time since June 2008. The central bank of India increased the benchmark reserve repurchase rate to 3.5% from a record-low 3.25% and the repurchase rate to 5.0% from 4.75%. In making the move, the RBI said that the "recovery is increasingly taking hold," adding that "developments on the inflation front, however, are a source of growing concern.” While food prices have moderated, they “remain at elevated levels," and the "acceleration in prices of non-food manufactured goods and fuel items in recent months has been of particular concern." As such, the central bank believes that anchoring inflation expectations and containing overall inflation have become imperative, and a normalization of monetary policy from levels consistent with a crisis situation is warranted. The RBI said that as "liquidity in the banking system will remain adequate, credit expansion for sustaining the recovery will not be affected."

In economic news in Europe, Germany reported producer price data that was inline with economist forecasts, with PPI flat month-over-month (m/m) and down 2.9% year-over-year (y/y), while Italy reported weaker-than-expected industrial orders, declining 2.8% m/m, versus the estimate that orders would be down 0.2%.

Greek Prime Minister Papandreou continued his appeal to the European Union to provide a clear mechanism for financial support in the case that interest costs do not decline, saying that Greece can't afford to hold out much longer at current market rates, and while the EU has given verbal guarantees, rates remain elevated ahead of an additional 10 billion euros in bonds that mature on April 20 and May 19. Papandreou said that, "We need the strong political support to make these necessary reforms and to make sure that we aren't going to pay more than necessary." Yesterday, Papandreou hinted that he may go to the International Monetary Fund (IMF) for help if the EU fails to act, a step that was considered a non-desirable option as it could diminish confidence that the European Union can handle its own crises. However, division on such a move has increased between Germany and France. German Chancellor Angela Merkel shifted more toward an IMF-led solution saying this week that involving the IMF "would probably have to be the right way out right now if action were to be taken", whereas French President Nicolas Sarkozy, opposes the idea, instead hoping for a European remedy.

Canada reported that core prices at the consumer level, which exclude food and energy, unexpectedly jumped 0.7% m/m in February, well above the 0.3% increase expected by economists polled by Bloomberg. It marked the fastest pace since November 2008 as traveler accommodations during the Vancouver Winter Olympics accelerated 16% and automobile insurance premiums rose 7.9%. The overall CPI rate rose 0.4%, above the 0.3% predicted. A separate report in the nation showed that retail sales for January increased 0.7%, slightly higher than the 0.6% gain expected by economists, citing a 7.5% rise in home improvement receipts before a government tax credit expired.

More of the same as Fed language maintained and inflation tame

The equity markets continued their recent theme of nudging modestly higher this week, showing subdued reactions to favorable data as optimism continued to be held in check by the backdrop of high unemployment and uncertainty regarding the impact on the markets of financial regulation and healthcare reform out of Washington. Uneasiness on the international front also stymied sentiment amid concerns the global economic recovery could be threatened by festering debt fears toward Greece and growing expectations that China may be nearing the deployment of further measures to try to prevent an overheating of its economy.

Some of the major developments this week that seemed to be discounted by the aforementioned cautiousness included the Federal Reserve maintaining its outlook that the "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." Moreover, reports showing a larger-than-expected drop in wholesale prices and an unexpected unchanged reading on consumer prices suggested all is quiet on the inflation front to support the Fed's low interest rate environment. Elsewhere, industrial production unexpectedly rose, both reads on business activity in New York and the Mid-Atlantic region were better than expected, and M&A activity continued to pour in, all helping support the recovery argument but seeming to fall relatively on deaf ears.

Next week chock full of economic data

A busy economic week starts Tuesday with the release of existing-home sales, expected to have decreased 0.9% m/m in February to an annual rate of 5.0 million units. Sales of existing homes reflect closings from contracts entered one to two months earlier, while new home sales, expected to show a 1.9% increase in February to an annual rate of 315,000 units when released on Wednesday, are a more timely indicator of conditions in the housing market, as they reflect contract signings. Housing market data has been volatile and has yet to show a resurgence in sales after the initial tax credit was expanded and extended, and a m/m increase in new home sales would be the first since October.

The housing market played an important role in the crisis and the stabilization in prices off the lows has played a role in improving consumer confidence in the recovery, as homes tend to be one of the largest assets for many Americans. Housing affordability is near 40-year highs, aided by the Fed’s mortgage-backed security (MBS) purchase program, which the New York Fed, who runs the program, estimates narrowed mortgage spreads by a full percent (100 bps).

Durable goods orders will also be reported on Wednesday, expected to rise 0.5% m/m in February after increasing 3.0% in January, while ex-transportation, orders are also forecasted to have grown 0.5% m/m, after falling 0.6% in January. The durable goods data is volatile on a month-to-month basis as the large size of orders for items such as airplanes and military equipment can have a tendency to distort the data.

Friday brings the third and final reading of Gross Domestic Product (GDP) for 4Q, considered a proxy for corporate profits. Economists are expecting no changes to the growth rate of 5.9%, on personal consumption growth of 1.7%, and a GDP Price Index of 0.4%, while core PCE (personal consumption expenditures) grew 1.6%. The prior reading of 4Q GDP was boosted by a slower pace of inventory consolidation, which added 3.9% to GDP, as well as capital spending on equipment and software, which contributed 0.9% and rose at an 18.2% pace in 4Q, the most since 2006. Meanwhile, net exports added 0.3%, as exports increased at a 22.4% pace and imports (a subtraction from GDP) gained 15.3%, and consumer spending contributed 1.2%.

Other reports on next week's US economic calendar include the Chicago Fed National Activity Index, the Richmond Fed Manufacturing Index, the MBA Mortgage Applications Index, initial jobless claims, and the University of Michigan consumer sentiment survey.

Economic releases in Asia/Pacific next week include Japan consumer prices and Australia will announce its leading index.

In Europe, releases include euro-zone PMIs for services and manufacturing, industrial new orders, German consumer confidence and the IFO survey of business confidence, French employment, as well as UK home prices, CPI, retail sales, and business investment.

Releases elsewhere in the Americas include Brazil employment and the Canadian leading indicators index.