Wednesday, May 31, 2006

Stocks Rise Despite Interest-Rate Worries

News Article
May 31, 2006

Business Week Online

Stocks Rise Despite Interest-Rate Worries

The latest Fed minutes revealed uncertainty over monetary policy. Meanwhile, crude futures tumbled near $71 on Iran news

Stocks ended a miserable May with gains Wednesday, finishing higher despite a jump in bond yields after the minutes from the most recent Federal Reserve meeting shed little light on the direction of interest rates. Uncertainty over the Fed's plans helped spark recent declines, but bulls showed strong conviction this session, says Standard & Poor's Equity Research.

The Dow Jones industrial average rose 73.88 points, or 0.67%, to 11,168.31, paced by Merck (MRK ) and Exxon Mobil (XOM ), but declined 1.8% in May. The broader Standard & Poor's 500 index climbed 10.25 points, or 0.81%, to 1,270.09, falling 3.1% for the month for its worst May since 1984. The tech-heavy Nasdaq composite added 14.15 points, or 0.65%, to 2,178.88, posting a monthly decline of 6.2%.

The minutes from the Fed's May 10 meeting indicated that the Fed has not yet determined the future course of interest rates. Choices on the table ranged from a pause to a hike of 50 basis points, reflecting policymakers' quandary as they continue to monitor economic data, says Action Economics.

The Fed is waiting for more data, some analysts say. "The members said the outlook for slower growth was 'not yet clear' in the data, while stressing that core inflation was a 'little higher than expected,'" says David Wyss, chief economist at Standard & Poor's. "It is becoming more likely that the Fed will pause in June, but then tighten again in August."

Others say the minutes were generally more hawkish than Wall Street expected. "Whatever we thought a half an hour ago, the odds of a June increase just went up," says Joe Balestrino, fixed-income market strategist at Federated Investors.

Also on the economic docket, the Chicago PMI reading for regional business activity surged unexpectedly to 61.5 in May, from 57.2 in April. Before the open, the recently created ADP employment report showed private nonfarm payrolls rose 122,000 in May, less than expected.

Thursday's economic calendar holds a report on U.S. productivity. First-quarter nonfarm productivity is projected to be revised up to 4.0% from the advanced release of 3.2%, says Action Economics. On Friday, a key payrolls report may provide further clues on the Fed's path.

In corporate news, retailer Costco (COST) was lower after posting 12% higher profit for its fiscal third quarter, slightly below expectations. The results followed a lackluster May sales report Tuesday by rival Wal-Mart (WMT ).

Chipmaker Advanced Micro Devices (AMD ) was higher on a report that some computer makers plan to begin selling systems based on a new group of technologies for managing digital media in the home.

Casino operator Las Vegas Sands (LVS) was higher after the company said it expects to recoup its more than $3 billion investment in its Singapore casino project within five years.

Seed producer Monsanto (MON) was higher after the company raised its full-year profit forecast to as much as $2.55 a share, from a previous estimate of as much as $2.50.

Jewelry retailer Tiffany (TIF )was higher after reporting a 7.7% increase in first-quarter profit on double-digit percentage growth in international sales.

On the downside, Cubist Pharmaceuticals (CBST ) was sharply lower after the pharmaceuticals company said it will offer $275 million in convertible notes.

In broker calls, network equipment maker F5 Networks (FFIV ) was higher after Citigroup upgraded the stock from hold to buy.

In the energy markets Wednesday, July West Texas Intermediate crude oil futures fell 74 cents to $71.29, after Secretary of State Condoleeza Rice said the U.S. would join talks with Iran if the OPEC nation halts its nuclear program.

European markets finished higher. In London, the Financial Times-Stock Exchange 100 index rebounded 71.8 points, or 1.27%, to 5,723.8. Germany's DAX index bounced 70.43 points, or 1.25%, to 5,692.86. In Paris, the CAC 40 index added 36.31 points, or 0.74%, to 4,930.18.

Asian markets finished lower. Japan's Nikkei 225 index tumbled 392.12 points, or 2.47%, to 15,467.33. In Hong Kong, the Hang Seng index was closed for a public holiday after Tuesday falling 105.88 points, or 0.66%, to 15,857.89. Korea's Kospi index was also closed after Tuesday dropping 11.52 points, or 0.87%, to 1,317.7.

Treasury Market

Treasury yields pressed higher after the FOMC minutes. Prices for 10-year Treasury notes dropped to 100-02/32 with a yield of 5.11%, while 30-year bonds fell to 89-10/32 for a yield of 5.21%.

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