Stocks rise as traders bet Fed will keep rates stable
Wall Street advanced for a second straight session Tuesday as investors placed bets that the Federal Reserve wouldn’t indicate that it was leaning toward an interest rate hike.
Market watchers are anticipating that the Fed today will leave rates on hold and say that economic growth is cooling although inflation remains a concern. The central bank has maintained this general stance for several months now, suggesting that rates are staying put.
Investors would prefer a shift in posture toward cutting rates; such a move could boost consumer spending and make mortgages cheaper. But they appeared to be content to hear the status quo for now, and were tentatively optimistic that a rate hike wasn’t in the offing given that recent economic data had shown slowing growth and that inflation, although high, had not been running rampant.
“What is likely is no change at all. We might get a little commentary on the housing market nationwide ... but we don’t think there’s much action in the cards,” said Jim Russell, director of core equity strategy for Fifth-Third Asset Management in Cincinnati.
The Fed has kept rates on hold for five straight meetings after two years of gradual hikes. Russell said he expected the Fed later this year to consider rate cuts, but because last week’s consumer and producer price indexes showed inflation rising, “it’s a little early for us to hope for this specific event,” he said.
Worries over the flagging housing market, particularly the sub-prime mortgage industry, have been dragging down stocks over the last month.
But investors got some reassurance Tuesday from a Commerce Department report that construction of new homes rose by 9% in February to a seasonally adjusted annual rate of 1.525 million units, higher than the expected 1.450 million. The data weren’t all positive -- applications for building permits dropped -- but not at all suggestive that the sector was collapsing.
Stocks were also boosted by a fresh slate of takeover activity, notably a $5.93-billion offer to take Affiliated Computer Services private.
The Dow Jones industrial average rose 61.93 points, or 0.51%, to 12,288.10, for a two-day advance of 177.69. This was the Dow’s best two-day gain since Feb. 13-14.
Broader stock indicators gained as well. The Standard & Poor’s 500 index advanced 8.88 points, or 0.63%, to 1,410.94, and the Nasdaq composite index added 13.80 points, or 0.58%, to 2,408.21.
Advancing issues outnumbered decliners by more than 2 to 1 on the New York Stock Exchange.
Overseas, Japan’s Nikkei stock average rose 0.9%. Britain’s FTSE 100 gained 0.5%, Germany’s DAX index advanced 0.4% and France’s CAC-40 rose 0.8%.
Early today, China’s Shanghai composite stock index was up 0.6% to a record 3,048.51 -- recouping the last of its losses from an 8.8% dive Feb. 27 that reverberated worldwide.
Bond yields dipped as the Treasury markets shrugged off the housing data and an announcement from China that the country didn’t intend to build up its reserves. The yield on the benchmark 10-year Treasury note fell to 4.55% from 4.57% on Monday.
Crude oil futures rose 14 cents to $56.73 a barrel on the New York Mercantile Exchange.
More talk of acquisitions also supported stocks Tuesday. An investment group that included Affiliated Computer Services’ founder and chairman made an offer to take the company private, while teen accessory retailer Claire’s Stores said it agreed to a $3.1-billion takeover proposal from New York-based private equity firm Apollo Management.
Also, speculation arose over media reports on other deals: that Palm is a takeover target for both Nokia and a private equity investor, and that American International Group could be attempting to acquire Prudential.
Affiliated Computer Services rose $8.66, or 16.9%, to $59.95, while Claire’s rose $1.12, or 3.6%, to $31.88 and Palm rose 63 cents, or 3.5%, to $18.77.
Ever-surging takeover activity has been a positive signal to investors that the economy isn’t weakening quickly enough to prevent companies from making deals.
“We’re glad that credit is not being shut down. That’s clearly on display today. We like that a ton,” Russell said.
In other market highlights Tuesday:
* Investors were relieved by Oracle’s third-quarter earnings after the closing bell. The database and software maker reported profit, after excluding certain items, of 25 cents a share, above the average expectation. Oracle rose to $18.16 in after-hours trading, after closing up 37 cents to $17.55.
* Duke Energy, the fifth-biggest U.S. utility owner, rose 52 cents to $20.21. Utilities climbed 1.4% as a group for the best performance among 10 industries. Lower interest rates make dividend-paying shares more attractive to investors who seek income. Utilities have an average dividend yield of 3%, compared with 1.85% for companies in the S&P; 500.
* Superior Industries fell 79 cents to $21.49. The Van Nuys-based maker of aluminum wheels for cars and trucks reported a fourth-quarter loss and also said it expected to lose money in the current quarter, in part because of production-quality issues.
Bloomberg News was used in compiling this report.
