The tech company and the Dow member each beat analyst estimates, but economic worries lingered after the Fed's rate-hike pause
Stocks finished lower Wednesday, giving up early gains as uncertainty about economic growth and inflation offset upbeat earnings news. The Federal Reserve's decision Tuesday to leave the federal funds rate target unchanged at 5.25% has sparked confusion in the markets, says Standard & Poor's Equity Research.
The Dow Jones industrial average fell 97.41 points, or 0.87%, to 11,076.18, led downward by Caterpillar (CAT ). The broader Standard & Poor's 500 index dropped 5.54 points, or 0.44%, to 1,265.94. The tech-heavy Nasdaq composite edged down 0.57 points, or 0.03%, to 2,060.28.
NYSE breadth was negative, with 19 issues declining for every 14 advancing, while Nasdaq breadth was 18-12 negative.
The Fed's pause may only be temporary, some analysts say. "We expect core inflation to continue rising, a lagged response to dollar weakness," says David Malpass, chief global economist at Bear Stearns. "We remain concerned that the Fed is leaving itself behind the curve in dealing with the inflation/weak dollar problem, and we expect the Fed will have to start hiking rates again later this year."
However, others predict rate cuts on the horizon. "Although a risk of further tightening remains, in several respects the committee's statement suggests that the hurdle for such a move is fairly high," notes Jan Hatzius, chief U.S. economist at Goldman Sachs. "Accordingly, we expect the next move by the FOMC to be a rate cut, though probably not until the spring of 2007."
In the wake of the Fed decision, investors eyed another set of economic data Wednesday. Wholesale sales rose 1.4% in June, much higher than expected, while inventories increased 0.8%. Thursday's calendar holds releases on weekly jobless claims, the June trade deficit, and the July Treasury budget.
On the company side Wednesday, Disney (DIS ) was modestly lower despite posting a 39% higher profit for its fiscal third-quarter, beating analyst estimates.
Homebuilder shares also declined after Toll Brothers (TOL ) lowered its fiscal fourth-quarter delivery guidance.
In tech, Cisco (CSCO) was sharply higher after the networking equipment maker forecast full-year revenue will increase 15% to 20% in the year ending July, 2007.
Shares of Digene (DIGE) surged after the biotechnology company said it expects to report revenue of about $192 million in fiscal 2007, topping the average analyst estimate of $188.5 million.
Companies due to report quarterly results after the close Wednesday included American International Group (AIG ), General Electric (GE ), and Viacom (VIA ). Among companies reporting Thursday are retailers J.C. Penney (JCP ), Kohl's (KSS ), and Target (TGT ).
M&A activity continued Wednesday after a flurry of deals the previous session. Morgan Stanley (MS ) was lower after the investment bank agreed to buy residential mortgage company Saxon Capital (SAX ) for $706 million, or $14.10 per share in cash.
In the energy markets, September West Texas Intermediate crude oil futures closed up 4 cents at $76.35, after flirting with an all-time closing high following a weekly inventory report that showed an unexpectedly large decline in crude supplies.
European markets finished higher. In London, the Financial Times-Stock Exchange 100 index gained 42.4 points, or 0.73%, to 5,860.5. Germany's DAX index moved higher 50.89 points, or 0.9%, to 5,702.81. In Paris, the CAC 40 index was up 57.2 points, or 1.15%, to 5,025.15.
Asian markets finished higher. Japan's Nikkei 225 index advanced 191.93 points, or 1.24%, to 15,656.59. In Hong Kong, the Hang Seng index climbed 298.38 points, or 1.75%, to 17,346.58. Korea's Kospi index added 3.83 points, or 0.29%, to 1,314.93.
Treasury yields ticked higher after the wholesale sales figures. The 10-year notes slipped in price to 101-14/32 for a yield of 4.94%, while the 30-year bond dropped to 91-22/32 for a yield of 5.05%.