Housing, Jobs Data Weigh on Stocks

Amid weak reports on pending home sales and private-sector employment, traders weighed the possibility of a Fed rate cut on Sept. 18

by David Bogoslaw

U.S. stock indexes ended lower on Wednesday, as investors reacted to weaker-than-expected private-sector employment data that could presage a gloomy payrolls report on Friday, and to lower pending home sales that hinted at a deepening housing market slump. There was no relief from the Federal Reserve's Beige Book report, which failed to provide clear signs about whether the central bank will cut interest rates on Sept. 18.

Once again, financial stocks led the way to the downside, but retailers were also weak. On the New York Stock Exchange, losers outnumbered winners nearly three to one, with 24 stocks trading lower for every nine that had gains. On the Nasdaq Stock Exchange, the ratio was two-to-one negative.

The Dow Jones industrial average dropped 143.39 points, or 1.07%, to 13,305.47 on Wednesday. The broader S&P 500 was down 17.13 points, or 1.15%, to 1,472.29. The tech-heavy Nasdaq composite index fell 24.29 points, or 0.92%, to 2,605.95.

Wednesday’s losses erased the gains from the previous session. Tuesday's advance reflected the fact that traders back from vacation wanted to put their money to work after seeing the positive market gains last Friday, said James McGlynn, managing director of equities at Summit Investment Partners.

The ADP National Employment Report showed an increase of only 38,000 in August, significantly below the 65,000 gain that had been expected and the smallest increase in four years. The private sector added 48,000 jobs in July.

An independent report from Challenger, Gray & Christmas Inc., an employment consulting firm, said that announced layoffs soared 85% to 79,459 in August from 42,897 in July. The job cuts in August were the highest since February, when they totaled 84,014.

Pending home sales fell 12.2% in July from June and were down 16.1% from a year ago. The July numbers were the lowest since September 2001. The biggest drop -- 20.8% -- was seen in the western U.S., where jumbo loans, whose rates have become especially costly since the credit crunch, are prevalent. Homebuilder stocks fell traded lower on the numbers.

The Beige Book showed that damage from troubles in the financial markets has, for the most part, been limited to the real estate sector, leaving broader economic growth intact across the 12 Federal Reserve districts. Manufacturing continued to expand across most districts and retail sales were stronger, despite weaker auto and furniture sales. Tighter credit standards were reported by more than half of the districts, with tighter conditions for both mortgage and business loans in six of the 12 districts. Delinquencies in consumer loans and mortgages were modestly higher in four districts.

The Beige Book information, though mixed, may add to the body of evidence mounting this week that is building the case for an easing of interest rates by the Fed at its Sept. 18 policy meeting. But analysts are debating whether a cut in the Fed funds rate will filter down to free up liquidity in the credit markets.

Adding firepower to that debate are new worries over an uptrend in the London interbank offered rate, or Libor, a key benchmark for giant floating-rate bank loans taken out by global corporations. At 5.72%, Libor is at a six-year high, markedly above the Fed funds rate and moving in the opposite direction of other short-term interest rates. That could mean that problems in the money markets may not be alleviated by Fed rate cuts.

Far from suggesting that cutting the Fed funds rate wouldn't be that effective, the rising Libor begs that much more for a rate cut, McGlynn said.

"It’s a symptom, when Libor goes up, of some tightness. Just because we can’t see it doesn’t mean it's not happening," he said.

By lowering the Fed funds rate, policymakers would make it more affordable for banks to take onto their balance sheets some of the commercial paper that goes through the conduit and has been defaulted on by other borrowers, McGlynn said. Lowering rates may only indirectly filter through to the larger credit markets, but it would make a difference, he said.