Creeping Doubt about Rate Cuts Casts a Shadow over Stocks

Stocks dipped Friday after two economic reports suggested the economy's slowdown may not merit aggressive moves by the Fed

To most investors these days, it is beyond a shadow of a doubt that the Federal Reserve will lower interest rates to keep the economy in check. But uncertainty crept over the Street today after two economic reports seemed to suggest that the economy's slowdown may not merit aggressive interest rat slashing.

"There was doubt in the minds of many people. I think people were looking for weak December retail sales data based partly on the weather and these data weren't as weak as people thought," said Richard Berner, chief U.S. economist at Morgan Stanley Dean Witter.

Berner is not one of the doubters. He is forecasting a recession so his view is that the Fed will continue to be aggressive in cutting short-term rates. On top of a slowing economy, variables dragging on the economy like Y2K hoarding last year and this winter's brutal weather in December and January cannot be discounted, Berner noted. "Investors were still anticipating an easier monetary policy, but not by as much. The Fed is going to ease significantly from here, but the pace will be influenced heavily by the ongoing flow of data," Berner said.

This afternoon Federal Reserve Vice Chairman Roger Ferguson gave said in that the central bank is on high alert. He said the bank will do whatever is necessary to ensure the economy remains strong and stable, suggesting it is open to further cuts in short-term interest rates. But investors let worry take hold as economic reports on retail sales figures and a key wholesale inflation index provided evidence of a less dramatic slowdown, fueling a suspicion that the Fed will not lower interest rates aggressively at its next meeting at the end of the month.

Profit warnings also weighed on investors. A brief rally came and went. Afterwards, advisories from technology names Hewlett-Packard (HWP ) and Gateway (GTW ) sent the stocks sharply lower and set the tone for the day. HP led hardware stocks lower down 3.2%.

Through most of this week, the market shrugged off recent earnings warnings from tech giants Nokia Corp. (NOK ), Cisco Systems Inc. (CSCO ) and Yahoo! Inc. (YHOO ).

"For the last couple of months, the market has been most concerned about corporate earnings -- and earnings are decelerating much faster than anyone had originally forecasted," Richard Mayo, manager of the GMO Pelican Fund told Standard & Poor's AdvisorInsight. "The economy and business conditions have also slowed down faster than anyone anticipated -- thus, I think there is a high probability that the Federal Reserve will cut interest rates by another 25 basis points at the end of January."

Despite a brief surge, the semiconductor group ended down 2.6% after consumer electronics chip maker Rambus (RMBS ) reported earnings per share of $0.12 compared with $0.03 for the first quarter, on a sharp rise in revenues. But the company missed analyst expectations by a penny because of higher tax payments and it cautioned that price pressure on memory chips will make it hard to grow revenues in the current quarter.

Investors bought retail stocks after the stronger-than-expected data on retail sales for December. The Dow Jones U.S. Retailers Index gained 1.3%.

HP was the big loser on the Dow, ending down 1-11/16, at 30-11/16. But the blue-chip index found strength in beleaguered Ma Bell. Telecom giant AT&T stock jumped 1, to 24-1/4 after J.P. Morgan issued a report that upgraded the stock along with a number of other telecom companies.

Dow component Walt Disney Co. (DIS ) rose 2-1/16, to 31 9/16 after the merger between America Online Inc. (AOL ) and Time Warner was approved. As part of the deal, FTC antitrust authorities prohibited the merged media giant from discriminating against content that passes through systems provided by rivals like Disney.

The blue chip Dow Jones industrial average closed lower by 84.17 points, or 0.79%, at 10,525.38. The broader Standard & Poor's 500 Index ended lower by 8.27 points, or 0.62%, at 1,318.55. The tech-heavy Nasdaq Composite Index finished down 14.07 points, or 0.53%, at 2,626.50.

Treasury Market

Treasuries ended lower following the most recent economic data on retail sales and producer price index for December. The data showed evidence of an overall slowdown. However, some investors saw the figures did not imply a slowing pace that would merit a giant interest slash from the Fed. The PPI in December was unchanged after rising 0.1% in November, but the index' core components, which excludes the volatile food and energy sectors, rose 0.3% for the month. Economists had expected a lower rise of just 0.1%, indicating inflationary pressure.

Retail sales meanwhile rose by a paltry 0.1%, while investors had expected a decrease of 0.2%. That figure, excluding automobile sales, was unchanged.

These data suggest that the Fed may cut interest rates by 25 basis points rather than a more aggressive 50 basis points. The next Fed policy meeting will be held on Jan. 30 and 31.

Stocks to Watch

Salomon Smith Barney downgraded its investment rating on networking computing products company Sun Microsystems (SUNW ) to neutral from buy. Sun said it expected higher net earnings despite a broader slowdown in tech spending and weak PC sales.

The merger between Internet giant America Online and cable and media conglomerate Time Warner Inc., was finally completed after winning conditional approval from the Federal Communications Commission.

Jabil Circuit, maker of circuit boards for personal computers and other equipment, said Friday it entered a deal with hardware and software provider Marconi, which includes buying certain Marconi Communications manufacturing operations. The deal is estimated to result in $4 billion plus in revenues for the company over three years.

World Markets

European markets ended higher following yesterday's tech-led rallies. The London Financial Times-Stock Exchange 100 index closed up 50.60 points, or 0.83%, to 6,165.50. In Germany, the DAX Index was up 24.82 points, or 0.38%, at 6,490.03. Meanwhile, France's CAC 40 ended up 131.56 points, or 2.31%, at 5,834.34.

The Asian markets finished the last day of the week on an upbeat note. Japan's Nikkei ended at 13,347.74, up 1.11%, led by core high-tech issues such as Sony Corp and NEC Corp. Hong Kong's Hang Seng Index finished up 204.65, or 1.36%, at 15295.42, with property issues leading the way after investment houses said they expected interest rate cuts would help the sector.

By Amy Tsao

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