Morning Update

Stocks Showing Their Holiday Green as Inflation Remains Tame

Stocks are moving higher in morning action as a drop in prices at the wholesale level is helping lend some support to yesterday’s maintained pledge by the Fed to keep a low interest rate environment. The Fed will remain in focus today, with an afternoon testimony by Fed Chief Ben Bernanke in front of the House Financial Services Committee. Treasuries are mixed, paring gains following the inflation report, while a separate release showed mortgage applications declined last week. Equity news is light, with Discover Financial Services posting an unexpected loss, but announcing that it will pay back taxpayer funds to the government. Overseas, Asia moved broadly higher on the heels of the Fed’s announcement and after the Bank of Japan doubled its loan facility, and European stocks are posting an afternoon advance.

As of 8:51 a.m. ET, the June S&P 500 Index Globex future is 2 points above fair value, the Nasdaq 100 Index is 1 point above fair value, and the DJIA is 20 points above fair value. Crude oil is up $0.78 at $82.48 per barrel, and the Bloomberg gold spot price is down $3.15 at $1,124.55 per ounce. Elsewhere, the Dollar Index—a comparison of the US dollar to six major world currencies—is down 0.1% to 79.66.

Discover Financial Services (DFS $15) reported 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. Analysts were expecting the company to post a $0.10 per share profit, but it was unclear whether this included the loan loss reserve addition. 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. Also, the company said 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.

Wholesale prices fall, mortgage applications decline, Bernanke set to opine

The Producer Price Index (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%. Treasuries are mixed, paring gains following the report.

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.

Later today, Federal Reserve Chairman Ben Bernanke will testify at a House Financial Services Committee hearing on examining the link between Fed bank supervision and monetary policy. The testimony from the Fed Chief is set for 2:00 p.m. ET, and comes a day after the Federal Open Market Committee (FOMC) left the fed funds rate unchanged at a range of 0-0.25% and reiterated that it 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.”

Europe higher as materials move

Stocks in Europe are in the green in afternoon action, led by strength in basic resources and industrials on global economic optimism after the US FOMC pledged to keep a low interest rate environment for an extended period. The economic calendar across the pond is also helping the advance, with a report showing 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 is helping 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%.

In equity news, shares of Italy’s largest bank UniCredit (UNCFF $3) are solidly higher to help the advance in the euro-area after it reported an unexpected 4Q profit and proposed a dividend. Meanwhile, Inditex (IDEXY $13) is also lending support to the gain in the region as the world’s largest clothing retailer, per Bloomberg, is nicely higher after posting 4Q profits that topped analysts’ forecasts. Elsewhere, shares of UK rail operator Arriva (ARRVF $13) are up over 15% after it said that it received a takeover offer from an entity that was not named.

Britain’s FTSE 100 Index is 0.4% higher, France’s CAC-40 Index is up 0.5%, Germany’s DAX Index is advancing 0.8%, and Italy’s FTSE MIB Index is 1.2% in the green.

Asia advances as global central banks update their stances

Stocks in Asia were broadly higher following the US Federal Reserve’s monetary policy announcement and on the news that the Bank of Japan eased its monetary policy further. The BoJ kept its benchmark interest rate unchanged at 0.1%, while it doubled its three-month loan facility to 20 trillion yen ($222 billion) in the nation’s attempt to fight deflation and possibly slowdown the recent strength in the yen. Japan’s Nikkei 225 Index gained 1.2% following the news, which pressured the yen to boost the outlook for profits in export issues. Meanwhile, South Korea was one of the leading performers in the region, with the Kospi Index advancing 2.1% on the aforementioned central bank announcements and following a report that showed the South Korean unemployment rate decreased from 4.8% to 4.4% in February. Elsewhere, Australia’s S&P/ASX 200 Index rose 1.2%, supported by higher commodity issues on the optimism that the global economic recovery will continue to receive support from the accommodative monetary policy stances in the US and Japan. Also, the eighth-consecutive increase in Australia’s Leading Index helped support that advance down under.

Chinese stocks also posted strong gains, with the Shanghai Composite Index rising 1.9% and Hong Kong’s Hang Seng Index advancing 1.7%. Rounding out the day, Taiwan’s Taiex Index gained 2.0% and India’s BSE Sensex 30 index rose 0.6%.