The Federal Reserve released the widely anticipated minutes of its Sept. 18 policy meeting -- you remember, the one that featured the supersized 50 basis point rate cut -- and the document said little about the economic situation and the health of financial markets that investors didn't already know.
Wall Street loved it anyway.
Major U.S. equity indexes rallied Tuesday, with the Dow Jones industrial average and Standard & Poor's 500-stock index each setting a new closing record after the 2:00 p.m. EDT release of the Fed minutes revealed that the decision to aggressively cut rates by 50 basis points was unanimous and designed to protect the economy from "tightening credit conditions" and "intensifying housing correction," suggesting the Fed is possibly willing to ease rates further if conditions warrant.
On Tuesday, the Dow Jones industrial average rose 120.8 points, or 0.86%, to 14,164.53. The broader S&P 500 index added 12.57 points, or 0.81%, to 1,565.15. The tech-heavy Nasdaq Composite index gained 16.54 points, or 0.59%, to 2,803.91.
Market breadth was positive, reports S&P MarketScope, with 23 shares gaining in price for each 10 that declined on the NYSE. Nasdaq breadth was 17-13 positive.
The minutes noted the increased concerns among policymakers in the days following the Aug. 7 Federal Open Market Committee meeting, and the various steps taken, says Action Economics. But the minutes "didn't really tell us anything we did not already know", according to the economic research firm. In their discussions about the economy, meeting participants focused on the potential strains to growth in coming quarters. All members thought that lowering the funds rate was a necessary step, with a 50 basis-point cut the "most prudent course of action."
The FOMC also noted inflation "seemed to have improved slightly," though policymakers were worried that it could worsen if the dollar fell too much more. Now the debate is whether they need to cut again later this month, says S&P MarketScope.
The FOMC minutes seemed to calm Wall Street players. By repeatedly referring to the many risks the markets faced in August and early September, the minutes "can be viewed as reassuring because it shows the Fed was fully cognizant of the risks and quite engaged," according to Tony Crescenzi, chief bond market strategist for Miller Tabak in New York. "This does not mean that there will be more rate cuts, just that the Fed is tracking the many factors that led to the recent cut with great intensity and respect for their potential impact on the economic expansion" he wrote in an Oct. 9 note.
Lehman Brothers economist Drew Matus wrote in an Oct. 9 note that the rate-cut decision appears to have been made because of credit concerns and the increased risk they posed for the economy rather than any certainty that fundamentals were deteriorating. "We continue to expect the Fed will remain on hold in October as it gathers more data regarding the health of the economy and confirms the downtrend in the inflation indicators," wrote Matus.
Wall Street continues to look for signs of economic weakness in upcoming data reports. Seamus Smyth, an associate U.S. economist for Goldman Sachs in New York, thinks that October's data calendar should show four main themes: (1) consumers continuing to shrug off the broader economy's problems, at least for now, (2) ongoing international support, (3) a slight pause in core inflation's decline, and (4) accelerated deterioration in the housing sector.
"Combined with the stronger than expected payroll report from last Friday, a data calendar like the one we foresee would make the FOMC decision on October 31 a very close call, though we still think they will ease another 25 [basis points]", Smyth wrote in an Oct. 9 note.
Friday's producer price index and retail sales data could give more clues about economic strength and inflation.
Wall Street braced for a flood of earnings reports, starting with Alcoa's (AA) release.
The aluminum giant reported third-quarter income from continuing operations of $558 million, or 64 cents a share, on revenue of $7.4 billion. The consensus forecast compiled by Reuters was for EPS of 66 cents. The company also boosted its stock-repurchase authorization to 25% of outstanding shares from the previous 10%.
The shares gained 3.7% in Tuesday's regular session but dipped in after-hours trading.
Energy futures, down at the start of trading Tuesday, moved solidly higher as the U.S. government predicted that consumers will have to pay more for fuel this winter even though temperatures are expected to be above normal. November West Texas Intermediate crude oil futures, which plunged $2.20 on Monday, were up $1.20 Tuesday to $80.22 per barrel.
Precious metals futures, down at the outset on Tuesday, rebounded as the dollar index faltered and the euro also recovered from earlier lows. December gold futures, which skidded $8.70 on Monday, rose $4.40 to $743.10 an ounce in a rebound from earlier lows. Spot gold was up $4.00 to $737.30.
European indexes were higher Tuesday amid EU worries about the lower U.S. dollar and soft Chinese yuan. In London, the FTSE 100 index rose 1.14% to 6,615.4. France's CAC 40 index gained 0.56% to 5,861.93. In Frankfurt, the DAX index added 0.08% to 7,980.44.
Major Asian indexes finished higher. Japan's Nikkei 225 index gained 0.56% to 17,159.90. The Hang Seng index in Hong Kong jumped 1.65% to 28,228.04.
Among Tuesday's stocks in the news, shares of Google (GOOG), which topped $600 for the first time on Monday, were 0.9% higher Tuesday after reports that the Web search giant will begin showing YouTube videos on thousands of other Web sites, hoping to profit from ads attached to the clips. Banc of America reportedly raised its target price on Google to $670.
Molson Coors (TAP) shares surged 10.5% Tuesday after the company and SABMiller (SAB.L) signed an agreement to combine the U.S. and Puerto Rico operations of their respective units, Miller and Coors, in a joint venture. Each company will have a 50% voting interest in the joint venture. SABMiller shares gained 1.4% in London trading.
Sprint Nextel (S) shares lost 1.2% Tuesday after the telco said its chairman, president, and CEO Gary Forsee has stepped down, effective immediately. The company will search for a new CEO. Sprint to report a net loss of about 337,000 post-paid subscribers in the third quarter. It also sees adjusted operating income before depreciation and amortization (OIBDA) and consolidated operating revenue for 2007 slightly below the ranges it had previously provided.
Microchip Technology (MCHP) said it sees lower-than-expected second-quarter sales of $258-$259 million. The company expects EPS under generally accepted accounting principles of about 35 cents (non-GAAP of about 38 cents), citing weak sales associated with the U.S. housing market, as well as weakness in other segments of its consumer-related business. The shares were down 12.7%.
Children's Place (PLCE) said it expects third-quarter EPS to come in at least 60% below the low end of its previous guidance of 94 cents to $1.02 (including charges). Assuming current sales and margin trends continue into the fourth quarter, the children's apparel retailer thinks fiscal 2008 EPS will be significantly below the low end of its previous guidance of $2.25-$2.40. The shares fell 5.9%.
Treasuries finished little changed Tuesday after erasing early gains, as the market consolidated after a sharp decline last Friday on back of a strong September labor report.
The 10-year note edged down 03/32 in price to 100-27/32 for a yield of 4.64%. The 30-year bond firmed 02/32 to 102-09/32 for a yield of 4.85%.