Fed Chairman Bernanke warned of recession risk in Congressional testimony. Traders also eyed reports on employment and factory orders
Major U.S. stock indexes closed lower Wednesday after spending much of the session struggling to find direction in the wake of Tuesday's big rally. Cautious comments on the economy from Federal Reserve Chairman Ben Bernanke, who cited the possibility of a recession, were keeping investors on edge. Light trading volume suggested that many would-be investors were staying on the sidelines, according to S&P MarketScope.
Bonds and the dollar eased. Gold and oil futures rose.
On Wednesday, the Dow Jones industrial average was lower by 72.48 points, or 0.57%, at 12,581.88. The broader S&P 500 index fell 5.42 points, or 0.4%, to 1,364.76. The tech-heavy Nasdaq composite index shed 7.75 points, or 0.33%, to 2,355.00.
Bernanke's written testimony referred to risk of a "slight contraction" in the economy in the first half of the year, with risks to the downside. Action Economics notes "that relatively dour near-term economic outlook was paired with hopes for a recovery in the second half of the year thanks to rate cuts, liquidity measures, etc."
Following Bernanke's comments, traders reduced bets that the central bank will lower the fed funds rate below 2.00%, according to S&P MarketScope.
Still, the Fed chief sees "considerable stress" remaining in the financial sector and confirmed that Bear Stearns told the Fed and other agencies that on March 13 it was on the brink of bankruptcy, which could have caused market chaos.
As expected, the question-and-answer session after the Fed chief’s testimony contained some sharp queries from lawmakers. Bernanke said the Fed did not have "early warning" on Bear Stearns, noting the SEC indicated the firm had "adequate capital," though the Fed chief noted that meant "regulatory" capital, but liquidity was the issue. The Fed wasn't informed until about 24 hours before the events came to a head just before the weekend of March 16.
In response to a question why the Bear Stearns rescue is different from rescuing home owners, Bernanke reiterated the Fed did not bail out Bear Stearns, noting shareholders took a significant loss. He argued the Fed has also been acting in various ways to help homeowners.
Bernanke's testimony delivered mixed messages for the policy outlook, says Lehman Brothers economist Zach Pandl. “In our view, this reflects the committee's desire to slow the pace of rate cuts, not a shift away from concern about growth. We continue to believe market expectations for the funds rate are too high” he wrote in a note Wednesday.
Aomn Thuesday, a Senate Banking Committe hearing will focus on the Fed's involvement in JP Morgan's buyout of Bear Stearns.
In economic news Wednesday, U.S. factory orders fell 1.3% in February after a 2.3% drop in January. It was much weaker than the 0.7% decline that markets expected. Orders are still up 6.0% over last year. Excluding transportation, orders were down 1.8%. The 1.7% initially reported drop in durable goods orders was revised up to a 1.1% drop. Nondefense capital goods orders excluding aircraft, a key indicator for future business investment, declined 2.4% following a 1.0% drop in January. Shipments fell 2.1% after a 1.1% increase in January. Inventories rose another 0.5% from a 1.3% January gain and are up 5.5% over last year. The inventory-shipment ratio is now 1.27 from 1.24.
U.S. ADP reported private payrolls rose 8,000 in March after an upwardly revised 18,000 decline in February (-23,000 before). This is better than the 48,000 lost jobs that markets had expected. The March reading suggests a similar small rise in nonfarm payrolls, says S&P economics, adding back a small contribution from government job growth. S&P continues to forecast a nonfarm payrolls decline of 25,000 in Friday’s employment report.
The U.S. MBA mortgage market index fell 28.7%, in addition to an 11.8% decline in the purchase index and a 38.1% plunge in the refinancing index. This largely reversed out some of the large gains in these indices seen in the prior week, notes Action Economics, while average mortgage rates were only marginally changed.
Bloomberg reports the International Monetary Fund cut its forecast for global growth this year to 3.7% from 4.1% in January and 5.2% last June, and said there's a 25% chance of a world recession due to what it calls the worst financial crisis in the U.S. since the Great
Depression. The IMF said central banks will need to conduct policy "flexibly" as the circumstances warrant.
Oil futures surged even though the Energy Dept.reported a huge 7.4 million barrel increase in crude oil inventories but substantial decreases in gasoline and distillate stocks. In NYMEX trading, May WTI crude oil futures rose $3.85 per barrel to $104.83, May reformulated gasoline futures soared 13.18 cents to 277.10 cents, and May heating oil futures rose 7.13 cents to 295.10 cents.
Comex June gold futures rose $12.40 per ounce to $900.20 as the dollar index was lower in a daylong struggle for direction. Some technical analysts see gold in a corrective phase but believe the long term trend is bullish, according to S&P MarketScope.
Among Wednesday’s stocks in the news, Monsanto (MON) reported second quarter EPS of $1.79 (from ongoing operations), vs. 99 cents one year earlier, on 45% higher total net sales. The company cited the strong growth of its U.S. and international corn business, and growing demand for its Roundup product. Monsanto expects fiscal 2008 EPS (ongoing) to be in the range of $3.15-$3.25; as-reported EPS is expected to be in the range of $3.38-$3.48.
Best Buy (BBY) posted fourth-quarter EPS of $1.71, vs. $1.55 one year earlier, on a slight drop in same-store sales and a 4% total sales rise. The company noted that the decline in same-store sales reflected a decline in its domestic segment, coupled with a smaller international segment. Best Buy initiated fiscal 2009 EPS guidance in the range of $3.25-$3.40.
According to a Wall Street Journal report, National City (NCC) is considering a plan to sell itself to hometown rival KeyCorp (KEY), citing people familiar with the matter. WSJ also said if such a deal were to occur, the resulting combined entity also could receive a capital infusion from private-equity behemoth Kohlberg Kravis Roberts & Co.
Walgreen (WAG) posted a 4.4% rise in March same-store sales and an 11% rise in total sales. The company said March sales benefited from an early Easter compared with Easter in April last year.
Pfizer (PFE) announced the discontinuation of a Phase III clinical trial of single-agent tremelimumab in patients with advanced melanoma, after the review of interim data showed that the trial would not demonstrate superiority to standard chemotherapy.
Krispy Kreme Doughnuts (KKD) announced that it has requested that its lenders approve certain amendments to its secured credit facilities which, among other things, would relax certain financial covenants of the facilities. Those covenants currently are scheduled to become more stringent during fiscal 2009.
On Wednesday, European indexes extended their rally of the previous session. In London, the FTSE 100 index rose 1.08% to 5,915.90. In Paris, the CAC 40 index gained 0.94% to 4,911.97. Germany’s DAX index added 0.85% to 6,777.44.
Asian markets Wednesday drew strength from big U.S. and European gains in the previous session. Japan’s Nikkei 225 index jumped 4.21% to 13,189.36. In Hoing Kong, the Hang Seng index gained 3.18% to 23,872.43.
Bonds, which plunged Tuesday as stocks soared, ended the session mixed as the ADP employment survey showed job gains, and Fed Chairman Bernanke
eased concern about credit markets during his testimony to the Joint Economic Committee about the economy, the housing crisis, and the bailout of Wall Street institutions. The 2-year Treasury
notes fell 05/32 to 99.25 for yield of 1.883%, and the 10-year notes lost 04/32 to 99-14/32 for yield of 3.575%. Meanwhile, the 30-year bond rose 12/32 to 99-00/32 for yield of 4.378%.