Market players headed to the sidelines in advance of Wednesday's decision on interest rates
Major U.S. stock indexes closed lower in light trading Tuesday as traders marked time before Wednesday’s decision on interest rates by the Federal Reserve. While press reports indicate that the Fed is reluctant to cut rates, Tuesday’s weaker-than-anticipated consumer confidence reading for October, along with data showing another slump in U.S. home prices, may prompt the central bank toward a monetary easing on Halloween.
On Tuesday, the Dow Jones industrial average finished lower by 77.79 points, or 0.56%, at 13,792.47. The broader S&P 500 index slipped 9.96 points, or 0.65% to 1,531.02. The tech-heavy Nasdaq composite index shed 0.73 points, or 0.03%, at 2,816.71.
Action in the broader market was negative, with 20 shares declining in price for every 12 that rose on the NYSE. Nasdaq breadth was 18-11 negative.
The Federal Reserve's policy committee began its two-day meeting on Tuesday. Many market players have been hoping the Fed will cut the Fed funds rate target by 25 basis points, to 4.5%, or even more, to help stimulate the economy. But with the dollar weaker and crude oil prices near record highs - despite a pullback on Tuesday -- a rate cut on Wednesday is not a given, says S&P MarketScope.
Victor Li, economics professor at the Villanova School of Business, says he expects the Fed to cut interest rates by a quarter point on Wednesday because the slowdown in economic growth continues to be a bigger concern than slightly higher inflation. Inflation is up mostly on rising energy prices, whose shocks tend to be temporary in nature, while the core inflation number is still within the Fed's comfort zone, Li says
Meanwhile, the Fed is certainly aware that housing in a leading indicator for the overall economy, as nearly every major recession of the past 50 years has followed a decline in residential investment, both in housing and consumer durable goods, he says. And given that Bernanke’s academic research focused on how financial crises translate into real crises, as during the Great Depression, he'll lean toward adjusting monetary policy to shore up liquidity in the financial markets, Li adds.
The Fed's statement about future policy, however, will probably be neutral, in light of rising inflation. And the central bank may want to sound a cautious note. "I don't think they want to signal to the public that the Fed is going to overreact to what's going on in the financial markets," says Li.
In addition to the Fed's announcement Wednesday, traders were also awaiting reports on third-quarter GDP, third-quarter employment cost index, the Chicago purchasing managers' index, and construction spending.
The housing market received more bad news Tuesday as the U.S. Standard & Poor's/Case Shiller Home Price Index fell 0.7% to 197.2 in August, a new record low for the 20-city composite. The prior low was an upward-adjusted 198.6 reading in July. Home prices rose in only two metro regions and were flat in two other regions, while 16 came in lower. The index is down 4.4% from August, 2006, and the weakness is consistent with the contraction seen in this measure all year as the housing sector continues to work through the big inventory glut, Action Economics said.
The Conference Board's October index of consumer confidence came in weaker than expected at 95.6, down four points from 99.6 in September. The October index had been anticipated falling only to around 99. Expectations for the future were sharply lower, while views on income and the supply of jobs were also weaker.
Days after press reports of the impending ouster of Merrill Lynch & Co. chairman and CEO E. Stanley O'Neal, the company announced the departure of the 21-year veteran. Merrill said O’Neal is retiring, rather than resigning. The word choice is significant because it means O'Neal will be collecting his full post-retirement benefits, reportedly as much as $159 million. The company announced he won't receive a bonus for 2007 or any severance benefits.
O'Neal's departure leaves Merrill with a gaping hole in its leadership. The company named four-year board member Alberto Cribiore as an interim non-executive Chairman, who will head a search committee to look both within and outside the firm for a new CEO. But Merrill said Almass Fakahany and Gregory Fleming, will continue as co-presidents.
Crude oil for December delivery in New York, which had soared to record heights in the past week, fell $3.28 to $90.25 per barrel Tuesday after Goldman Sachs said it was closing its long crude positions, and that it was time for investors to take profits. Goldman said its goal of $95 crude had been just about realized. Many observers had contended the market was way overdone, notes S&P MarketScope.
Among stocks in the news Tuesday, Procter & Gamble (PG) reported a profit of 92 cents a share for its first quarter of fiscal 2008, vs. 79 cents a share a year ago on a 8% increase in sales. The company expects to earn 95 to 97 cents a share in the second quarter on 6% to 8% growth in sales. It raised its fiscal 2008 forecast to $3.46 to $3.49, including a tax benefit). S&P maintained its strong buy rating.
UBS AG (UBS) reported an operating loss of 726 million Swiss francs in the third quarter, compared with a profit of 6.236 billion Swiss francs in the prior-year period. The Swiss bank cited substantial losses, writedowns in trading positions related to the U.S. subprime residential mortgage-backed securities market. UBSD said it doesn't expect its Investment Bank segment to contribute positively to its fourth-quarter results.
CB Richard Ellis Group (CBG) said it earned 55 cents a share in the third quarter, vs. 40 cents a share (non-GAAP) a year ago, thanks to a 54% jump in revenue. The commercial real estate giant still expects 2007 earnings to be about 50% higher than in 2006, excluding one-time items.
Colgate-Palmolive (CL) reported 86 cents a share in third-quarter profit, up from 73 cents a share a year earlier, excluding charges, on a 12% rise in worldwide sales. The consumer products maker is projecting double-digit growth in earnings for the fourth quarter and all of 2008. S&P reaffirmed a strong buy rating.
European equity indexes were trading lower Tuesday. In London, the FTSE 100 index fell 0.70% to 6,659.00. Germany's DAX index slipped 0.40% to 7,977.94. In Paris, the CAC 40 was off 0.55% at 5,803.93.
Asian markets ended mostly higher. In Japan, the Nikkei 225 index finished 0.28% lower at 16,651.01. In Hong Kong, the Hang Seng index inched up 0.16% to 31,638.22. The Shanghai composite index rose 2.60% to 5,897.19.
Prices for Treasury bonds finished flat Tuesday, as traders appeared to shrug off weaker-than-expected consumer confidence data and more gloom on the home sales front and instead bide their time for the Fed’s 2:15 pm EDT policy statement Wednesday.
At the short end of the yield curve, the two-year note was unchanged at 99-21/32 for a yield of 4.80%. At the long end, the 10-year note was flat at 102-30/32 for a yield of 4.38%, and the 30-year bond was down 04/32 at 105-08/32 for a yield of 3.67%.