The Federal Reserve raised rates by 25 basis points, as expected. Some market watchers say this brings it a step closer to ending its tightening policy
PREMIUM SEARCH Search by job title, geography and build a list of executive contacts
Stocks surged Thursday after the Federal Reserve raised the key federal funds rate by 25 basis points, to 5.25%, as expected. The markets are interpreting its statement, which focused on moderation in economic growth as well as inflation risks, as a sign the Fed may end its monetary tightening cycle in August or September, says Standard & Poor's Equity Research.
The Dow Jones industrial average jumped 217.24 points, or 1.98%, to 11,190.8. The broader Standard & Poor's 500 index gained 26.87 points, or 2.16%, to 1,272.87. The tech-heavy Nasdaq composite climbed 62.54 points, or 2.96%, to 2,174.38.
The market rally after the Fed announcement was not surprising, says Jeff Kleintop, chief investment strategist at PNC Financial Services in Philadelphia. "It was a big event for the market, and it's out of the way and allows money managers to put some money to work that they might have kept on the sidelines over the last few days or even weeks," he says. Still, Kleintop sees more of the same market volatility in the third quarter, setting up for a fourth-quarter rally.
The Fed's statement also relieved some uncertainty in the market about how many more rate hikes are left. The Fed seemed to remain biased toward further firming, though not to the degree seen in May, says Action Economics. In its statement, the key sentence was "the extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information," says Action Economics. The Fed noted the recent cooling in growth, but said "core inflation readings have been elevated," and there is an going concern over elevated energy costs.
"What took traders by surprise was the rather dovish talk about inflationary pressures, vs. the extreme talk on inflation earlier by the Fed," says Barry Hyman, equity market strategist at EKN Financial Services in New York. "You have to listen to the data, because the changeable [Fed] commentary can make you crazy." He predicts the Fed will notch up rates by 25 basis points again at its next meeting in August.
Action Economics says "the door is still open for an August hike, of any size, though there is a lot less certainty over such as the Fed eliminated the phrase "some further policy firming may yet be needed'." Indeed, the probability of a Fed hike in August has dropped from 90% before the announcement to around 70%. Says Kleintop: "This gives the Fed a lot more flexibility in shaping market expectations as the data comes in over the next month or so."
In economic data released Thursday, the final reading of first-quarter GDP was revised to 5.6% from 5.3%, as expected. The personal consumption expenditures (PCE) price index was unrevised at 2.0% -- the upper bound of the Fed's comfort zone, which provided a little relief on the inflation front, says Action Economics.
Coming Friday is the final June reading for the University of Michigan consumer sentiment, which is expected to hold at the preliminary level of 82.4. This would mark an improvement from May's trough of 79.1, but would remain below the previous six-month average of 87.9. saus Action Economics. High gas prices and the recent slump in stocks is likely continuing to hold back current levels of sentiment, says Action Economics.
Also being released is May personal income, which is expected to increase 0.2%, while consumption increases 0.3%. The May employment report suggests a very weak month for wage growth, where we expect an unchanged reading following the 0.9% surge in April. Action Economics expects a 0.3% PCE chain price gain, with a 0.3% core gain. The price forecast is consistent with the upside in the CPI report.
Among stocks on the move Thursday, Manitowoc Company (MTW) rose after the maker of cranes and foodservice equipment raised its outlook. It sees second-quarter EPS 10 cents above Street average estimates. The company raised $2.15-$2.25 2006 non-GAAP EPS guidance to $2.50-$2.60; reported GAAP EPS will include a charge of 15 cents for debt redemption.
The IPO of the day was Aventine Renewable Energy (AVR), an ethanol company. The stock dipped below its offering price of $43 a share. This follows the IPO earlier in June of rival VeraSun Energy (VSE).
A few stocks fell sharply on lowered earnings guidance, including Neoware (NWRE) and Advance Auto Parts (AAP).
Red Hat (RHAT) dropped after the company posted first-quarter EPS of 7 cents, the same as a year ago, as higher provision for income taxes and more shares outstanding offset a 38% total revenue rise.
Food maker General Mills (GIS) posted fourth-quarter earnings per share of 61 cents, vs. $1.14 a year ago, despite a 4.6% sales rise. It notes prior-year results included gain from divestitures. It set a $3.03-$3.08 fiscal year 2007 EPS target.
3Com (COMS) posted a 4 cents fourth-quarter loss (GAAP) per share, vs. 15 cents loss, on a 44% revenue rise.
Circuit City Stores (CC) raised its quarterly dividend to 4 cents from 1.75 cents. It increased its stock buyback program to $400 million.
In the energy markets, August West Texas Intermediate crude oil rose $1.33 to $73.52 a barrel, amid short covering ahead of the long holiday weekend in the U.S., says Action Economics.
European markets rallied ahead of the Fed decision. In London, the Financial Times-Stock Exchange 100 index rose 112.9 points, or 1.99%, to 5,791.5. Germany's DAX index jumped 124.8 points, or 2.29%, to 5,581.67. In Paris, the CAC 40 index climbed 106.38 points, or 2.23%, to 4,880.38.
Asian markets posted strong gains. Japan's Nikkei 225 index climbed 235.04 points, or 1.58%, to 15,121.15. In Hong Kong, the Hang Seng index rose 122.56 points, or 0.78%, to 15,865.22.
Treasury Market
Treasury yields ticked a few points lower after the Fed hiked rates. The benchmark 10-year note yield dropped to 5.20%.
By Karyn McCormack
READER COMMENTS
Get BusinessWeek directly on your desktop with our RSS feeds.
Add BusinessWeek news to your Web site with our headline feed.
Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video.
To subscribe online to BusinessWeek magazine, please click here.
Printer-Friendly Version