‘Just Right’ Scenario Lifts Markets
Stocks surged and Treasury bond yields slid Wednesday as tumbling oil prices, a tame inflation report and hopes for an improved trade picture with China brought buyers rushing back into financial markets.
The Dow Jones industrial average jumped 132.57 points, or 1.3%, to a five-week high of 10,464.45, pacing a rally that spread worldwide.
More surprising to some analysts was another decline in long-term Treasury bond interest rates, which pushed the rate of return, or yield, on the 10-year T-note to a three-month low of 4.08%, from 4.11% on Tuesday.
Because the T-note yield is a benchmark for other long-term interest rates -- including those on mortgages -- the drop toward the 4% level could provide more fuel for the still-booming housing market nationwide.
For investors, the day’s news raised fresh hopes for a “Goldilocks” economic scenario: decent growth without the risk of sharply higher inflation or interest rates -- in other words, not too cold and not too hot.
Falling oil prices and declining long-term interest rates could ensure that the recent slowdown in the economy doesn’t deepen, said Peter Kretzmer, economist at Banc of America Securities in New York.
“I think the expansion is very much intact,” he said.
Technology stocks, which are sensitive to swings in the economic outlook, outpaced blue chips Wednesday: The tech-heavy Nasdaq composite index gained 26.50 points, or 1.3%, to 2,030.65, for the fifth advance in six sessions.
The day provided something for everyone who wanted to be bullish on stocks or bonds:
* Near-term crude oil futures in New York plunged $1.72 to $47.25 a barrel, the lowest since Feb. 11, after the government said U.S. oil inventories last week rose for the 13th time in 14 weeks, to levels last seen in 1999.
* The consumer price index for April showed no change in its measure of so-called core prices, the first time that gauge has been flat in 17 months.
* Treasury Secretary John W. Snow repeated his warning that China must allow its currency to float, ending its artificial peg to the dollar, or risk the wrath of an angry Congress. By pegging its yuan currency to the dollar, China keeps the costs of its exports low, making it tougher for U.S. manufacturers to compete.
The Bush administration’s sudden high-profile campaign to pressure China began Tuesday, when Snow threatened trade sanctions if the Chinese government failed to revalue the yuan. Snow’s comments sparked a rally in stocks late in the session Tuesday, and the gains continued early Wednesday, helped along by oil, the inflation report and the bond rally.
The stock market has responded positively to the administration’s jawboning of China because investors believe the efforts could avert congressional action that could launch a trade war, said John Caldwell, investment strategist at McDonald Financial Group in Cleveland.
If China accedes to pressure from the White House and allows the yuan to float, it “takes Congress out of the equation,” Caldwell said.
Set free, the yuan would rise in value, analysts say. The downside for the U.S. economy is that a stronger yuan could fuel inflation by making Chinese imports more expensive. But it also could make American goods cheaper for Chinese buyers.
The possibility of higher sales of U.S. products to China may have helped to boost industrial stocks Wednesday, including Caterpillar, up $1.56 to $93.52; Textron, up $2.01 to $77.76; and Eaton, up $1.45 to $60.25.
The dollar eased against other major currencies. It fell to 106.86 yen from 107.36 Tuesday; the euro rose to $1.267 from $1.262.
On Wall Street, investors bought stocks across a broad spectrum: Winners topped losers by more than 3 to 1 on the New York Stock Exchange.
Some analysts said the market had been showing surprising strength in recent weeks, shaking off worries about the economy and fears of financial-system turmoil because of rumored losses at some hedge funds.
The Standard & Poor’s 500 index, which was up 11.76 points, or 1%, to 1,185.56 on Wednesday, had risen in three of the last four weeks before this week’s advance. The S&P; now is up 4.2% from its 2005 low reached April 20 and is within 3.4% of the 3 1/2-year high set March 7.
In its role as an economic forecasting mechanism, the stock market in recent weeks “wasn’t telling you the economy will be slower” later in the year, said Kathleen Camilli, head of Camilli Economics in New York.
The market also has been primed to rally for technical reasons, analysts said: The level of “short selling,” or bets that stock prices would continue to decline, reached record levels in mid-April on Nasdaq and on the New York Stock Exchange.
In a short sale a trader borrows stock and sells it, expecting to repay the loaned shares with stock bought at cheaper prices later.
Sudden market rallies can compel short sellers to close out their trades. Their buying, in turn, can propel share prices even higher.
Treasury bonds also may be rallying partly for technical reasons, experts say: Heavy selling of corporate junk bonds in recent weeks, on jitters over the economy, has been boosting Treasury bonds’ status as a haven.
Still, “I’m surprised we’re down at this level” of near 4% on the 10-year T-note, said Gary Pollack, head of fixed-income research at Deutsche Bank Private Wealth Management in New York.
Others say Treasury yields are likely to continue to stay relatively low, even if investors believe the Federal Reserve will raise its key short-term rate several more times from the current 3% level.
“Economic growth has moderated and inflation appears to be cresting,” said Peter McTeague, interest rate strategist at RBS Greenwich Capital Markets. “I think [bond] rates are going to continue to stay down here.”
Among the day’s highlights:
* Home builders’ shares soared on hopes for lower mortgage rates. Toll Bros. jumped $4.60 to $84.67, and Ryland Group gained $3.01 to $65.22.
* Financial stocks also rallied. Newport Beach-based Downey Financial, the subject of renewed takeover rumors, rose $2.28 to a record $75.63.
* Steel stocks surged on some optimistic comments by industry executives on pricing. Also, a stronger Chinese currency could boost U.S. steel exports. Nucor soared $2.34 to $52.74.
* Hewlett-Packard gained $1 to $22.55, a 52-week closing high, one day after the firm reported higher first-quarter earnings. IBM jumped $2.07 to $76.36, and Google surged $6.03 to $239.16.
* Foreign markets were broadly higher. The Mexican market rose 2.3%, German shares gained 1.7%, and the British market was up 1%.
