Monday, May 1, 2006

Fed Talk Sends Stocks Lower

News Article
May 1, 2006

Business Week Online

Fed Talk Sends Stocks Lower

Bernanke reportedly said the media misread his congressional testimony last week as too dovish

Stocks finished lower Monday, sinking in the final hour on a CNBC report that Federal Reserve Chairman Ben Bernanke said media commentators misunderstood his recent congressional testimony. The report dampened speculation the Fed's rate hikes may be nearing an end, while a set of stronger-than-expected economic readings stoked inflation concerns, says Standard & Poor's MarketScope.

The Dow Jones industrial average slipped 23.1 points, or 0.21%, to 11,343.29. The broader Standard & Poor's 500 index fell 5.43 points, or 0.41%, to 1,305.18. The tech-heavy Nasdaq composite declined 17.78 points, or 0.77%, to 2,304.79.

Bernanke reportedly said the media misinterpreted his testimony last week before the Congress Joint Economic Committee as too lax on inflation. According to the report, Bernanke said the Fed was "flexible, not dovish," and that economic data will determine the central bank's next moves on interest rates.

Earlier in the session, Wal-Mart (WMT)'s April sales report helped lift stocks. The retailer finished higher after saying its same-store sales rose 6.8% in April compared with the same month last year.

Among other blue-chips in the news, General Motors (GM ) was lower after the automaker said it was recalling roughly 400,000 pickup trucks because of defective brake lights.

Economic reports were also in focus Monday. Personal income rose 0.8% in March, while personal spending rose 0.6%. The Institute for Supply Management's manufacturing index rose to 57.3 in April, above expectations. Construction spending rose 0.9% in March.

All four readings topped Street expectations, says Action Economics. On tap Tuesday, investors await April vehicle sales and the March pending home sales index.

The latest data indicate the Fed will not pause as Bernanke seemed to suggest last week, some analysts say. "A jump in core inflation readings brings the annual rate of inflation to the upper bound of the Fed's target zone," says Lehman Brothers economist Drew Matus. "A pause would seem inconsistent with price stability and would only serve to reinforce our view that the Fed will move the Fed funds rate to 5.5% by the end of the third quarter."

Others echo the view that the Fed's tightening cycle will likely continue. "If the Fed were to pause against the backdrop of these kinds of data, we think it would hurt the Fed's inflation fighting credibility," says Bear Stearns senior economist Conrad DeQuadros.

In remarks on the economy near midsession, Federal Reserve Bank of Atlanta President Jack Guynn said the Fed was "very close" to having monetary policy "properly calibrated."

Meanwhile, M&A activity picked up to start the week. Dow component Boeing (BA ) was modestly higher on news the aerospace company agreed to buy supplier Aviall (AVL ) for about $1.7 billion.

Elsewhere in deal news, telecom outfit Level 3 Communications (LVLT ) was sharply higher on reports the company plans to buy privately held rival TelCove for $1.2 billion.

In earnings reports, Humana (HUM) was lower after the health insurer posted 22% lower first-quarter profit. The company cited costs incurred to become the second-biggest seller of insurance plans for a new U.S. drug benefit. Verizon (VZ ) will be among companies releasing quarterly results Tuesday.

On the brokerage front, Men's Wearhouse (MW ) was lower after JPMorgan Chase cut its rating on the stock from overweight to neutral.

In the energy markets Monday, June West Texas Intermediate crude oil futures closed up $1.82 at $73.70 amid Iran worries, boosting energy stocks like Exxon Mobil (XOM ).

European markets were closed for a holiday. On Friday, London's Financial Times-Stock Exchange 100 index fell 36.9 points, or 0.61%, to 6,023.1. Germany's DAX index dropped 57.85 points, or 0.95%, to 6,009.89. In Paris, the CAC 40 index slipped 25.15 points, or 0.48%, to 5,188.4.

In Asian markets, Japan's Nikkei 225 index rose 19.48 points, or 0.12%, to 16,925.71. In Hong Kong, the Hang Seng index was closed for a holiday after on Friday falling 81.55 points, or 0.49%, to 16,661.3. Korea's Kospi index was also closed after tumbling 32.8 points, or 2.26%, to 1,419.73.

Treasury Market

Treasury yields pushed higher after the strong economic data. Prices for 10-year Treasury notes fell to 95-04/32 with a yield of 5.14%, while 30-year bonds dropped to 89-02/32 for a yield of 5.23%.

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