"It's as done a deal as there could possibly be," said Charles White, president of money management firm Avatar Associates. He noted that the Fed has done nothing to dispel the Street's anticipation of a half point rate cut. But the key to tomorrow's announcement will be in the Fed's language. "It's another case of what and how they talk about the economy. They need to look out a little bit," White said.
Investors were happily surprised on January 3, when the central bank made an interest rate cut of 50 basis points. The Street is convinced that the Fed will cut short-term interest rates tomorrow Wednesday by at least 50 basis points as Fed chief Alan Greenspan has admitted U.S. growth has "slipped very dramatically," to the point it may be "close to zero." Rumors of a 75 basis point aslo began to swirl around.
Many analysts see a 50 basis point cut already built into the stock market, which could spell a sell off tomorrow if the Fed delivers any less. Tony Dwyer, chief market strategist at brokerage firm Kirlin Securities, is also looking for a 50 basis point cut and he agreed that investors need to pay close attention to the central bank's phrasing. "If it's typical, then a 50 basis point cut will be greeted by a yawn. If they're a lot more aggressive and say that they stand ready to cut further then we won't see a sell off."
Investors saw more ammunition for a rate cut in the latest reading of the U.S.
consumer confidence index. The index plunged to 114.5 in January from a revised 128.6 in December. This is the biggest drop since October 1990, and represents the lowest reading since December 1996. The Conference Board, which issues the report, says this is in the range normally seen prior to a recession.
"A recession is unavoidable, but there is no reason for panic since the Federal Reserve has considerable room to move," Oscar Gonzalez, an economist with John Hancock Financial Services, told S&P's AdvisorInsight. A 50 basis point cut "would go a long way toward helping the economy avoid a sharp slowdown." Though the stalling economy appears here to stay, Gonzalez notes the Federal Reserve still "has about 600 basis points to work with."
Along with the Fed's decison on interest rates, investors will be responding to internet retailer Amazon.com's news of layoffs. The company posted a reduced quarterly loss, just beating Wall Street estimates, but said it would cut 15% of its workforce and take a restructuring charge of more than $150 million.
Number 1 mobile phone maker Nokia (NOK
) posted fourth-quarter profits that met analysts' estimates, but trimmed first-quarter sales growth forecasts. Sweden's Ericsson had previously issued a lackluster growth outlook.
The most actively traded issue on the Nasdaq was networking firm Cisco (CSCO
), which was down about 3% after its CEO said the current quarter was more challenging than previously thought. The stock gained some ground in the early afternoon, up about 2%.
The 30-stock Dow index rocketed with household products maker Proctor & Gamble (PG
) boosting the index more than 6%. The company said its earnings rose in the second quarter, excluding one-time charges, just beating consensus estimates. Also strong on the Dow was telecom giant AT&T (T
). Chipmaker Intel (INTC
), led the Philadelphia Semiconductor Index up 2%.
The Dow ended the day less than 1,000 points away from a record high, gaining 178.94 points, or 1.67%, at 10,881.13, while the tech-heavy Nasdaq finished near even, down 0.04 points, at 2,838.30. Meanwhile, the broader S&P 500 climbed 9.41 points, or 0.69%, at 1,373.58.
U.S. treasuries ended higher following the release of the worse-than-expected consumer confidence report. The short-covering squeeze this morning at the long end continues to gather upside momentum and the sharp drop in consumer confidence is giving the entire yield curve a lift. It clearly looks like the "fabric of consumer confidence" that Greenspan was so worried about last week is in tatters.
Stocks in the News
Pepsi Bottling Group (PBG
), the world's largest distributor of PepsiCo Inc. (PEP
) beverages, reported earnings that reversed a loss from a year earlier, and it said its CEO would step aside by the end 2001.
Aetna Inc. (AET
), the largest U.S. health insurer, said fourth-quarter earnings from continuing operations fell 65%, as higher medical costs cut into profits.
Confectioner Hershey Foods (HSY
) posted fourth quarter earnings per share of $0.84 compared with $0.70, on an 8% rise in sales.
Cosmetics maker Estee Lauder (EL
), posted second quarter earnings per share of $0.50 compared with $0.45 a year ago, on a 5% sales rise. The company said it believes it can achieve 8% to 10% third-quarter revenue growth and set fiscal year 2001EPS estimates in the range of $1.32 to $1.35.
Shipping giant United Parcel Service (UPS
) was hurt by the impact of a slowing U.S. economy on its domestic package delivery volumes, but the firm reported a quarterly profit slightly above lowered Wall Street expectations.
European markets were trading mixed. London's Financial Times-Stock Exchange 100 index finished up 17.50 points, or 0.28%, at 6,334.50, amid reports that December consumer credit rose 1.1 billion pounds. In Germany, the DAX Index finished down 11.66 points, or 0.17%, to 6,739.30, in anticipation of the U.S. central bank's rate cut decision. Meanwhile, France's CAC 40 ended up 29.25 points, or 0.50%, at 5,917.15, amid a report that business confidence fell in January.
The Asian markets finished down. Japan's Nikkei ended down 18.63 points, or 0.13%, at 13,826.65. Hong Kong's Hang Seng Index finished with a loss of 206.75 points, or 0.58%, at 15,893.07.
Treasury Secretary O'Neill says he doesn't expect U.S. influence over world economy to wane during any slowdown in domestic growth: Reuters.
BTM-UBSW retail chain store sales index rose 0.6% in the week ended Jan. 27 after falling 0.7% the week before. Sales were considered mixed: BTM.
DaimlerChrysler unit will cut Chrysler's annual production by about 15%, slash its work force by 20%, or 26,000 people, and idle six factories in North and South America in the industry's biggest retrenchment in a decade: WSJ. By Amy Tsao