Dow Hits New Record After Fed Statement
After a rocky session, the Dow Jones industrial average pushed to a new record after the Federal Reserve announced that they kept the federal funds rate at 5.25% and remains worried about inflation. Investors liked the message: expect more of the same steady rates for the time being while the economy remains in a Goldilocks mode.
“The market finally realized that the Fed won’t raise rates or cut rates anytime soon,” says Peter Cardillo, chief market economist at Avalon Partners in New York. “That left the market to focus on deals and M&A.”
The Dow Jones industrial average climbed 53.8 points, or 0.4%, to a new record close of 13,362.87. The broader S&P 500 index was up 4.86 points, or 0.32%, to 1,512.58. The tech-heavy Nasdaq Composite index added 4.59 points, or 0.18%, to 2,576.34.
In its statement, the FOMC reiterated that the “predominant policy concern” remains inflation failing to moderate as expected. But it subtly fine-tuned its economic view from “mixed” to “slowed” from March, says Action Economics.
“For now, this statement positions the Fed to remain on hold for several meetings,” says John Ryding at Bear Stearns. He thinks that core inflation will gradually rise and end the year at 2.5% on core PCE price inflation, prompting the Fed to adjust rates modestly higher. He sees the funds rate at 5.50% by yearend and 5.75% by the middle of 2008.
After the market’s strong run in recent weeks, driven by better-than-expected earnings guidance, Cardillo at Avalon Partners thinks the market is overbought and due for a pullback as summer approaches — typically a slower season for the markets. Still, investors will look for individual names that are associated with M&A and deals.
Among stocks moving on deal talk on Wednesday, Rio Tinto PLC ADS (RTP) shares surged 12% on speculation that BHP Billiton (BHP) approached Rio Tinto about a takeover.
Alltel (AT) rose 2% after The Wall Street Journal reported that the company is drawing interest from at least three private-equity buyout groups. The wireless firm has a market cap of $22.7 billion.
The Nasdaq lagged the broader market due to weakness in Cisco Systems (CSCO) after the company reported fiscal third quarter EPS of 30¢ a share, up from 22¢ a share a year ago, on a 21% sales rise. But that was below some analysts’ estimates and the “whisper number” of 36¢ from WhisperNumber.com that traders hope for. The networking gear maker reportedly sees fourth-quarter sales of $9.2 billion to $9.3 billion — slightly lower than analysts’ forecast. The shares were down about 6%.
Disney (DIS) shares were also lower after it reported better-than-expected EPS, but its revenue missed forecasts for its second quarter.
Toll Brothers (TOL) posted 19% lower second-quarter home building revenues, 32% lower second-quarter-ending backlog, and 25% lower net signed contracts. It sees $90-$130 million in second-quarter writedowns. The home builder no longer expects to achieve its most recent quarterly and annual guidance.
Priceline.com (PCLN) reported first-quarter EPS of 43¢, vs. 19¢ a year ago (pro forma), on an 18% revenue rise. It sees 80¢ to 90¢ second-quarter EPS. The company says lower margins on retail airline tickets and higher return hurdles it imposed on marketing investments will hurt its airline ticket business.
In the energy markets, June NYMEX crude oil was down 66¢ to $61.60 a barrel. A larger-than-expected build in crude stocks weighed on prices, as did the first increase in gasoline supplies in three months, says Action Economics. Losses were ultimately pared however, as attacks continued in Nigeria, while the market was reminded of the hurricane season, as the first named subtropical storm of the season churned off the Southeast U.S. coast, says Action Economics.
European stock markets finished mostly higher. In London, the FTSE 100 index barely budged at 6,549.6. Germany’s DAX index was up 0.45%, to 7,475.99. In Paris, the CAC 40 index added 0.29%, to 6,051.63.
Asian markets moved up. In Japan, the Nikkei index was up 0.52%, to 17,748.12. In Hong Kong, the Hang Seng index rose 0.67%, to 20,844.78.
Treasury Market
Treasury yields bounced higher after the Fed kept its bias against inflation in its statement, driving the 10-year note up 3 basis points to 4.668%. “Some in the bond market had apparently been holding out hope that the Fed could make a greater concession to slow growth and toward neutral policy, but that was unrealistic based on the intermeeting data,” says Action Economics.
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