Economic Data Depress Stocks, Bond Yields
A drop in Treasury bond yields to generational lows failed to either impress or concern the stock market much Wednesday, as key indexes closed with modest losses.
In commodity trading, oil closed above $29 a barrel for the first time in three weeks on worries about tighter supplies.
The Treasury market rallied sharply after the government reported weaker-than-expected April retail sales -- which appeared to make it more probable the Federal Reserve will cut short-term interest rates at or before its late-June policy meeting, analysts said.
What’s more, the Fed’s announcement last week that it is worried about a potential deflationary cycle in the economy raised the possibility that the central bank could actively try to push longer-term yields down, perhaps by directly purchasing bonds in the open market.
“If we get a run of weak [economic] data, you will hear a lot more chatter about unconventional Fed action,” said Michael Cloherty, fixed-income strategist at Credit Suisse First Boston in New York. “The odds are still very low, but it’s moved into the conceivable.”
Whatever their motivation, traders and investors piled into Treasury securities, driving long-term yields down to levels last seen in the 1950s.
The 10-year T-note, a benchmark for mortgage rates, sank to 3.52%, down from 3.61% on Tuesday and below the previous generational low of 3.56% reached March 10. The yield was last at current levels in 1958, according to Reuters.
Shorter-term yields also fell, though they held slightly above their recent lows. The six-month T-bill yield dropped to 1.08% from 1.11% on Tuesday. The low this year was 1.06% on March 10.
Wednesday’s government data reinforced the picture of an economy unable to get its motor revving, analysts said.
But the stock market doesn’t seem worried, at least not yet.
The Dow Jones industrials traded in a narrow range and closed off 31.43 points, or 0.4%, to 8,647.82. It was the second straight loss for the index, but it still is up for the week so far.
The Nasdaq composite lost 4.78 points, or 0.3%, to 1,534.90.
Losers outnumbered winners by a narrow margin on the New York Stock Exchange, while winners had the edge on Nasdaq. Trading was active.
Retail stocks led the market lower. J.C. Penney slid $1.63 to $17.22, Wal-Mart lost $1.59 to $53.90 and Ross Stores was off 95 cents to $40.95.
But investors continued to find some issues they liked. J2 Global Communications soared $6.28 to $34.93 after the L.A.-based Internet messaging company said its products would be integrated into Microsoft’s Office 2003 software package.
Ceradyne, a Costa Mesa-based maker of industrial ceramic products, rose $1.06 to $15.65, the highest since the late 1980s. The firm has signed some large contracts this week.
Some analysts say it makes sense for the stock market to slow or even stall out for the time being, in the face of economic concerns. Share prices have surged since mid-March in large part on optimism about a second-half recovery in business activity. The Nasdaq index is up 20.7% since March 11; the Dow is up 14.9% in the same period.
“It’s been a good, solid run, but we’ll probably slow to a walk from here, at least until we see confirmation that the economy is genuinely gaining traction,” said Paul McManus, director of fundamental research at Independence Investments in Boston.
Others worry that investors have become too sanguine about the outlook. A low level of concern could leave the market vulnerable to a setback, some say.
A weekly poll of independent market newsletter writers shows 23.9% are bearish, the lowest bearish total since mid-January 2002, according to Schaeffer’s Investment Research. (The balance of writers either are bullish or expect a modest market “correction.”)
The oil market could give Wall Street something new to worry about. Near-term crude futures in New York rose 67 cents to $29.17 a barrel, the highest close since April 22.
Oil rose as gasoline futures prices also jumped, on the heels of a report showing a smaller-than-expected increase in U.S. gasoline supplies. That stirred fears of a summer fuel shortage.
In currency trading the dollar advanced against the euro, as some traders speculated that the European Central Bank will cut interest rates next month, reducing the appeal of rates that now are well above U.S. rates.
