Stocks end mixed as hopes dim for Fed rate reduction
Wall Street finished mixed Wednesday after the Federal Reserve reported slow but steady regional economic growth, deflating hopes for an interest rate cut that were already damped by a larger-than-expected producer price index.
Investors’ rate worries trumped their optimism about strong earnings in the financial services sector, which earlier in the day helped nudge the Dow Jones industrials above 12,600 for the first time.
The Labor Department said before the market opened that the producer index, an indicator of inflation, rose 0.9% in December -- slower than in November but faster than the market expected. Later, the Fed reported in its “beige book” of regional economic conditions that the economy was moderating at a steady pace. Investors believed not only that the reports lowered the chances of a rate cut but also that the Fed might raise rates to curb inflation, a move that could crimp consumer spending and hurt corporate profits.
“Inflation may be a worry, and that is job one at the Fed: to control inflation,” said Kim Caughey, equity research analyst at Fort Pitt Capital Group in Pittsburgh. The index figure “makes it more unlikely that easing will happen, and may make it likely for the Fed to raise rates.”
Also weighing on stocks was a rebound in oil prices and an outlook from Intel, the world’s largest chip maker, that suggested profits in the technology sector might weaken this year.
The Dow fell 5.44 points, or 0.04%, to 12,577.15 after hitting a new trading high of 12,614 earlier in the session and after three straight days of record closes.
Broader stock indicators also slipped. The Standard & Poor’s 500 index declined 1.28 points, or 0.1%, to 1,430.62, and the technology-heavy Nasdaq composite index fell 18.36 points, or 0.7%, to 2,479.42.
Although the indexes ended lower, advancing issues narrowly outnumbered decliners on the New York Stock Exchange.
Bond yields moved higher on the producer data and the Fed survey, although most Treasury market participants didn’t anticipate any moves by the Fed until much later in the year.
The yield on the benchmark 10-year Treasury note rose to 4.78% from 4.75% on Tuesday.
Shorter-term interest rates also have climbed in recent weeks as hopes for a Fed rate cut have faded. The two-year T-note yield rose to 4.90% from 4.86% on Wednesday, the highest since Oct. 23. The yield has surged from a recent low of 4.52% in early December.
Crude oil futures rose $1.03 to $52.24 a barrel in New York trading, rebounding off lows not seen since May 2005 and leaving investors wondering whether energy prices have bottomed out.
Before Wednesday’s producer report, inflation concerns were calmed by a huge tumble in crude oil prices, which should lead to lower fuel bills for consumers. The markets are now bracing for the consumer price index, scheduled to be released today.
The index should give investors a good clue to how energy prices are affecting inflation for the average American, said Janna Sampson, co-manager of AmSouth Select Equity Fund and director of Portfolio Management at Oakbrook Investments.
Oil prices are still down more than 14% this year.
“Especially for the lower-end consumer, having this drop in energy prices should help to put a little bit more money back in their pockets so they can keep spending,” Sampson said.
In other market highlights:
* Struggling home builders got a boost Wednesday after Lennar’s chief executive said the company would fare the same or better in 2007 than it did in 2006. Lennar rose $2.23 to $51.95 and KB Home rose $1.13 to $50.35.
* The technology sector pulled back after Intel said late Tuesday that fourth-quarter profit plunged and that 2007 profit margins would be weaker than analysts had expected. Intel dropped $1.26, or 5.7%, to $21.04. Cisco sank $1.06 to $26.98 and Google fell $7 to $497.28.