Stocks End Higher After Fed Rate Hike

The Federal Reserve raised interest rates by a quarter percentage point, as expected, and did not change its stance on the inflation risk

Stocks moved modestly higher on Wednesday after the Federal Reserve raised interest rates by a quarter of a percentage point, as expected, and reiterated that a "measured" pace was needed to fight off inflation.

The Dow Jones industrial average gained 22.19 points, or 0.21%, to 10,435.62. The broader Standard & Poor's 500 index was up 6.45 points, or 0.57%, to 1,142.65. The tech-heavy Nasdaq composite index added 12.86 points, or 0.63%, to 2,047.79.

Looking ahead to Thursday, a reading on national manufacturing activity is expected to show a slight decrease in the rate of growth in June over the previous month. The Institute for Supply Management index of manufacturing activity is forecast to cool to a reading of 62.3 from 62.8 in May. Still, any number over 50 indicates an expansion.

Meantime, initial jobless claims for the week ending June 26 are seen rising slightly to 350,000 from 349,000 in the previous week.

The earnings docket is fairly light on Thursday, with ConAgra Foods (CAG ) among the few companies reporting results.

Although the Federal Open Market Committee's decision to raise the benchmark federal funds target rate by a quarter percentage point to 1.25% on Wednesday was widely expected, the market was relieved the FOMC move and statement remained dovish on inflation. In the Fed's statement, the Fed maintained a balanced assessment of the risks to growth and inflation and said part of the rise in inflation was "transitory." As for future rate hikes, it said: "With underlying inflation still expected to be relatively low, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured." It did, however, say that it will act if necessary to contain inflation. This is the first hike in four years.

Stocks had been lower ahead of the FOMC annoucement. Investors had been discouraged by an index of regional manufacturing activity which showed growth slowing. The headline Chicago Purchasing Manager's Index (PMI) came in at 56.4 for June, vs. a prior 68.0, well below expectations. According to Informa Global Markets, the data are "all consistent with slower growth, but growth, nonetheless."

In stocks news, Research In Motion (RIMM ) posted its fourth quarterly profit in a row on brisk sales of the popular BlackBerry handheld mobile communications device. The stock jumped 15% on the news.

Freddie Mac (FRE ) posted a 52% drop for 2003 as the home financing outfit moved to recover from an accounting scandal. The stocks finished up slightly.

Packaged foods giant General Mills (GIS ) reported stronger-than-expected fourth-quarter profits, excluding one-time items. However, the company reduced its long-term sales and earnings forecast. The stock rose.

AutoZone (AZO ) shares skidded 9% after it said same-store sales through the first 7 weeks of its fourth quarter were down 1% and retail same-store sales were down 3%. S&P cut its price target and reiterated an accumulate ranking.

Commerce Bancorp (CBH ) shares fell 10% on Tuesday's news that two of its bank unit officers were indicted in a federal probe of corruption in Philadelphia city government. The executives allegedly gave favors to Philadelphia's former city treasurer and attorney Ronald White in exchange for banking business from the city government, according to news reports.

Treasury Market

Treasuries closed higher in price after the FOMC's decision on interest rates, though that result and the subsequent statement language was very closely aligned with market expectations, says Action Economics. The yield on the 10-year note fell to 4.62%.

World Markets

European stock markets closed lower on Wednesday. London's FTSE 100 index was off 48.3 points, or 1.07%, to 4,464.1, even though Britain's first-quarter gross domestic product was revised to 0.7%, or 3.4% on an annualized basis, from 0.6%, or 3.0%, year-over-year. Gallaher was lower on brokerage downgrades. Exel was higher, boosted by bullish comments from both JP Morgan and Morgan Stanley. Ashtenne was higher after announcing plans to return capital to shareholders following the sale of some assets.

Germany's DAX index fell 17 points, or 0.42%, to 4,052.73 after reports that Eurozone June economic confidence fell to 99.8 from 100.1 in May, but the June business climate rose to 0.43 from 0.29 in May. In other news, eurozone June flash CPI rose 2.4% year-over-year, after rising 2.5% in May. HypoVereinsbank was higher after an FT report says the company sees no pan-European merger in the short term. Infineon Technologies was higher after naming Hermann Eul to run fixed-line telco unit. Merck AG was higher after receiving European approval for its key colorectal cancer drug Erbitux.

In Paris, the CAC 40 index eased 23.49 points, or 0.63%, to 3,732.99 following reports French consumer confidence was unchanged in June and the French jobless rate remained at 9.8% but the number of jobless rose 14,000. Euro Disney was higher after saying it would launch a 250 million euro rights issue as part of a three-part plan to restore its profitability. France Telecom was lower after the Financial Times reported the company may be asked by the EU to repay hundreds of millions of euros in back taxes. Clarins was lower after saying it will terminate its U.S. distribution contract with Procter & Gamble at the end of 2005.

Asian markets finished mixed on Wednesday. In Japan, the Nikkei index lost 1.94 points, or 0.02%, to close at 11,858.87 as investors stayed sidelined ahead of the FOMC meeting and Japan's Tankan corporate poll due out Thursday. Select blue chips such as Toyota Motor and Mitsubishi Tokyo Financial Group edged higher, while Toshiba sank on dilution worries after it said it would issue up to 150 billion yen worth of EuroYen convertible bonds. Separately, the release of the Bank of Japan's June Tankan survey on Thursday is widely expected to underscore a broadening upturn underway in the Japanese economy. Action Economics' projection for the headline diffusion index for large manufacturers at +17, improving from +12 in March to its highest since 1991, would be in line with the consensus forecast.

In Hong Kong, the Hang Seng index added 169.45 points, or 1.40%, to close at 12,285.75, helped by upbeat consumer confidence data reported in the U.S. last night. Property names rallied after S&P Ratings raised Hong Kong's long-term currency rating to stable on Tuesday, giving stocks related to consumer spending a boost.

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