Morning Update

Slightly in the Red Before the Fed

The equity markets are modestly lower in morning action amid some concerns about a government-induced slowdown in China and as traders are treading cautiously ahead of tomorrow’s Federal Reserve one-day monetary policy meeting. Treasuries are nearly unchanged and stocks showed a modest reaction to the first piece manufacturing activity data for March as the Empire Manufacturing Index declined by a smaller amount than economists’ expected. Meanwhile, industrial production and capacity utilization, and the NAHB Housing Market Index are set to be released later today. In equity news, PepsiCo Inc increased its dividend, private-equity firm Apax Partners agreed to sell Tommy Hilfiger to Phillips-Van Heusen Corp, and Capital One Financial Corp reported declines in some key loan charge-off indicators. Overseas, Asia was mostly lower, and European stocks are modestly in the red in afternoon trading.

As of 8:48 a.m. ET, the June S&P 500 Index Globex future is 1 point below fair value, the Nasdaq 100 Index is 2 points below fair value, and the DJIA is 5 points below fair value. Crude oil is down $0.43 at $80.81 per barrel, and the Bloomberg gold spot price is up $4.96 at $1,106.85 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is up 0.4% to 80.14.

PepsiCo Inc. (PEP $65) 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.

In M&A news, private equity firm Apax Partners announced a definitive agreement to sell Tommy Hilfiger Group to Phillips-Van Heusen Corp. (PVH $48) for about $3.0 billion, which includes $2.6 billion in cash and $380 million in PVH common stock.

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.

New York manufacturing declines by a smaller amount than expected

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 (economic calendar). Treasuries are nearly unchanged, showing little reaction to the manufacturing report.

Later in morning action, industrial production and capacity utilization will be released for February, with production forecast to come in flat after increasing 0.9% in January, while utilization is expected to tick lower from 72.6% in January to 72.5%. Meanwhile, in afternoon action, the NAHB Housing Market Index will be released and the gauge of homebuilder sentiment is expected to remain at 17 for March.

The highlight for the week will be the Federal Open Market Committee (FOMC) meeting and statement release mid-day Tuesday. The one day meeting is the first since the crisis, as the Fed is returning to its normal meeting schedule. While no changes are expected to interest rate policy at the meeting, market participants continue to dissect the Fed’s language with regard to the “extended period” for keeping rates at an exceptionally low rate, particularly in light of a dissenting vote to keeping the “pre-commitment” language at the last meeting, the increase in the discount rate inter-meeting, and the looming expiration of the mortgage-backed security (MBS) purchase program at the end of the month.

Other releases on this week’s US economic calendar include the Producer and Consumer Price Indexes, housing starts and building permits, MBA Mortgage Applications, the import price index, initial jobless claims, and the Index of Leading Economic Indicators.

Europe lower as on China concerns and as finance ministers meet

Stocks in Europe are under slight pressure in afternoon action, led by weakness in basic materials amid concerns about the impact on the global economic recovery of possible monetary tightening in China. Also, focus is on meetings between European finance ministers, expected to discuss today and tomorrow the best way to handle the debt crisis in Greece, as well as other issues regarding the euro-area financial system. Reports suggest that German and French officials are anticipating that no aid package will be released amid expectations that Greece’s recent austerity plans will be enough to tackle its deficit problems. Meanwhile, in other economic news, a report showed that euro-zone employment declined 0.2% quarter-over-quarter (q/q) in 4Q, compared to the 0.5% decline in 3Q. Year-over-year (y/y), the report showed employment contracted by 2.0%. Elsewhere, a separate report showed UK home prices rose 0.1% month-over-month (m/m) in March, compared to the 3.2% m/m increase that was seen in February. Britain’s FTSE 100 and France’s CAC-40 Indexes are off 0.1%, while Germany’s DAX Index is 0.1% higher.

Asia lower on China tightening concerns

Stocks in Asia were mostly lower amid increased expectations that the Chinese government will announce new measures to prevent the overheating of the economy, with another increase in the nation’s bank reserve requirement—the amount of capital banks must keep on hand instead of lending out—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. The Shanghai Composite Index was down 1.2% and Hong Kong’s Hang Seng Index finished 0.6% lower. Meanwhile, the concerns of a slowdown in China weighed on materials issues and stocks in the resource rich nation of Australia came under pressure, with the S&P/ASX 200 Index declining 0.7%. However, the Nikkei 225 Index was flat, as weakness in the yen helped support export issues, limiting some of the aforementioned sentiment toward China. Also, a report showed Japanese consumer confidence improved from 39.4 in January to 40.0 in February to help keep stocks from slipping below the flatline. Elsewhere, Taiwan’s Taiex Index fell 1.5%, South Korea’s Kospi Index decreased 0.8%, while India’s BSE Sensex 30 Index was nearly unchanged.

In other economic news, China’s foreign direct investment rose 1.08% y/y in February, down from 7.8% in January and compared to the 10.7% increase that economists had expected. Moreover, 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.