Stocks gain as investors weigh a better-than-forecast pending home sales index and await Tuesday's Federal Reserve rate-cut decision.
Stocks jumped Monday as investors welcomed a stronger-than-expected pending home sales report and geared up for Tuesday's expected interest-rate cut from the Federal Reserve.
The Dow Jones industrial average added 0.7 percent. The broader S&P 500 index added 0.8 percent and the tech-fueled Nasdaq composite added 0.5 percent.
Treasury prices slumped, boosting the corresponding yields. The dollar fell versus the euro and was little changed versus the yen. Oil prices dipped and gold prices rose.
The Fed's policy committee, meeting Tuesday, is widely expected to cut the fed funds rate, a key short-term lending rate, by a quarter-percentage point, to 4.25 percent, after cutting rates at the last two meetings.
Some Wall Streeters are looking for a cut of a half-percentage point, but such bets were diminished by last week's mostly upbeat November jobs report.
"I think people are pretty positive that we'll get a quarter-percentage point cut and also hoping that maybe we'll get a half-percentage point cut," said Curtis Teberg, portfolio manager of the Teberg Fund.
The central bank has been cutting the fed funds rate, which impacts consumer borrowing costs, since September, as a means of loosening up the credit market and trying to keep the economy out of falling into a recession.
Investors will also be looking to the statement Tuesday that accompanies the decision to shed further light on the Fed's outlook for the economy and the risks to that outlook.
Stocks are also continuing to coast on the positive momentum that has been in place for the last few weeks, said John Merrill, CEO at Tanglewood Capital Partners.
He said that the market has been driven over the last few weeks on a combination of technical factors and hopes that the Fed will cut rates again. As such, "we may see some selling after Tuesday, as investors take a buy on the rumor, sell on the news reaction," Merrill said.
Ahead of the meeting, Wall Street eyed the morning's pending home sales index, which showed a rise of 0.6 percent, versus forecasts that sales would fall 1 percent.
After the close of trade Monday, mortgage lender Washington Mutual said it was cutting its dividend and more than 3,000 jobs in the wake of the housing and credit market crisis.
The Fed's plan B
In corporate news, UBS issued a profit warning, said it will write down about $10 billion related to the credit market crisis and will borrow about $11.5 billion from outside investors.
Troubled bond insurer MBIA said Monday that it will receive a $1 billion investment from private equity firm Warburg Pincus. Shares jumped around 13 percent.
McDonald's, a Dow component, reported November sales at its stores open a year or more rose 8.2 percent, well above estimates. Shares gained nearly 3 percent.
MGI Pharma rallied nearly 20 percent after the drug company agreed to be bought by Japanese drug company Eisai for $3.9 billion in cash.
McDonald's was one of many Dow components rising, with 26 of the 30 blue-chip components higher. Other gainers included Alcoa, General Motors, Citigroup, Caterpillar, Honeywell and JP Morgan.
Market breadth was positive. On the New York Stock Exchange, winners topped losers 5 to 3 on volume of 1.17 billion shares. On the Nasdaq, advancers beat decliners eight to seven on volume of 1.81 billion shares.
Treasury prices slipped, boosting the yield on the 10-year note to 4.15 percent from 4.10 percent late Friday. Treasury prices and yields move in opposite directions.
In currency trading, the dollar fell versus the euro and was little changed against the yen.
U.S. light crude oil for January delivery fell 42 cents to settle at $87.86 a barrel on the New York Mercantile Exchange.
COMEX gold for February delivery rallied $13.30 to settle at $813.50 an ounce.
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Monday, December 10, 2007
Wall Street bets on rate cuts
Wednesday, October 31, 2007
Fed Lowers Benchmark Rate by a Quarter Point to 4.5 Percent
The Federal Reserve cut its benchmark interest rate by a quarter point to 4.5 percent to cushion the U.S. economy from the housing recession that officials predict will extend into next year.
Today's action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets, the Federal Open Market Committee said in a statement after the meeting today in Washington. The committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth.
Policy makers lowered borrowing costs for a second month even after reports today showed the economy expanded more than forecast last quarter and companies stepped up hiring. Chairman Ben S. Bernanke emphasized this month that the outlook is uncertain and housing will constrain growth into 2008.
Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance, the Fed said. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction.
Discount Rate
The Fed also lowered the discount rate, the cost of direct loans to banks, by 25 basis points to 5 percent, from 5.25 percent. A basis point is 0.01 percentage point.
Policy makers said in the statement that inflation risks remain and the committee will continue to monitor inflation developments carefully.
Economists anticipated the decision, according to the median of 108 forecasts in a Bloomberg News survey. Futures contracts on the Chicago Board of Trade showed traders also expected a quarter-point move.
Economists and former officials said before the meeting that the central bank would want to preserve leeway to take back the rate cuts should the economy weather the risks from credit and housing markets. Vice Chairman Donald Kohn said Oct. 5 the Fed must be nimble in adjusting policy to promote both growth and price stability.
Bernanke, 53, and other officials in speeches this month have described the importance of taking out insurance to protect the economy from risks when the outlook is difficult to judge.
Consumer-price increases have slowed, while a falling dollar and rising oil costs threaten a renewed acceleration. The Fed's preferred gauge, the personal consumption expenditures price index excluding food and energy, probably rose 1.8 percent in September from a year ago, according to the median forecast. The Commerce Department reports the figures tomorrow.
The index remained below 2 percent from June to August. Bernanke, before taking the Fed's helm, said his comfort range for the measure was 1 percent to 2 percent.
The Commerce Department said today that the expansion picked up in the third quarter, though economists surveyed by Bloomberg predict a slowing this quarter. A private report showed companies hired 106,000 this month after creating 61,000 jobs in September.
The economy grew at a 3.9 percent annual rate in July to September, up from 3.8 percent in the previous three months, Commerce figures showed. It will slow to a 1.8 percent pace in the current period, according to the median estimate in a survey published Oct. 10.
Housing figures this month showed the industry has yet to find a bottom. A private survey yesterday showed home values in 20 metropolitan areas slid the most in at least six years. Sales of previously owned homes fell to the lowest level since National Association of Realtors began keeping records in 1999, and government figures recorded a 14-year low for housing starts.
Continued stress in credit markets may lengthen the housing recession and temper business investment plans. The world's largest banks and securities firms announced more than $30 billion of third-quarter charges.
Citigroup Inc. the biggest U.S. bank, said Oct. 15 that earnings fell 57 percent as loan losses increased. Merrill Lynch & Co. last week wrote down the value of subprime mortgages, asset-backed debt and leveraged loans by $8.4 billion.
The benchmark rate is now at the lowest level since January 2006. Bernanke took office the following month, and continued a series of rate increases that lifted the federal funds rate to 5.25 percent by June last year.
Saturday, October 20, 2007
Dollar May Extend Drop After G-7 Fails to Address Record Slide
The dollar, trading at an all-time low against its major trading partners, may extend the decline after the Group of Seven failed to address the drop following a meeting of finance officials.
The policy makers, representing the U.S., U.K., Japan, Germany, Italy, France and Canada, stuck to language in prior statements by saying excess volatility' in currencies is undesirable and that currencies should trade in line with fundamentals. They also intensified calls for China to let its currency strengthen, during yesterday's gathering in Washington.
The dollar is going to be under pressure as the growth outlook weakens. Risk aversion is the focus now. The dollar dropped this week by the most in two months versus the yen, on concern the U.S. housing slump will rekindle a credit market sell-off.
The yen rose against the 16 most-actively traded currencies this week as a decline in global stocks prompted investors to sell assets funded by loans in Japan. A report next week is forecast to show existing home sales in the U.S. fell to the lowest since 2001 in September.
Sell the Dollar
The dollar fell 2.6 percent to 114.51 yen, from 117.61 on Oct. 12, the biggest weekly decline since the period ended Aug. 17. The U.S. currency weakened 0.9 percent to $1.4301 per euro. It touched an all-time low of $1.4319 yesterday.
The statement gives the market a green light to sell the dollar, said Brian Dolan, chief currency strategist at FOREX.com, a unit of the online currency trading firm Gain Capital in Bedminster, New Jersey, which has about $250 million of funds under management. With no comment from the G-7 about its weakness, the dollar could decline to $1.45 per euro in a month.
An Oct. 24 report from the National Association of Realtors may show sales of existing homes fell to an annualized 5.25 million last month, from 5.5 million in August, according to the median estimate of 64 economists surveyed by Bloomberg News.
The International Monetary Fund cut its forecast for 2008 U.S. economic growth to 1.9 percent from 2.8 percent on concern the sell-off in the credit markets will cut business and consumer spending.
Risk Aversion
Increased risk aversion caused investors to pare carry trades financed by yen. In such transactions, investors get funds in countries with lower borrowing costs and buy assets in nations with higher rates.
The trades have pushed the yen down 8.9 percent versus the euro and 12 percent against the Australian dollar in the last 12 months. The Japanese currency gained 1.8 percent to 163.79 versus the euro this week, the biggest increase since the period ended Aug. 17.
The Bank of Japan's benchmark borrowing cost is 0.5 percent, the lowest among major economies, and compares with the European Central Bank's 4 percent, the Federal Reserve's 4.75 percent and Australia's 6.5 percent.
Interest-rate futures traded on the Chicago Board of Trade show a 92 percent chance the Fed will cut its benchmark interest rate a quarter percentage point to 4.5 percent on Oct. 31. The odds were 32 percent a week ago. The chance of another rate cut in December to 4.25 percent is 74 percent, up from 15 percent on Oct. 12.
