U.S. stocks and 10-year Treasuries fell after the Federal Reserve cut growth estimates and expanded its economic stimulus program known as Operation Twist. Oil tumbled to an eight-month low.
The Standard & Poor’s 500 Index lost 0.2 percent to 1,355.69 at 4 p.m. in New York, paring a drop of as much as 0.9 percent. The yield on 10-year Treasuries increased four basis points to 1.66 percent, while the rate on 30-year bonds was almost unchanged at 2.74 percent. Crude slid 2.7 percent to $81.80 a barrel after U.S. inventories climbed to a 22-year high. The S&P GSCI Index of commodities fell to the lowest level since 2010. Spanish and Italian bonds rallied on speculation European leaders will act to reduce yields.
Fed Chairman Ben S. Bernanke, who said progress in the job market has slowed, extended the program of replacing short-term bonds with longer-term debt by $267 billion through the end of 2012, disappointing investors anticipating a more aggressive approach. Policy makers cut their estimate for U.S. gross domestic product growth in 2012 to between 1.9 percent and 2.4 percent from 2.4 percent to 2.9 percent.
“The Fed’s goal is to take volatility out of the market, keep rates low and stable and help mortgage rates stay low,” said Bret Barker, a money manager at Los Angeles-based TCW Group Inc., which manages about $128 billion in assets. “The Fed is not out of bullets. If things get worse they will act more. This keeps us afloat for now. The Fed is buying time and trying to allow the economy to continue to heal.”
The continuation of Operation Twist “should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative,” the Federal Open Market Committee said today in a statement at the conclusion of a two-day meeting in Washington.
Bernanke said at a news conference after the meeting that the Fed may take additional steps to spur growth, including additional asset purchases, if labor markets don’t continue to improve. U.S. employers added 69,000 jobs in May, the slowest growth in a year, according to Labor Department figures released June 1. He also said that access to credit remains a “major issue” and may be muting the impact of the central bank’s actions.
“The risk was that if they didn’t do anything, the market would have thrown up on itself,” said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, who helps oversee about $76 billion.
The S&P 500 had closed higher for four straight days and reached its highest level since May 10 yesterday amid speculation policy makers will do more to safeguard the economic recovery.
Losses today were led by utilities, commodity and consumer-staples companies as eight of the 10 main industry groups in the S&P 500 retreated. Caterpillar Inc., Verizon Communications Inc. and McDonald’s Corp. lost at least 1 percent to pace declines in the largest U.S. companies.
Procter & Gamble Co., the world’s largest consumer-goods company, declined 2.9 percent after cutting its earnings and revenue forecasts for the second time in less than two months as sales growth slows in Europe and the U.S. Adobe Systems Inc., the largest maker of graphic-design software, fell 2.7 percent as it forecast sales and profit that trailed estimates after it began selling its products via subscriptions.
Coffee, cocoa, oil and cotton lost at least 2.3 percent as 18 of the 24 commodities tracked by the S&P GSCI Index retreated, sending the gauge down 1.9 percent to the lowest level on a closing basis since November 2010. Wheat advanced for a third day as dry weather in Russia damaged crops.
The dollar rose against eight of 16 major peers and weakened against the rest. It strengthened 0.8 percent versus the yen, while slipping 0.1 percent to trade at $1.2703 against the euro.
The announcement from the Fed today came as the original Operation Twist was set to expire this month. In Operation Twist, the central bank sells short-term securities and buys the same amount of longer-term debt to lengthen the average maturity of its holdings and keep borrowing costs low.
Prior stimulus efforts by the Fed, including two rounds of quantitative easing through asset purchases known on Wall Street as QE1 and QE2, helped the S&P 500 double from its bear-market low in 2009 while Treasury yields reached the lowest on record amid demand for safety amid Europe’s debt crisis.
Ten-year yields have increased from their record of 1.4387 percent on June 1, the day the S&P 500 began a rebound after a 9.9 percent retreat from a four-year high on April 2. The stock index rallied after its valuation slid to 12.9 times its companies’ reported earnings, the cheapest since November.
A valuation measure showed U.S. 10-year notes have declined from the most expensive levels ever. The term premium, a model created by economists at the Fed, reached a record of negative 0.94 percent on June 1 as investors sought refuge from Europe’s sovereign-debt crisis.
A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average over the past decade is 0.50 percent.
Almost four rose for each that fell in the Stoxx Europe 600 Index. Aer Lingus Group Plc jumped 15 percent in Dublin trading as Ryanair Holdings Plc revived its push to purchase the airline with an offer valuing the company at 694 million euros ($883 million). Hennes & Mauritz AB rose 4.8 percent after earnings topped forecasts. Unilever NV declined 0.8 percent after P&G’s forecast.
French President Francois Hollande said European leaders are exploring ways for the rescue fund to buy debt from countries that have taken fiscal consolidation measures. German Chancellor Angela Merkel declined to commit to direct sovereign debt purchases through the euro-area bailout fund, pushing back on calls by euro-region leaders who backed the measure as a way to ease the crisis.
Such a move, while legally possible, “is not up for debate” at present, Merkel said today in Berlin. Just back in Berlin following the Group of 20 summit in Los Cabos, Mexico, Merkel said: “I haven’t heard about such things.” In Greece, Antonis Samaras, head of Greece’s New Democracy party, was sworn in as prime minister after Greek political leaders agreed on a coalition that will seek relief from austerity measures tied to international loans.
Spain’s 10-year bond yield sank 30 basis points to 6.74 percent after rising above 7 percent this week for the first time in the history of the euro. Its two-year note yield fell 28 basis points to 5.02 percent. Italy’s 10-year yield slipped 15 basis points to 5.77 percent. Hollande said “we’re looking at the ways and means” to use the European Stability Mechanism, the euro region’s bailout fund, to buy bonds.
“There’s some talk about the ESM buying Spanish and Italian bonds and it looks like it’s going to be discussed at a European level,” said Padhraic Garvey, head of developed debt markets at ING Groep NV in Amsterdam. “That is giving Italy and Spain a short-term boost but it’s only talk at the moment, there’s nothing concrete.”
The yield on the German 10-year bund rose eight basis points to 1.62 percent and the two-year note yield added six basis points to 0.15 percent. Germany sold 4.005 billion euros ($5.09 billion) of two-year notes at an average yield of 0.10 percent.
The New Zealand dollar weakened against all 16 major peers after a report showed the nation’s current-account deficit widened more than economists estimated.
Japan’s Topix rallied 1.7 percent to the highest since May 15 after exports beat estimates.
The MSCI Emerging Markets Index added 0.5 percent to its highest level since May 14. The Hang Seng China Enterprises Index of Chinese companies listed in Hong Kong rose 0.2 percent.