U.S. stocks closed lower Tuesday as recent market gains -- including as strong rally on Monday -- paved the way for profit taking ahead of two key events: Thursday's bank stress test results and Friday's U.S. April nonfarm payrolls data.
Federal Reserve Chairman Ben Bernanke told the Joint Economic Committee of Congress the economic contraction is slowing but the recovery will be slower than normal. The Fed chief sidestepped questions from lawamers on the government's stress test of major banks.
Traders weighed a better than expected reading on the Institute for Supply Management's April nonmanufacturing index, which rose to 43.7 from 40.8 in March.
On Tuesday, the 30-stock Dow Jones industrial average finished lower by 16.09 points, or 0.19%, at 8,410.65. The broader S&P 500 index fell 3.44 points, or 0.38%, to 903.80. The tech-heavy Nasdaq composite index shed 9.44 points, or 0.54%, to 1,754.12.
Treasuries eased after a $35 billion 3-year refunding auction. The dollar index rose. Gold and crude oil futures fell.
Bernanke sees signs of bottoming in the housing market, according to his prepared testimony before the JEC. He still expects the economy to turn up later this year, but he added, a relapse in the credit crisis could stall the recovery. The recovery will be only gradual, he warned, with the major risk to the economy coming from the labor market. He believes we are likely to see further "sizable job losses and increase unemployment" in coming months. Business investment also remains "extremely weak."
Bernanke told the JEC he doesn't want long term government ownership of businesses. What the Fed and Treasury are doing is trying to find ways of exit where firms are no longer dependent on government capital.
The Fed chief refused to "pre-disclose" stress test results, but is "satisfied" with the data. He said he was hopeful that many banks will be able to raise private capital given their "substantial" earnings capacity, although their ability to raise private funds remains to be seen.
According to press reports, the U.S. is expected to direct about 10 of the 19 banks undergoing government stress tests to boost their capital, according to several people familiar with the matter, a move that officials hope will quell fears about the solvency of the financial sector. The exact number of banks affected remains under discussion. It could include Wells Fargo (WFC), Bank of America (BAC), Citigroup (C) and several regional banks. At one point, officials believed as many as 14 banks would need to raise more funds to create a stronger buffer against future losses, these people said, but that number has fallen in recent days. Representatives from Wells, Bank of America and Citi declined to comment.
In economic news Tuesday, the U.S. ISM services index rose to 43.7 in April, better than expected, after falling 0.8 points to 40.1 in March (November's 37.4 marked an all time low; the index was at 52.0 a year ago). The business activity index increased to 45.2 from 44.1 in March (and 50.9 last April). The employment index improved to 37.0 from 32.3. New orders climbed to 47.0 from 38.8. The composite manufacturing and non-manufacturing index rose to 43.3 from 40.3. Prices paid inched up to 40.0 from 39.1.
Reuters reports prices at euro zone factory gates logged their biggest annual fall on record in March, pointing to possible deflation in coming months and boosting ECB rate cut expectations. Producer prices in the 16-country euro currency area fell 0.7% month-on-month and 3.1% annually, the biggest drop since EU measurements started in 1996, the European Union statistics office, Eurostat, said.
In earnings news Tuesday, UBS AG (UBS) posted a first-quarter loss from continuing operations of 0.57 Swiss francs vs. a 5.30 Swiss franc loss one year earlier, on a 62% drop in interest income. UBS said losses were driven primarily by risk positions in businesses now exited or in the process of being exited by its investment bank; results include 0.6 billion Swiss francs goodwill impairment charge related to the announced sale of UBS Pactual. UBS said it remains cautious on the immediate outlook for the company.
MGM Mirage (MGM) posted first-quarter EPS of $0.38 (including a $0.44 gain, net of tax) vs. $0.40 one year earlier, on 20% lower net revenue. Excluding the gain, which stems from the sale of the Treasure Island hotel and casino, MGM posted a $0.06 first-quarter loss, one cent narrower than the Street's $0.07 loss estimate.
Kraft Foods (KFT) posted first-quarter EPS of $0.45, vs. $0.39 one year earlier, on a 2.3% rise in organic revenues. Based on the strong operating gains in the first quarter, Kraft reaffirmed its confidence in achieving 2009 organic net revenue growth of approximately 3% and EPS of $1.88.