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MORNING WATCH, Mar. 22
By Frederic Ruffy, Optionetics.com
3/22/2005 6:00 AM EST

http://optionetics.com/articles/article_full.asp?idNo=12116

Stocks are set to open modestly higher Tuesday, helped by a benign reading from the latest Producer Price Index [PPI]. Trading is expected to remain cautious, however, ahead of today’s Federal Reserve Open Market Committee [FOMC] meeting. Approximately one hour before the opening bell on Wall Street, stock index futures hinted at a possible 12-point move higher in the Dow Jones Industrial Average ($INDU) and 6-point gain for the Nasdaq ($COMPQ).

The latest reading on producer prices held no major surprises. The PPI Index, which measures the price of a basket of goods on the wholesale level, rose .4% in February. Economists were looking for a gain of .3%. Excluding food and energy, the core-PPI rose only .1%, which was in line with expectations. Stock index futures ticked higher on the news because the tame reading helps to allay some of the recent inflation fears. The Consumer Price Index [CPI], which is considered a better barometer of inflation, is due out tomorrow.

In addition, the FOMC meets later today to discuss monetary policy. Economists expect the committee to announce another.25-point increase in its Fed Funds target, to 2.75%. The announcement is due out at 2:15 a.m. ET today.

Investors will be interested in the post-FOMC statement and any possible changes to the wording since the last meeting. To be specific, there is some uncertainty regarding whether or not the adjective “measured” will be dropped from Fed’s stance on future rate hikes. If the word is removed, it could signal that the FOMC is ready to move more aggressively on rates. That is, the Fed is ready to move rates up faster than previously expected.

Software stocks might fall in early trading after Electronic Arts (ERTS) issued an earnings warning Monday afternoon. The software maker says it now expects to earn $1.62 to $1.64, compared to previous estimates of $1.87. Shares are down $8.65 to $57.70 in pre-market trading.

In other stock news, General Motors (GM) and American International Group (AIG) are likely to weigh on the Dow Jones Industrial Average early today. Shares of General Motors lost ground in overseas trading on news that General Electric (GE) has decided to pull its $2 billion credit line that has helped GM pay parts suppliers. Meanwhile, AIG fell $1.00 to $56.90 after two key executives said they would invoke their Fifth Amendment rights as regulators investigate the company. However, Alcoa (AA) might help offset some of those losses within the Dow after the company announced a restructuring plan that might save $45 million a year.

Overall, the tone of early trading is likely to be somewhat positive due to the tame reading from the PPI. However, although the report helps ease some of the recent inflation fears, trading is likely to remain cautious ahead of the FOMC announcement. High oil prices, which are essentially unchanged this morning, along with the GM news might weigh on market sentiment. For that reason, after the market’s initial reaction, stocks are likely to trade cautiously until the Fed’s announcement hits the wires.



Frederic Ruffy
Senior Writer
Optionetics.com ~ Your Options Education Site