Wednesday's Drivers Were Powerful

Stocks slowly sank into the 2:00 PM FOMC Meeting Minutes release, and then dove deeper from there in Wednesday trading. We said it in our weekly preview, that the driver this week and today would certainly be the Fed minutes, and that was the case.

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The Fed’s Sexy Ways are Tiring

The S&P 500 sank 1.2% on the day, with the majority of the loss posted after 2:00 PM. Investors are worried that the Fed will eventually have to back away from its asset purchases and low rate policy, either due to an improving economy or emerging inflation. Despite the recently reported Q4 2012 GDP contraction, the outlook for the economy is for improvement, and so trading around Fed meetings will begin to prove problematic from here on out as it weighs backing out.

Former Fed Governor Frederic Mishkin appeared on CNBC this evening and said Fed members were beginning to raise concerns about the Fed’s low rate policy leading to excessive risk taking. I have concern that the Fed balance sheet could prove unmanageable if our economic operating environment were to experience significant and abrupt change, perhaps due to an outside catalyst.

A second housing data point found the wire this morning, when the Housing Starts report came due for January. The annual pace of housing starts slowed to 890K, down from a revised December pace of 973K (adjusted from 954K). Economists were expecting housing starts to measure 914K, and so housing stocks marked a second leg lower Wednesday. This followed Tuesday’s disappointment in the Housing Market Index decline. Still, Builder Permits edged up to a pace of 925,000 in January, up from December’s revised pace of 909,000. Economists were expecting improvement, but only to 920K. Because good news is built into housing stocks at this point, any disappointment is going to be meaningful for industry shares, as we’ve seen the last two days.

The Mortgage Bankers Association reported its Weekly Applications Survey of mortgage activity this morning. Mortgage application activity decreased by 1.7% in the period ending February 15, after declining the week before by 6.4%. Again, the key factor was rising effective mortgage rates, with the 30-year fixed rate mortgage rate on conforming loans up three basis points to 3.78%; that is the highest it has been since August. We recently wrote about the impact of a lender supply shortage on mortgage rates, which could be another factor behind the rise. Still, these holiday and weather affected periods are hard to read, so investors will want to look forward to beyond the next report as well (due to President’s Day) for a clear read on activity.

The Producer Price Index was reported this morning for the month of January. The PPI increased 0.2% month-to-month, versus the economists’ consensus expectation for a 0.3% rise and against the 0.3% decrease (revised from -0.2%) in December. Excluding food and energy prices, the more important Core PPI also rose by 0.2% against expectations for the same. In December, the Core PPI was up 0.1%. The news certainly didn’t take pressure off the Federal Reserve nor did it alleviate the market’s concerns about potential future inflation. We’ll get the Consumer Price Index, which is obviously going to play bigger than PPI, tomorrow morning. Economists are looking for a Core CPI increase of 0.2%, which shouldn’t be supportive of stocks tomorrow.

The International Council of Shopping Centers reported Weekly Same-Store Sales for the period ending February 16. Sales increased by 2.7% this week, versus the 2.5% decline the week before. Obviously, Valentine’s Day played big for the period. On a year-over-year basis, sales gained by just 1.8% last week, versus the 2.1% increase in the prior year period. The blizzard that just nailed New England probably had something to do with the year-to-year comparison.

Wednesday’s corporate wire had investor/analyst meetings at Genpact (NYSE: G) and Triumph Group (NYSE: TGI). The Barclay’s (NYSE: BCS) Industrial Select Conference highlighted presentations by Danaher (NYSE: DHR) and Praxair (NYSE: PX). The day’s earnings schedule included 51Job Inc. (Nasdaq: JOBS), A. T. Cross (NYSE: ATX), Acadia Healthcare (Nasdaq: ACHC), Achillion Pharmaceuticals (Nasdaq: ACHN), AerCap (NYSE: AER), Ameren (NYSE: AEE), American Equity Investment (NYSE: AEL), American Railcar (Nasdaq: ARII), Avista (NYSE: AVA), Baltic Trading (Nasdaq: BALT), Cinemark (NYSE: CNK), Clean Harbors (NYSE: CLH), Clearwater Paper (NYSE: CLW), Cobra Electronics (Nasdaq: COBR), Commtouch Software (Nasdaq: CTCH), Concho Resources (NYSE: CXO), Crocs (Nasdaq: CROX), Curis (Nasdaq: CRIS), Curtiss-Wright (NYSE: CW), Denny’s (Nasdaq: DENN), DENTSPLY (Nasdaq: XRAY), Depomed (Nasdaq: DEPO), Devon Energy (NYSE: DVN), DISH Network (Nasdaq: DISH), Dixie Group (Nasdaq: DXYN), Drew (NYSE: DW), Dynamics Research (Nasdaq: DRCO), DTE Energy (NYSE: DTE), Eaton Vance (NYSE: EV), EchoStar (Nasdaq: SATS), EMC Insurance (Nasdaq: EMCI), Encore Wire (Nasdaq: WIRE), Energy Transfer Equity (NYSE: ETE), Equity Transfer Partners (NYSE: ETP), Exact Sciences (Nasdaq: EXAS), EXCO Resources (NYSE: XCO), FleetMatics (Nasdaq: FLTX), Fluor (NYSE: FLR), Forest Oil (NYSE: FST), Franklin Electric (Nasdaq: FELE), Garmin (Nasdaq: GRMN), Genco Shipping & Trading (NYSE: GNK), Goodrich Petroleum (NYSE: GDP), Gray Television (NYSE: GTN), Healthcare Realty Trust (NYSE: HR), Heico (NYSE: HEI), Helix Energy (NYSE: HLX), Heritage Crystal Clean (Nasdaq: HCCI), HomeAway (Nasdaq: AWAY), Horsehead Holdings (Nasdaq: ZINC), Hudbay Minerals (NYSE: HBM), Huron Consulting (Nasdaq: HURN), Iconix Brand (Nasdaq: ICON), InterDigital (Nasdaq: IDCC), Isle of Capris Casinos (Nasdaq: ISLE), Jack in the Box (Nasdaq: JACK), KAR Auction (NYSE: KAR), KBR (NYSE: KBR), Leap Wireless (Nasdaq: LEAP), LifeLock (Nasdaq: LOCK), Lithia Motors (NYSE: LAD), Lumber Liquidators (NYSE: LL), Macquarie Infrastructure (NYSE: MIC), Maiden Holdings (Nasdaq: MHLD), ManTech Int’l (Nasdaq: MANT), MedAssets (Nasdaq: MDAS), Medicines (Nasdaq: MDCO), MGM Resorts (NYSE: MGM), Neenah Paper (NYSE: NP), Newport (Nasdaq: NEWP), Noranda Aluminum (NYSE: NOR), Orient Express Hotels (NYSE: OEH), Owens Corning (NYSE: OC), Pegasystems (Nasdaq: PEGA), Penn Virginia (NYSE: PVA), PGT (Nasdaq: PGTI), Polypore (NYSE: PPO), PVR Partners (NYSE: PVR), Quality Distribution (Nasdaq: QLTY), Questar (NYSE: STR), Radio One (Nasdaq: ROIA), RealPage (NYSE: RP), Regency Energy Partners (NYSE: RGP), Responsys (Nasdaq: MKTG), Rubicon (Nasdaq: RBCN), Safe Bulkers (NYSE: SB), Sauer-Danfoss (NYSE: SHS), Six Flags Entertainment (NYSE: SIX), SM Energy (NYSE: SM), Sodastream (Nasdaq: SODA), Solazyme (Nasdaq: SZYM), Sonic Automotive (NYSE: SAH), Southwestern Energy (NYSE: SWN), STAG Industrial (Nasdaq: STAG), Sunoco Logistics (NYSE: SXL), Synacor (Nasdaq: SYNC), Synopsis (Nasdaq: SNPS), Tesla Motors (Nasdaq: TSLA), The Boston Beer Co. (NYSE: SAM), The Cheesecake Factory (Nasdaq: CAKE), Toll Brothers (NYSE: TOL), TOR Minerals (Nasdaq: TORM), Trinity Industries (NYSE: TRN), Tronox (Nasdaq: TROX), United Online (Nasdaq: UNTD), USA Mobility (Nasdaq: USMO), Vantiv (Nasdaq: VNTV), Vermillion (Nasdaq: VRML), WageWorks (Nasdaq: WAGE), Walter Energy (NYSE: WLT), Waste Connections (NYSE: WCN), Williams Cos. (NYSE: WMB), Williams Partners LP (NYSE: WPZ) and more.

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