Fed’s Warning Clips Dow Rally; Yields Mixed
Stocks pulled back Tuesday from a midday rally, after the Federal Reserve served notice to financial markets that inflation, while currently a glimmer in the continuing economic boom, could mean higher interest rates in the months to come.
Bond yields ended mixed, with shorter-term yields rising while longer-term yields eased slightly.
The Fed left its key short-term interest rate unchanged at 4.75% during a meeting of its policymaking Open Market Committee, but it warned that rates are likely to rise if long-quiet inflation reawakens.
The Dow Jones industrial average tumbled as much as 112 points in the hour after the Fed’s announcement but recovered to close down 16.52 points at 10,836.95.
Broader stock indicators also fell, though they also regained ground late in the session. The Standard & Poor’s 500 index ended off 6.17 points at 1,333.32, and the Nasdaq composite index slipped 3.48 points to close at 2,558.36.
Stocks slid after the Fed’s midday announcement, even though the central bank’s decision was largely expected.
Cyclical industrial stocks, which rise and fall with the fortunes of the U.S. economy, were among the worst performers of the day.
“I just think it’s an indication of how nervous the market is,” said Ned Collins, a trader at Daiwa Securities America. “We’re at lofty levels, and it doesn’t take much to make people lose their nerve.”
Market players had anticipated the Fed would at least issue a warning about higher rates since Friday, when a jump in the consumer price index increased inflation worries. Higher interest rates can put the brakes on an economy that’s growing too fast, but they also deplete corporate earnings as it becomes more expensive for companies to borrow.
The bond market’s reaction hurt stocks: Yields had been trending lower by midday, then shot up on shorter-term Treasury issues after the Fed announcement.
The two-year T-note yield was at 5.26% before the Fed issued its statement, then jumped to close at 5.34%.
But the yield on the 30-year Treasury bond slipped to 5.88% by the close, down from 5.89% on Monday.
“The greater likelihood of short-term rates rising is hurting” shorter-term Treasury yields, said Scott Grannis, who helps manage about $50 billion at Western Asset Management in Pasadena.
Longer-term yields didn’t rise, however, because the Fed’s announcement is “a comforting message that it’s not about to let its guard down on inflation,” which is the greatest threat to long-term bonds, Grannis said.
Even though major stock indexes gave up midday gains, analysts noted that winners edged losers on Nasdaq--a sign that the recent broadening of the market rally may continue.
While many investors spent Tuesday on the sidelines, waiting for word from the Fed, strong earnings reports from retailers and computer giant Hewlett-Packard stimulated buying in a number of stocks.
J.C. Penney rose $4.44 to $50.13 after the company said it plans to outsource its credit card business and to offer a separate stock for its Eckerd drugstore business. The department store chain also reported first-quarter earnings that topped analysts’ expectations.
Hewlett-Packard rose for a second straight session after it reported a 34% increase in quarterly profit. Its stock jumped $7.25 to close at $96, buoying the Dow.
Among Tuesday’s highlights:
* Cyclical stocks fell, possibly on worries that higher interest rates will soon slow the economy, some analysts said.
A downbeat earnings report from Deere also weighed on the sector. The company slid $2.31 to $38.50.
Other losers included Caterpillar, the world’s largest maker of construction equipment, down $2.44 to $58.69; USX-U.S. Steel Group, the biggest U.S. steelmaker, down $2 to $28.25; and Alcoa, which led the Dow industrials’ advance year-to-date with a 64% gain, down $1.88 to $61.25.
Also, Dow Chemical slid $2.56 to $129.63, and DuPont fell 75 cents to $69.13.
* Qualcomm tumbled $5.56 to $103.19, as the developer of the world’s second-most popular wireless technology faces investor concern because of lower sales in South Korea, the Wall Street Journal reported.
* Redback Networks, which sells hardware and software used for high-speed Internet access, zoomed $61.13 to $84.13 in its first trading day. The Sunnyvale, Calif.-based company, whose ticker is RBAK, had sold 2.5 million shares at $23 each late Monday, raising $57.5 million.
* Oil stocks were broadly lower as crude oil futures fell in the wake of reports showing rising inventories of gasoline in U.S. markets.
Market Roundup, C15
