Fed Warning Damps Stocks
A Federal Reserve official’s warning about a possible resumption of interest rate hikes rattled Wall Street on Tuesday, wiping out most of an early advance.
The comments by Chicago Fed President Michael Moskow unnerved investors looking to revive last week’s rally after having collected some profits Monday. Retailers and other sectors dependent on consumer spending were weak after Moskow said, “Some additional firming of policy may yet be necessary to bring inflation back into the comfort zone within a reasonable period of time.”
The Fed left interest rates unchanged this month after raising them 17 straight times. Wall Street has rallied since then on hopes this would be the end, but one analyst said Moskow’s comments could be “putting out a trial balloon” to gauge the market’s reaction to a continuation of rate hikes.
“The market has discounted the likelihood of another rate increase [to] about a 20% chance for the next meeting” in September, said Scott Merritt, a U.S. equity strategist for JPMorgan Asset Management. Moskow “might want to get that up to 50% to get more flexibility” for the Fed.
The Dow Jones industrial average slipped 5.21 points, or 0.1%, to 11,339.84 after gaining more than 38 points early in the session. But advancers still beat decliners in relatively light summer trading on the New York Stock Exchange and the Nasdaq Stock Market.
Broader stock indicators edged higher. The Standard & Poor’s 500 index rose 1.30 points, or 0.1%, to 1,298.82, and the Nasdaq composite index gained 2.27 points, or 0.1%, to 2,150.02.
Bonds held their ground, with the yield on the benchmark 10-year Treasury note unchanged at 4.81%. The 10-year T-note yield has been trading at its lowest point in four months after the release of economic reports last week suggesting that the Federal Reserve’s attack on inflation was working.
Wall Street wants the economy to slow so inflation is contained but still grow enough to keep corporate profits strong.
The market initially ramped up Tuesday after Iran’s top nuclear negotiator committed to “serious negotiations” over its nuclear ambitions, giving hopes that Middle East tensions might ease. And gains made by Advanced Micro Devices and XM Satellite Radio Holdings helped attract buyers to the technology sector.
Iran is the world’s fourth-largest producer of crude and controls one of the biggest stockpiles of reserves. Investors were encouraged as oil prices held steady after Monday’s gains, with a barrel of crude rising to $72.63, up 18 cents, in New York trading.
In other market highlights:
* Among the decliners were high-end retailers such as electronics chains, which could see sales curbed if higher interest rates drag on consumer spending. Circuit City Stores shed 80 cents to $24.20, while rival Best Buy fell 76 cents to $46.90.
* An Advanced Micro Devices executive told news services that the world’s No. 2 chip maker behind Intel hoped to capture 40% of the global market for computer processors by 2009. Shares of the company, which was upgraded by Bear Stearns, advanced $1.48 to $24.88. Intel picked up 9 cents to $18.34.
* XM Satellite Radio shares shot up $2.28, or 20%, to $13.52 after its upgrade. An analyst for Bear Stearns said the depressed stock would soon be buoyed by positive news, such as expected regulatory approval for one of its radios in time for the holiday season. Rival Sirius Satellite added 14 cents to $4.03.
* Gateway rose for a second day, jumping 19 cents, or 12%, to $1.72. Investors Firebrand Partners and Harbinger Capital Partners are asking to meet with Chief Executive Richard Snyder to discuss ways to turn around a drop in the share price of the third-largest U.S. personal-computer maker. The group, which owns more than 10% of Gateway, made its request in a letter to Snyder on Monday.
* Weyerhaeuser rose $2.98, or 5.2%, to $60.03. The world’s biggest lumber company may attract an unsolicited takeover offer from private equity firms interested in acquiring its timber assets, Deutsche Bank analysts wrote in a report. Weyerhaeuser declined to comment.
* Despite the interest-rate warning from the Fed’s Moskow, two stock sectors often considered to be vulnerable to rising rates hit all-time highs. The Dow utility stock index gained 0.7% to a record 441.93. It’s up 9.1% this year. A Bloomberg index of real estate investment trust shares gained 0.8% to a record 235.57. It’s up 15.6% this year.
The S&P; 500 index is up 4.1% year to date.
Bloomberg News was used in compiling this report.
