Policymakers left rates unchanged and said that the pace of U.S. economic contraction appears to be slower
U.S. stocks finished solidly higher Wednesday after the Federal Reserve, concluding its two-day policy meeting, held the Fed funds rate steady at 0-0.25% and said that the pace of contraction in the economy "appears to be somewhat slower."
Earlier, stocks got a boost from stronger-than-expected earnings reports from DreamWorks Animation (DWA), Goodyear Tire & Rubber (GT), and other firms, which offset a steeper-than-expected drop in first-quarter GDP.
Investors' worries about the swine flu outbreak in a number of countries appear to have had less impact on trading than earlier this week, says S&P MarketScope.
On Wednesday, the 30-stock Dow Jones industrial average finished higher by 168.78 points, or 2.11%, at 8,205.40. The broader S&P 500 index gained 18.48 points, or 2.16%, to 873.64. The tech-heavy Nasdaq composite index gained 38.13 points, or 2.28%, to finish at 1,716.99.
Treasuries headed lower as stocks rallied. The dollar index fell. Gold futures climbed. Oil futures rose.
Short sellers were apparently getting squeezed in end-of-month portfolio adjusting, according to S&P MarketScope.
In its post-meeting statement, the policy-setting Federal Open Market Committee said that "household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit". Weakness in sales and tight credit conditions have led businesses to cut back on inventories, fixed investment, and staffing, the Fed added.
"Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time," the Fed said.
In light of increasing economic slack in the U.S. and abroad, the central bank expects that inflation will remain subdued. "Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term."
The Fed reiterated that it will "employ all available tools" to promote economic recovery and to preserve price stability. It anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.
The Fed cited its previously announced intention to purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Fed will buy up to $300 billion of Treasury securities by autumn.
"The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of financial and economic developments," the Fed added.
The Fed's decision was unanimous.
"The FOMC didn't surprise with its actions or statements this month," said Action Economics, which noted that.
U.S. gross domestic product (GDP) contracted 6.1% in the first quarter, a third consecutive quarterly decline following the 6.3% drop in the fourth quarter and the 0.5% slip in the third. It's the biggest back-to-back drop in growth since 1957-58, notes Action Economics.
As expected, a record $103.7 billion inventory drawdown chopped off 2.8% from growth, says Action Economics. Gross private fixed investment fell a whopping 51.8%, taking off 8.8% from growth, with declines of over 35% for both residential and nonresidential spending. Government spending declined 3.9%. Personal consumption expenditures actually rebounded 2.2% after a 4.3% decline in the fourth quarter and a 3.8% drop in the third.
The weaker-than-expected GDP figure could increase concerns of a deeper recession, says S&P MarketScope. But apparently some traders are betting the worst is over for the economy.
Bloomberg News reports at least six of the 19 largest U.S. banks require additional capital, according to preliminary results of government stress tests, people briefed on the matter said. While some of the lenders may need extra cash injections from the government, most of the capital is likely to come from converting preferred shares to common equity, the people said. The Federal Reserve is now hearing appeals from banks, including Citigroup (C) and Bank of America (BAC), that regulators have determined need more of a cushion against losses, they added. By pushing conversions, rather than federal assistance, the government would allow banks to shore themselves up without the political taint that has soured both Wall Street and Congress on the bailouts.
Citigroup, soon to be one-third owned by the U.S. government, is asking the Treasury for permission to pay special bonuses to many key employees, according to people familiar with the matter. The WSJ said the request comes as Citigroup is grappling with broad government pay restrictions that could break apart its legendary energy-trading unit.
After BofA's annual meeting Wednesday, company chairman Kenneth Lewis's iron grip could be more tenuous than ever. According to people familiar with the preliminary results of shareholder votes set to be announced at the meeting in Charlotte, N.C., the 62-year-old Lewis is likely to win re-election to Bank of America's board by a wide margin. But a separate shareholder proposal that would force him to give up his seat as chairman was too close to call and could go against Lewis, these people said.
Investors also weighed news that automaker Chrysler had reached a tentative deal with bondholders, dampening the risk of bankruptcy.
Wall Street was still buzzing about the puzzling activity in Dendreon (DNDN) shares Tuesday. Trading in Dendreon was halted just before 1:30 p.m. Tuesday as the shares, which were trading higher, suddenly turned sharply lower ahead of the release of what turned out to be positive results of the company's IMPACT study of Provenge in men with advanced prostate cancer. Following an investigation, the Nasdaq Stock Market said Tuesday that all Dendreon trades will stand.
The shares soared when trading resumed Wednesday, up 12.33 to 24.14 at around 2:00 p.m. ET. An analyst at Needham upgraded Dendreon stock, and a handful of other Wall Street firms also boosted their view on the shares.
In earnings news Wednesday, General Dynamics (GD) posted $1.54 vs. $1.42 first-quarter EPS from continuing operations on 18% higher revenue.
VF Corp. (VFC) posts $0.91 vs. $1.33 first-quarter EPS on a 7% revenue decline (as reported). VF said changes in several key markets have led it to reduce its top and bottom line assumptions for the balance of the year.
Time Warner Inc.) posted $0.46 vs. $0.46 first-quarter EPS (excluding earnings from discontinued operations related to cable television) on 7% lower revenue. EPS results reflect a 1-for-3 reverse stock split, which became effective on March 27, 2009. Wall Street was looking for post-reverse split EPS of $0.38.
Aetna Inc. (AET) posted $0.96 vs. $0.92 first-quarter operating EPS on 11% higher revenue. However, Aetna noted that it incurred higher-than-projected medical costs in its commercial products. Looking ahead, the company continues to forecast 2009 operating EPS of $3.85-$3.95.
In other economic news Wednesday, the Mortgage Bankers Association said its Mortgage Applications index fell 18.1% for the week ended April 24 compared with the prior week even though the 30-year fixed-rate mortgage fell to an average 4.62% from 4.73% the week before. Fifteen-year fixed rate mortgages carried an average 4.45% rate, off slightly from the prior week's 4.46%. One-year adjustable-rate mortgages averaged 6.23%, up from 6.19%. Refinancings fell 21.9% on a week-to-week basis. Filings for mortgages to purchase homes were off a seasonally adjusted 0.6%.
Reuters reports a monthly survey by the European Commission showed economic sentiment in the 16 countries using the euro improved to 67.2 points in April from 64.7 in March, against market expectations of a rise to 65.2 points. This is the first rise in euro zone economic sentiment after 10 straight months of falls. But with sentiment still only just above record lows and consumer inflation expectations hitting new lows, the pressure was still on for the European Central Bank to cut interest rates and ease policy in others ways in May, economists said.