Stocks Finish Higher as the Fed Stands Pat
Stocks gained ground in the last hour of trading Tuesday after the Federal Reserve kept interest rates unchanged. Many sectors, including consumer finance, industrial equipment makers, and apparel retailers, helped boost the major averages.
The Dow Jones industrial average gained 92.7 points, or 1.01%, to 9,310.06. The broader Standard & Poor's 500 index was up 9.76 points, or 1%, to 990.35. Meanwhile, the tech-heavy Nasdaq composite index jumped 25.5 points, or 1.53%, to 1,687.01.
As expected, the Fed's policy-setting arm, the Federal Open Market Committee, left the funds rate at a 45-year low of 1% and maintained an "easing bias," citing the risks of inflation becoming undesirably low. In a statement, the Fed said the risks to the economy remain roughly in balance, and that low interest rates along with strong productivity growth are helping support the economy.
The Fed also said that "spending is firming, although labor market indicators are mixed." The Fed's overall stance is much like that of the previous two statements, notes economic research outfit MMS International. And it looks like rates will stay low for a while.
"The Fed is saying as clearly as possible that it intends to do nothing until the economic signals change," says David Wyss, chief economist for Standard & Poor's.
Though investors may pour over the Fed's statement, traders are likely to turn their attention to data for clues on the economy's progress. Among the highlights on Wednesday is an update on retail sales. MMS International expects July retail sales to surge 1%, while the ex-auto figure jumps 0.6%. Most indications suggest it will be another solid month for consumption: unit auto sales jumped a better-than-expected 6%, which bodes well for the related auto component in the release.
Also coming Wednesday are reports on business inventories, and import and export prices. Other economic data this week include the trade balance, producer prices, and jobless claims on Thursday; and industrial production, consumer prices, and consumer sentiment on Friday.
On the earnings front, chip equipment giant Applied Materials (AMAT ) reported earnings after the close of trading Tuesday of 5 cents per share, beating the consensus estimate by a penny. The company said new orders of $1.05 billion rose 9% from the second quarter.
In other earnings news Tuesday, farm-equipment maker Deere & Co. (DE ) posted third-quarter EPS of $1.02, vs. 61 cents, on 11% sales rise. The EPS figure was much higher than analysts' forecast. Deere sees $575 million to $625 million in 2003 net income. The shares rose Tuesday.
Marvel Enterprises (MVL ) reported second-quarter EPS of 42 cents, vs. 10 cents, on 27% net sales rise. Its EPS beat analysts' forecast. The comic book publisher sees third-quarter EPS of 25 cents to 30 cents, and raised its 2003 EPS outlook to $1.26 to $1.31. Marvel sees EPS of 96 cents to $1.14 in 2004. The shares were higher Tuesday.
Retailer J.C. Penney (JCP ) reported a second-quarter loss of 2 cents per share, vs. 5 cents loss a year ago, on 2.1% rise in same-store department store sales, and flat same-store sales at its Eckerd drugstore chain. Its loss was narrower than expected.
One area of weakness, though, was drug stocks. Schering-Plough (SGP ) shares fell after the company warned that it may borrow money to meet cash-flow needs for working capital, capital expenditures, and dividends for the second half of the year.
The FOMC did not surprise as it left rates steady and reiterated its concerns over the risk of falling prices, says MMS International. Nevertheless, the Treasury curve steepened rather dramatically Tuesday. Shorter-dated issues rallied as traders covered short positions as the Fed indicated rates will not be headed higher over the foreseeable future and as the FOMC was perhaps not as upbeat on growth as some expected -- especially with respect to the labor market, which was termed "mixed," according to MMS. Nevertheless, prices for longer-dated issues sunk on indications the Fed is becoming more sanguine on the economy, says MMS.
European stock markets finished higher. In London, the Financial Times-Stock Exchange 100 added 8.9 points, or 0.21%, to 4,185.6 even though government reported inflation rose for first time in 5 months.
In Germany, the DAX Index was up 42.13 points, or 1.26%, to 3,381.71 with help from a report that the German July semiconductor book-to-bill ratio rose to 0.91 from 0.88 in June. In France, the CAC 40 was up 19.91 points, or 0.62%, to 3,208.23 as French June industrial production rose a surprising 1.2%.
In Asia, major stock indexes finished higher. Japan's Nikkei index finished up 77.01 points, or 0.81%, to close at 9,564.81. The Japanese government reported that real GDP in the April-June term rose 0.6% quarter over quarter (up 2.3% at a seasonally adjusted annual rate), beating market expectations. Although the number of market participants was limited in Tokyo, the good economic news boosted stocks such as major banks.
Meanwhile, Hong Kong's Hang Seng index gained 90.63 points, or 0.9%, to close at 10,184.17.