Stocks rallied broadly on Tuesday after the Federal Reserve raised interest rates by one quarter percent -- as widely expected -- and signaled it was on course to keep tightening at a measured pace.
The Dow Jones industrial average finished higher by 130.01 points, or 1.32%, at 9,944.67. The broader Standard & Poor's 500 index gained 13.82 points, or 1.30%, to 1,079.04. The tech-heavy Nasdaq added 34.06 points, or 1.92%, at 1,808.70.
"I think it is kind of a relief rally," says Stephen Leeb, editor of The Complete Investor, a New York-based financial newsletter for retail and institutional clients. "I think investors were sort of relieved the Fed was not changing its policy and that it said there wasn't much to be concerned about."
Parsing the Fed's statement was expected to keep investors busy for a good part of the week as second quarter earnings season is beginning to taper off. Among the companies due to report on Wednesday are retail chain Federated Department Stores (FD) and food and support services firm Aramark (RMK).
Wednesday will also be fairly quiet on the economic data front. Among the few reports expected is the U.S. Treasury budget for July. It's expected to show the deficit widening to $65 billion from $62 billion in the previous month.
After Tuesday's hike, the Federal funds target rate is now at 1.5%. Investors were encouraged by the Fed's post-meeting statement that said despite some sluggish elements to the economy, "the economy nevertheless appears poised to resume a stronger pace of expansion going forward."
Still, it warned that higher energy prices could be to blame for slower output growth and a weaker-than-hoped for job market. Leeb adds that rising energy prices present a tough challenge for the Fed. "I think the Fed would probably liked to have raised rates by a half percentage point," he says. Rising energy prices are inflationary, Leeb notes, but the problem is, they are also a depressant on the economy. "It is the worst sort of position to be in and it is totally out of their control."
Oil slipped back in price Tuesday after touching a record high of $45 a barrel. Iraq is resuming full production in its southern Basra oil terminal, according to Informa Global Markets, citing an unnamed oil official. But Informa says supply and terror concerns remain at the forefront as U.S. oil prices trade 40% higher than a year ago and up almost $14 from last year's average.
After the closing bell, networking gear maker Cisco Systems (CSCO) said its quarterly profit and sales increased thanks to higher demand from corporate customers.
Walt Disney (DIS) said its profit rose, thanks to good business at its theme parks and cable channels, which helped offset lackluster results at ABC television and its film studio.
In other economics news, U.S. productivity outside of the farm sector rose at a 2.9% annual pace in the second quarter following a revised 3.7% gain in the first quarter (was 3.8%), according to Informa. The news was better than the expected 2.3% gain. But the second quarter gain was the slowest in 5 quarters.
Elsewhere in the report, labor compensation rose at a 4.9% annual pace, pushing unit labor costs up 1.9%, vs. expectations of a roughly 1.4% rise. Unit non-labor costs rose at a 4.4% pace, while the deflator rose 2.8%. Manufacturing productivity gained 7.5%, which was way ahead of the first quarter's 2.8% gain, and the best showing since the 10.5% rise for the third quarter of 2003, according to Informa.
Among other stocks in the news Tuesday, EchoStar Communications (DISH), the satellite television service provider, posted better subscriber growth and authorized a new $1 billion stock buyback plan.
Trump Hotels & Casino Resorts (DJT) annouced that bondholders had agreed to a plan to take Donald Trump's lodging and gaming group into voluntary bankruptcy and restructure its $1.8 billion debt.
May Department Stores (MAY), the name behind Lord & Taylor and David's Bridal chains, said quarterly profit as slow sales were offest by cost controls and better margins.
Church & Dwight (CHD), which makes Arm & Hammer baking soda and other household products, posted lower quarterly profits because of charges related to acquisitions.
Treasuries ended lower after the Fed removed expectations that it will take a "pause" in hiking rates, Informa Global Markets says. The yield on the benchmark 10-year note rose to 4.29%.
European stock markets closed higher on Tuesday. London's Financial Times-Stock Exchange 100 index gained 36.50 points, or 0.85%, to 4,350.90 as the British Retail Consortium reported UK retail sales rose 1.8% in July, down from 2.4% in June. Also, the UK June trade deficit widened to 4.97 billion pounds from 4.8 billion pounds in May and higher than the 4.5 billion anticipated. Meanwhile, UK CPI fell 0.3% in July. Barclays was higher on renewed speculation it may be a takeover target for New York-based Citigroup. Old Mutual higher on improved earnings.
In Germany, the DAX index was higher by 30.31 points, or 0.82%, to 3,720.69 as the German June trade surplus rose to 14.7 billion euros from 14.1 billion in May. Some investors were encouraged by oil prices pulling back from high levels. Deutsche Boerse was higher as lower second earnings still were better than expected.
In Paris, the CAC 40 index added 35.76 points, or 1.02%, to 3,533.06 as French manufacturing production rose 0.4% in June, vs. 0.7% in May, while industrial production rose 2.7% year on year in June, vs. 3.5% in May. Michelin was lower after Credit Suisse lowered its rating on the stock.
Asian stock markets closed mixed. Japan's Nikkei 225 index gained 44.85 points, or 0.41%, to 10,953.55 but upside was limited by investors' caution over soaring oil prices and ahead of the U.S. central bank's interest-rate decision later in the day. Shares of Japan's big four banks made solid gains while brokerages and general contractors also rose on bargain-hunting. Some investors sold exporters such as Toyota Motor, Nissan Motor and Canon, as the Fed is expected to indicate that it would slow the pace of U.S. interest rate rises this year which could lead to a rise in the yen versus the U.S. dollar and hurt Japanese exports. .
In Hong Kong, the Hang Seng index fell 59.37 points, or 0.48%, 12,408.09, following Monday's lackluster performance on Wall Street, high oil prices and wariness over the Fed meeting. Blue chips were mixed, with heavily-weighted stock, HSBC dipping 0.84% on profit-taking. The bank's share price had gained 4% last week after releasing strong earnings.