MarketView for April 6

Summary 

We came close but it was no cigar on Tuesday as the Dow Jones industrial average continued to make runs at the psychologically important 11,000 level, coming within 13 points of that goal in afternoon trading during a brief run into positive territory after the Fed's minutes. The Dow last crossed that mark in September 2008.

By the close, though, the Dow's slim gain had evaporated, and it ended just below break-even as Travelers fell when an analyst cut his rating on the stock to a "hold" from "buy. The stock was down 1.4 percent at $52.59. Meanwhile, the S&P 500 and Nasdaq rose modestly as the banking sector received a bit of momentum from some positive analyst comments, while minutes from the Federal Reserve's last meeting eased concern over rising rates. During the trading day the S&P 500 hit an 18-month intraday high at 1,191.80, and the Nasdaq touched a 19-month intraday high at 2,443.50.

The minutes from the latest Federal Reserve meeting suggested the central bank could keep interest rates at ultra-low levels longer than investors have anticipated if the economy worsens. Lower rates support financial shares, which have been at the center of the market's year-long rally. The three major U.S. stock indexes moved in a tight range, but perked up after the release of the Fed minutes at 2 p.m.

Bank of America rose 2 percent to $18.49 and JPMorgan Chase added 1.1 percent to $45.84 amid the sector's strong gains. Wells Fargo Securities upgraded large-cap banks, citing more clarity on asset-quality trends.

Wall Street's fear gauge, the CBOE Volatility Index or the VIX, fell 4.6 percent to end at 16.23, its lowest close since October 9, 2007. On that day, the S&P 500 closed at 1,565.15, its all-time closing high. Regional banks' shares rose after Credit Suisse increased its price target on two smaller banking companies, Regions Financial and Synovus Financial. Regions Financial gained 4.4 percent to $8.55, while Synovus Financial advanced 6.2 percent to $3.62.

The Nasdaq garnered support from Amazon, up 3.1 percent at $135.56. The launch of Apple's iPad has stirred optimism the device could expand the market for e-publishing, including Amazon’s Kindle.

Home builders' stocks slid as rising Treasury yields raised worries about higher mortgage rates. KB Home fell 2.8 percent to $16.51 after Credit Suisse cut its rating on the company's stock to "neutral" from "outperform."

Higher mortgage rates would pose a significant hurdle for a recovery in the housing sector. The 10-year Treasury note's yield reached 4 percent in intraday trade on Monday, though its yield slipped to 3.96 percent on Tuesday as bargain hunters stepped in to buy some debt and push prices up slightly.

“Extended period" Could Be a Long Time

The Federal Reserve

The minutes of the Fed's March 16 gathering, released on Tuesday showed lingering concern about the economy's prospects, with policymakers indicating they were in no hurry to raise interest rates. What that means is that the Fed could keep interest rates ultra-low for even longer than the Street is currently thinking if the economic outlook worsens or inflation drops, according to the minutes from the central bank's last meeting.

"The duration of the extended period prior to policy firming might last for quite some time and could even increase if the economic outlook worsened appreciably or if trend inflation appeared to be declining further," the minutes said. "Such forward guidance would not limit the committee's ability to commence monetary policy tightening promptly," they said.

Kansas City Fed President Thomas Hoenig again dissented on this count, favoring a more flexible commitment to keep rates low "for some time," according to the minutes, which did not elicit major market reaction.

In response to the worst financial crisis in generations, the Fed not only cut short term interest rates to near zero but also undertook a host of emergency measures aimed at reviving credit markets in the past three years. Fed officials expressed concern about renewed weakness in housing markets and persistently high unemployment, saying the threat of a vicious cycle had not fully receded.

"Participants agreed that household spending going forward was likely to remain constrained by weak labor market conditions, lower housing wealth, tight credit, and modest income growth," the minutes said.

The release of the minutes came after the release last Friday of a U.S. government payrolls report that showed employers added 162,000 jobs in March, the fastest monthly job growth in three years. Still, the data was marked by a number of seasonal distortions, and the jobless rate remained stuck at 9.7 percent.

Separately on Tuesday, Minneapolis Fed President Narayana Kocherlakota said he would be surprised if the U.S. unemployment rate, managed to dip below 8.0 percent by the end of 2011.

Housing starts will likely remain low, possibly for several years, he added, although the U.S. economy could recover even without a turnaround in the housing market. Despite the sobering nature of the Fed's economic assessment, some analysts interpreted the new characterization of the "extended period" language as signaling the phrase no longer meant a fixed amount of time, paving the way for its removal from the statement.

Yet, the Fed's latest assessment of economic conditions was downbeat. The central bank characterized inflation pressures as subdued and likely to remain that way, while noting that expectations for price increases are "reasonably" well-anchored. Against that backdrop, a few Fed members indicated they thought the risk of tightening policy too soon was greater than that of waiting too long.

Not everyone agreed, however. Speaking to CNBC television, Richmond Fed president Jeffrey Lacker argued just the opposite.

"The risk going forward in this expansion is going to be a little more tilted toward waiting too long, and I'm going to be pretty vigilant about that," Lacker said.