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Indexes finished modestly higher Tuesday in a volatile session after Bernanke & Co. said inflation remains its top concern
Stocks ended Tuesday's session higher despite initial disappointment that the Federal Reserve was not shifting its focus from inflation to the market's main preoccupation: anxiety about housing, credit markets, and the economy.
Major indexes, breaking even at midday, plunged after the end of the Federal Reserve meeting, when policymakers issued a statement saying inflation remains their "predominant concern." As expected, policymakers left interest rates unchanged.
Investors weren't expecting the Fed to cut interest rates, but many were hoping the Fed would back off its hawkish stance on inflation, toward a more neutral stance. "It's just the language that's a little disappointing to some investors," says Bryant Evans, portfolio manager at Cozad Asset Management.
"They're reiterating their primary job is inflation control," says Kim Caughey, senior analyst at Fort Pitt Capital Group. "We should not expect a [rate] cut."
Inflation remains a concern even if core inflation measures have "improved modestly," the Fed said. The Fed did acknowledge risks to economic growth have "increased somewhat." The statement said: "Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing."
Despite initial disappointment on the part of equity investors, buyers re-entered the market later. By the end of trading Tuesday, the Dow Jones industrial average was up 35.52 points, or 0.26%, to 13,504.3. The broader S&P 500 rose 9.04 points, or 0.62%, to 1,476.71. The tech-heavy Nasdaq index was up 14.27 points, or 0.56%, to 2,561.6.
Widespread uncertainty about the threat from problems with subprime loans has sent the stock market on a wild ride lately. Indexes came off a big rally on Monday, which in turn followed two weeks of steep declines.
Economic data released Tuesday may have made the Fed more cautious about the threat of inflation. Nonfarm productivity rose 1.8% in the second quarter, less than many were expecting. Unit labor costs rose 2.1%, more than expected.
On Tuesday, investors learned of problems at another mortgage lender. However, financial stocks, battered for weeks, were rebounding a bit. Thrifts and mortgage lenders were up 2.87%, and the investment banking sector was up 2.02%, according to Standard & Poor's.
Before Tuesday's Fed statement, there was a growing sense that the Fed may cut interest rates this fall. A Merrill Lynch report predicted the Fed could cut rates by October. The prediction "hinges on both the economy being weak and the financial market jitters being sustained," North American economist David Rosenberg wrote Monday.
But many were skeptical the Fed will move so quickly. The Fed's main responsibility isn't calming markets but ensuring stability in the economy, says Art Hogan, chief market analyst at Jefferies. "There's a difference between something that's bothering the markets and something that's bothering the economy," he says.
In the energy markets Tuesday, September West Texas Intermediate crude oil futures were back into positive territory after a couple days of declines. Oil was up 18 cents to $72.24. Oil dropped more than 5% on Monday because of speculation that U.S. demand has peaked.
Among stocks in the news on Tuesday, Luminent Mortgage Capital (LUM) suspended its second quarter dividend, canceled its second quarter earnings conference call, and has delayed filing a key report to the SEC. The firm says it's exploring options to address liquidity issues. The news is reminiscent of the cash crunch, caused by problems in the credit markets, that last week hit American Home Mortgage (AHM), which filed for bankruptcy on Monday.
Countrywide Financial (CFC), another big lender, agreed to buy certain assets of HomeBanc's retail mortgage operation.
Microsoft Corp. (MSFT) cut the estimated retail price of its Xbox 360 by $50. Separately, a U.S. judge reversed a $1.5 billion verdict against the company in a patent dispute with Alcatel Lucent ALU.
U.S. Cellular (USM) reported earnings of $1.67 in the second quarter, up from 57 cents a year ago. Total revenues were up 15%.
Duke Energy (DUK) reported earnings of 25 cents, vs. 24 cents a year ago.
Tyco International (TYC) reported earnings of 55 cents in its third quarter, up from 49 cents a year ago. Revenues were up 7.8%, and the firm expects fourth quarter revenue to rise 6 to 7%.
Harrah's Entertainment (HET) reported earnings of 96 cents, vs. 95 cents a year ago. Revenue rose 14%.
Wynn Resorts (WYNN) reported earnings of 82 cents per share, vs. a 20 cents loss a year ago, on a sharp rise in revenue.
Novatel Wireless (NVTL) reported earnings of 25 cents in the second quarter. It broke even a year ago. The firm sees 2007 earnings of $1.05 to $1.10 per share.
European stock rallied on Tuesday. In London, the FTSE 100 index rose 1.93% to 6,308.80. Germany's DAX index was up 0.93% to 7,513.66. In Paris, the CAC 40 index moved 1.58% higher to 5,620.4.
Asian markets were mixed. In Japan, the Nikkei index rose 0.04% to 16,921.77. In Hong Kong, the Hang Seng index edged down 0.13% to 21,907.99. In China, the Shanghai Composite index was up 0.5% to 4,651.22.
Treasury prices were volatile after the Tuesday's Fed meeting but ended the day lower. The 10-year note fell 12/32 to 97-26/32 for a yield of 4.78%, and the 30-year bond slid 15/32 to 97-05/32 for a yield of 4.83%.