Stocks Drop on Economic Worries

Sellers emerged after the FOMC minutes, a lower U.S. growth forecast from the IMF, and a realtors group's dimmer outlook for housing

Stocks lost ground Wednesday as investors worried about the economic outlook after the release of the minutes from the Federal Reserve's Mar. 21 policy meeting. All of the FOMC members expressed concern about the risks to inflation and that further rate hikes might be needed, but there was also increased uncertainty about growth, reports Action Economics. Lower forecasts for housing and U.S. growth also added to the gloom.

The Dow Jones industrial average fell 89.23 points, or 0.71%, to 12,484.62. The broader Standard & Poor's 500 index was down 9.52 points, or 0.66%, to 1,438.87. The tech-heavy Nasdaq composite lost 18.3 points, or 0.74%, to 2,459.31.

The FOMC minutes indicated that increased risk to growth and prices spurred the change in language in the Mar. 21 policy statement, says Action Economics. On growth, they were concerned about the possibility of "persistently sluggish" investment and "surprisingly" weak investment spending. Meanwhile, the Fed saw some "slight" upward pressure on inflation, and it was tough to tell if the the "downward trend" in inflation was continuing, says Action Economics.

"The mix of concerns in the minutes suggest the FOMC will remain in a watchful, waiting mode until a more definitive trend manifests," says Action Economics.

Early Wednesday, the International Monetary Fund revised U.S. GDP growth down to 2.2% in 2007 from 2.9% originally, though it expects a rebound in growth to 2.8% in 2008, according to updated forecasts in its World Economic Outlook, reports Action Economics. The international body sees this more as a "growth pause" than a recession and that steady Fed policy is the appropriate path for now given slowing growth, says Action Economics.

Among stocks on the move, financials got hit after Citigroup (C) announced an expected restructuring that involves cutting 17,000 jobs, relocating more than 9,500 jobs to lower-cost locations, and eliminating layers of management. The bank will take a $1.38 billion pre-tax and $871 million after-tax charge in the first quarter and $200 million (pre-tax) in subsequent quarters.

Housing stocks also fell after the National Association of Realtors lowered home sales forecasts due to the likelihood of tighter lending standards and other fallout from the subprime mess, says Action Economics. But the group also noted these conditions will eventually lead to a healthier housing market.

Kicking off the earnings season Tuesday night, Alcoa (AA) reported stronger than expected results -- first-quarter earnings per share from continuing operations were 77 cents, vs. 70 cents a year ago, on an 11% sales rise (see BusinessWeek.com, 4/10/07, "A Solid Kickoff from Alcoa").

American Medical Systems (AMMD) sees lower-than-expected first quarter EPS of 5-7 cents on sales of $108.4 million, below previous guidance of $113-$118 million. It cited vendor quality issues and performance shortfalls in internal manufacturing and demand planning efforts.

Tractor Supply (TSCO) sees better-than-expected first quarter EPS of 10-12 cents on same-store sales rise of 8.5% and $559.8 million total sales.

In the energy markets, May NYMEX crude rose 7 cents to $61.96 a barrel -- following the EIA inventory data, which revealed a 700,000 barrel build in crude stocks, vs. expectations for a 1.5 million rise. But the big news was the huge 5.5 million barrel draw in gasoline supplies. Fresh eight-month high gasoline prices pushed up crude - front-month gasoline surged nearly 5 cents/gallon to $2.17/gallon before closing around $2.1550, according to Action Economics.

European stock markets took a cue from their U.S. counterparts to turn lower in late-session trading Wednesday. In London, the FTSE-100 index was down 4.5 points, or 0.07%, to 6,413.3. Germany's DAX index fell 13.84 points, or 0.19%, to 7,152.83. In Paris, the CAC 40 index shed 14.35 points, or 0.25%, to 5,751.92.

Asian markets finished higher. In Japan, the Nikkei 225 index edged up 5.38 points, or 0.03%, to 17,670.07. In Hong Kong, the Hang Seng index rose 101.56 points, or 0.5%, to 20,449.43.

Treasury Market

Treasury yields nudged slightly higher in the wake of the FOMC minutes. "The market shifted uncomfortably in its seat after the Fed confirmed that it remains predominantly biased against inflation risks and that some further policy firming might be needed, but altered its rhetoric last month to accommodate increased uncertainty over both growth and inflation," says Action Economics. "This should really not come as a surprise, though through repetition the market is finally getting the message from the Fed." The 10-year yield edged up to 4.739%.