Evening Update

Markets Celebrate “Green” Day, Finish in the Black

Stocks finished the day higher, although slightly off the highest levels of the day, led by the release of the Producer Price Index, which showed a larger-than-expected drop in wholesale prices. In light equity news, Discover Financial Services announced that it will pay back funds received under the TARP program, but also reported an unexpected 1Q loss. Hartford Financial Services Group followed suit by announcing it will issue common stock and debt in order to pay off its $3.4 billion TARP loan. Meanwhile, tax preparation software maker Intuit Inc reported a solid increase in tax preparation software units. Treasuries finished the day mixed after paring modest gains following the release of the inflation report and a release showing that mortgage applications declined last week.

The Dow Jones Industrial Average rose 48 points (0.4%) to close at 10,734, the S&P 500 Index gained 7 points (0.6%) to 1166, and the Nasdaq Composite was 11 points (0.5%) higher at 2,389. In moderately light volume, 1.0 billion shares were traded on the NYSE and 2.2 billion shares were traded on the Nasdaq. Crude oil was $0.94 higher at $82.64 per barrel, wholesale gasoline jumped $0.03 to $2.30 per gallon, and the Bloomberg gold spot price fell $8.09 to $1,119.61 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—was down 0.05% to 79.72.

Discover Financial Services (DFS $15) announced that it received regulatory approval to redeem the $1.2 billion of preferred stock that it issued to the US Treasury to payback funds received under the Troubled Asset Relief Program (TARP), which it will issue $350 million of subordinated debt prior to the redemption. Additionally, the credit card company confirmed last week’s guidance, announcing a fiscal 1Q loss of $0.22 per share, which included a pre-tax addition to its loan loss reserves of $305 million, which it said brings the company’s reserve coverage to approximately 12 months of losses. The credit card firm said its card sales volume increased 5% year-over-year (y/y) to $22 billion and its expenses were down 15% y/y. Shares finished the day slightly lower.

Also, Hartford Financial Services Group (HIG $29 ¹) reported that it is conducting a public offering of equity and debt securities as part of a plan to fully repurchase the $3.4 billion in preferred shares issued to the government under the Treasury’s Capital Purchase Program. The offerings will consist of $1.45 billion of common stock and $500 million of mandatory convertible preferred stock, with the debt offering consisting of $425 million. Additionally, HIG said it will issue $675 million of senior notes to pre-fund the repurchase of senior debt, which is set to mature in 2010 and 2011. Shares were solidly higher.

Tax preparation software maker Intuit Inc. (INTU $35) provided its second of three season-to-date updates, announcing that total TurboTax federal units increased 10% y/y. INTU said it is pleased with how the tax season is progressing and continues to see strong growth online fueled by the increasing popularity of do-it-yourself tax software. Shares were lower.

Wholesale prices fall, mortgage applications decline, Bernanke speaks before Congress

The Producer Price Index (PPI) (chart) showed prices at the wholesale level fell 0.6% month-over-month (m/m) in February, after advancing 1.4% in January. The average economist forecast surveyed by Bloomberg called for prices to decrease 0.2%. Meanwhile, the core rate, which excludes food and energy, rose 0.1% m/m, matching the forecast of economists. On a year-over-year basis, headline producer prices were 4.4% higher, and the core rate was up 1.0%.

The larger-than-expected drop in the headline inflation rate of prices paid by wholesalers and manufacturers was due mainly to a 2.9% decline in energy goods, which had increased the past four months, with the Labor Department saying 90% of the drop was attributed to a 7.4% fall in gasoline prices. Meanwhile, the modest gain in the core rate—the figure that the Fed pays closer attention to—came courtesy of a 0.5% increase in passenger car prices. The report illustrates the volatility in the headline figure due to the energy component—and part of the reason why the Fed applies more weight to the core rate—as January’s larger-than-expected increase was traced back to a more than 5% jump in energy prices. The main takeaway from today’s data is that it supports the Federal Reserve’s outlook it reiterated in yesterday’s monetary policy statement that “With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time,” supplying some breathing room to keep “exceptionally low levels of the federal funds rate for an extended period.”

Also, keep in mind that tomorrow, we will get the release of the Consumer Price Index (CPI) to add a more complete picture of the inflation landscape, and prices at the consumer level are expected to increase 0.1% m/m on both the headline and core rates. The CPI typically carries more weight than the PPI as it depicts prices that the consumer, which account for the lion’s share of the economy, bears.

Treasuries were mixed, as the yield on the 2-year note rose 1 bp to 0.92%, while the yield on the 10-year note lost 2 bps to 3.63%, and the 30-year bond yield fell 2 bps to 4.56%.

In other economic news, the US MBA Mortgage Application Index declined 1.9% last week, after the index, which can be quite volatile on a week-to-week basis, ticked 0.5% higher in the previous week. The decrease came amid a 1.7% decline in the Refinance Index and following a 2.3% deterioration in the Purchase Index. Moreover, the drop in the overall index came despite a 10 basis-point decrease in the average 30-year mortgage rate, which fell to 4.91% and remains above the record low of 4.61% that was reached at the end of March 2009.

Federal Reserve Chairman Ben Bernanke testified at a House Financial Services Committee hearing on examining the link between Fed bank supervision and monetary policy. Bernanke urged Congress to allow the Fed to keep all of its banking oversight, arguing that the information obtained from that oversight helps the Central Bank to guide the economy and make interest rate decisions. He also added that the Fed’s banking duties give it insights into the health of the entire banking system. The testimony came a day after the Federal Open Market Committee (FOMC) left the fed funds rate unchanged at a range of 0-0.25%.

World Bank issues recommendations for China

The World Bank issued its quarterly assessment of China today, recommending an increase in interest rates in order to contain a growing property bubble and strengthening of the yuan to help control inflation expectations. The Washington-based World Bank raised its economic growth forecast for 2010 to 9.5% from 9% in January and predicted an inflation rate of 3.7% for the year, compared to a target rate that the country has set at 3%. China has kept an exchange-rate peg to the dollar since mid-2008, in an effort to protect export levels. Recent estimates suggest that China’s export levels could increase by 14% in 2010 as it maintains its place as the world’s number-one exporter. In a meeting of the nation’s legislature earlier this week, Chinese Premier Wen Jiabao opposed calls to appreciate the yuan, arguing that politicizing exchange-rate issues is “counterproductive to global efforts in tackling the financial crisis.”

In other international news, a report showed UK jobless claims unexpectedly fell in February, declining by 32,300, compared to the forecast of Bloomberg economists, which called for claims to rise by 6,000. The upbeat labor data in the UK helped offset a separate report that showed euro-zone construction output fell in January. In other economic news, the Bank of England released the minutes from its last monetary policy meeting, which showed policymakers voted unanimously to keep the 200 billion-pound bond purchase program on hold and its benchmark interest rate unchanged at 0.5%.

Consumer price index headlines busy day on tomorrow’s economic calendar

In addition to the aforementioned CPI, the other major economic releases due out tomorrow include weekly initial jobless claims, which are expected to decrease to 455,000 from 462,000 reported last week, and the Index of Leading Economic Indicators, which is expected to have increased 0.1% in February, after increasing 0.3% last month, which was the tenth consecutive increase. Rounding out the US reports will be the Philadelphia Fed’s Business Activity Index, which economists predict will rise to 18.0 in March from a previous reading of 17.6 in February.

On the international front, Japan will release its leading indicator index and the euro-zone will report its trade balance, while the European Central Bank will meet to discuss monetary policy.