Stocks ended with small gains Wednesday, with some names rallying on strong March-quarter earnings news. However, worries that an interest rate hike could come sooner than hoped loomed after Federal Reserve Chairman Alan Greenspan gave his assessment of the economy to the Joint Economic Committee.
The Dow Jones industrial average edged up 2.77 points, or 0.03%, to 10,317.27. The broader Standard & Poor's 500-stock index rose 5.97 points, or 0.53%, to 1,124.12. The tech-heavy Nasdaq composite index gained 17 points, or 0.86%, to 1,995.63.
In his testimony Wednesday, Greenspan said "the Fed funds rate must rise at some point to prevent ... inflation from eventually emerging." So far, however, "monetary accommodation has not fostered an environment in which broad-based inflation pressures appear to be building." That said, the Fed "will act, as necessary, to ensure" that inflationary pressures do not build. In particular, Greenspan said rates must rise, rather than return to neutral, at some point.
Wednesday afternoon, the Federal Reserve's Beige Book, an anecdotal report on economic conditions, noted "widespread" economic growth from mid-February to early April, with labor markets tightening somewhat while wage gains are modest. "There were no real surprises from the Beige Book, but it certainly supports the sunny outlook from Greenspan," says Informa Global Markets.
The Fed chief's Wednesday comments came after a steep drop in stock prices the previous day when Greenspan testified to the Senate Banking Committee in Washington, D.C., about banks' readiness to absorb rate hikes. He said deflation is no longer an issue, and added that if productivity remains strong, inflationary pressures will be reasonably contained. During the Q&A that followed, he mentioned that pricing power is returning and he is confident about jobs doing the same.
Economic data the rest of the week are weekly jobless claims, as well as the Labor Dept.'s release of the March producer price index, on Thursday. Durable goods orders will be reported on Friday.
In Wednesday's market action, the prospect of higher rates drove the U.S. dollar index to a 5-month high, hurting gold, metals, and other commodity sectors, notes Standard & Poor's MarketScope. Rate-sensitive groups were also lower, including financials and insurance.
In earnings news, Motorola (MOT) shares rallied after the mobile phone maker posted 18 cents for March quarter operating EPS, sharply above the Street's 7-cents forecast. Other communications-equipment stocks also rose.
Results from Coca-Cola (KO), a member of the Dow average, were also strong. Another well-known name, Eastman Kodak (EK), posted solid numbers and raised guidance.
The automotive group was also up, boosted by strong March-quarter results and raised guidance from Ford (F).
Electronic manufacturing services stocks were higher after Sanmina (SANM) posted better second-quarter results vs. a year ago on a pro forma basis.
Career Education (CECO) shares jumped after the company reported first-quarter EPS of 40 cents, vs. 20 cents a year ago, on a 64% revenue rise. It sees 33 cents for second quarter EPS on $405 million and $410 million revenue. For 2004, the company sees $1.75 in EPS on $1.675 billion to $1.7 billion in revenue.
Companies on the earnings calendar Thursday include Amazon.com (AMZN), AIG (AIG), AT&T (T), Merck (MRK), Microsoft (MSFT), Nextel Communications (NXTL), and many more.
It was a wildly volatile session in the Treasury market, with Greenspan's testimony providing the highlight. An upbeat Beige Book sparked short covering as it was not overly strong, quelling fears of near term Fed action, says Informa Global Markets. Prices rose into the close, sending the yield on the 10-year note down to 4.44%.
The Fed chairman soothed some of the market's fears, emphasizing that rates will rise, but declining to say by how much or when. Greenspan also eased inflation fears. Thus, massive short covering and outright retail buying emerged, says Informa Global Markets.
Fed funds futures priced out some rate hike expectations near term, but August futures still price in a 100% probability of a hike, notes Informa.
European stock markets finished lower. London's Financial Times-Stock Exchange 100 index was down 29.1 points, or 0.64%, to 4,539.9 in reaction to yesterday's late U.S. market selloff on higher interest rate fears. Some investors were disturbed by Chancellor Brown's warnings for corporations to keep a lid on wage increases because he won't tolerate inflation, reports Standard & Poor's MarketScope.
Germany's DAX index fell 34.98 points, or 0.86%, to 4,026.15. In Paris, the CAC 40 index lost 30.28 points, or 0.8%, to 3,743.15.
Asian markets finished lower on Wednesday. In Japan, the Nikkei 225 index declined 7.96 points, or 0.07%, to close at 11,944.3, as tech names slid after Tuesday's strong performance and amid cautious sentiment ahead of Greenspan's congressional testimony later Wednesday. Analysts say a U.S. interest rate hike could lead to selling of U.S. stocks, which would encourage foreign investors to take profits on Japanese stocks as well.
In Hong Kong, the Hang Seng index lost 167.07 points, or 1.35%, to close at 12,227.3.