Tuesday, March 28, 2006

Stocks Fall as More Fed Hikes Loom

News Article
March 28, 2006

Business Week Online

Stocks Fall as More Fed Hikes Loom

The FOMC announced a quarter-point rate hike and hinted that further tightening may be necessary

Stocks finished lower Tuesday, after the Federal Reserve raised interest rates for the 15th straight time, leaving the door open to further tightening and sending Treasury yields higher. Equity investors may have seen the FOMC statement as a cue to take profits, says Standard & Poor's MarketScope.

The Dow Jones industrial average fell 95.57 points, or 0.85%, to 11,154.54. The broader Standard & Poor's 500 index dipped 8.39 points, or 0.64%, to 1,293.22. The tech-heavy Nasdaq composite index declined 11.12 points, or 0.48%, to 2,304.46.

The Fed's interest-rate hike was the focal point Tuesday. The FOMC raised the federal funds rate target 25 basis points to 4.75%, as expected, and said additional policy firming may be required. The rate-setting meeting was Ben Bernanke's first as Fed chairman.

The debate now moves to whether the Fed will top out at 5%, 5.5% or higher, says S&P MarketScope. The futures market has priced in a jump to 5% at the May meeting.

Some analysts find the news disappointing. "It was a fairly hawkish statement and the markets are reacting pretty negatively to that," says Keith Hembre, chief economist with First American Funds. "The basic market reaction was the same to 'may be needed' that it used to be to 'measured.'"

The Fed still has more work to do, other analysts say. "We believe the Fed will move further to contain future inflation risks," says Richard Berner, chief U.S. economist at Morgan Stanley.

Some worry that the Fed's dependence on backward-looking data may cause it to go a rate hike too far. "We're probably getting closer to overshooting," says Bill Larkin, fixed-income portfolio manager at Cabot Money Management. "It's likely that it's going to start to impair economic growth."

An array of economic data was also on tap. Consumer confidence surged in March to 107.2, its highest level since 2002 and much stronger than expected, says Action Economics.

Later in the week are final fourth-quarter gross domestic product, personal income and personal consumption expenditures, and the Chicago Purchasing Manager's index of manufacturing activity.

On the corporate side, M&A activity continued to percolate. Citigroup (C ) and the National Bank of Greece (NBG ) were reportedly vying to acquire Turkish bank Finansbank, in what could be a more than $5 billion deal.

Telecommunications equipment maker Lucent (LU ) and French broadband equipment maker Alcatel (ALA) were moving closer to a proposed merger. The two companies were reportedly working on a plan to allay U.S. national-security concerns.

Of other blue-chips in focus, General Motors (GM) reportedly said it expects North American sales to fall sharply. The automaker also set plans to announce white-collar layoffs, and shares finished lower.

Hewlett-Packard (HPQ) led the Dow downward on a report that analysts and professional money managers are souring on the computer maker's growth prospects. Rival Apple (AAPL ) was lower ahead of a court battle with London-based Apple Corp., the Beatles' record company.

In earnings news, homebuilder Lennar (LEN ) rose modestly after posting 34% higher first-quarter profit, breaking from recent reports of declining new orders at peers like KB Home (KBH ).

On the brokerage front, drugmaker Eli Lilly (LLY ) was lower after downgrades at both Merrill Lynch and Friedman Billings Ramsey.

Internet search giant Google (GOOG ) was higher after reports the tech bellwether has stepped up its lobbying efforts. Separately, the company reportedly filed patent applications related to free wireless Internet access.

In the energy markets Tuesday, May West Texas Intermediate crude oil futures closed up $1.91 at $66.07 a barrel, amid supply concerns related to Nigeria and Iran. Sources also reported technically related buying, says Action Economics.

European markets finished lower. In London, the Financial Times-Stock Exchange 100 index fell 36.5 points, or 0.61%, to 5,935.7. Germany's DAX index dropped 21.63 points, or 0.37%, to 5,890.63. In Paris, the CAC 40 index slipped 12.45 points, or 0.24%, to 5,149.99.

Asian markets finished higher. Japan's Nikkei 225 index rose 40.14 points, or 0.24%, to 16,690.24. In Hong Kong, the Hang Seng index added 40.71 points, or 0.26%, to 15,856.58. Korea's Kospi index edged higher 0.97 points, or 0.07%, to 1,331.31.

Treasury Market

The Fed report sparked a sell-off in Treasuries, driving yields higher. Prices for 10-year Treasury notes finished lower at 97-28/32 with a yield of 4.78%, while 30-year bonds fell to 95-14/32 for a yield of 4.79%.

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