MarketView for April 5

Summary 

It was another rather dull day on Wall Street with the S&P 500 index once again unable to close above a key technical resistance level for a second consecutive day on Tuesday. Trading volume was once again low with just 6.85 billion shares changing hands on the three major exchanges when compared with last year's estimated daily average volume of 8.47 billion shares. The seemingly never ending low trading volume raises doubts as to the market's strength going forward. The S&P has slowly built gains since mid-March in mostly quiet sessions. Last week was the thinnest week of trading so far in 2011 and Monday was the lowest-volume day of the year.

However, a rebalancing of the Nasdaq 100, which takes effect on May 2, spurred traders to buy companies with increased weightings, including Microsoft, Intel and Cisco, all of which were up in the range of one percent. Apple's weighting was slashed, though it remains the biggest component of the Nasdaq 100. The stock was down 0.7 percent at $338.89 after earlier falling as much as 1.5 percent.

Minutes of the last Federal Reserve meeting indicated that Fed officials are now split on the idea that the Fed should tighten its monetary policy before year-end.

Chip stocks were supported after Texas Instruments announced late Monday that it was planning to acquire National Semiconductor in a deal worth $6.5 billion, a premium of 78 percent. The announcement of the merger with Texas Instruments sent National Semiconductor’s shares up 71 percent to $24.06. Texas Instruments added 1.7 percent to $34.69. The deal is the latest in a string of multibillion-dollar deals that have helped pushed stocks higher in recent weeks.

China's central bank increased interest rates on Tuesday for the fourth time since October, raising suspicions that data next week may show higher inflation than expected in March.

KB Home shares closed down 4.2 percent at $11.69 after it reported a first-quarter loss that widened from the previous year, hurt by a fall in net orders.

Discontent within the Fed

Discontent at the Fed over how soon to reverse course on monetary policy emerged more clearly last month, although the central bank appeared intent to complete a $600 billion bond-buying plan. Specifically, there were some at the Fed's March 15 policy-setting meeting who were of the opinion that because the economy is showing continuing strength, there is a need for tightening monetary conditions this year. However, others believe the Fed could maintain its ultra-loose stance beyond 2011, according to the minutes of the meeting released on Tuesday.

Similarly, some members of the Fed's policy panel thought the central bank should be prepared to cut short its bond purchases if growth quickened or inflation threatened to move higher. However, several others did not anticipate any need for adjustments, the minutes said.

The dollar briefly rose to its highest level in more than five months against the yen and gained versus the euro as traders seized on the comments showing some Fed officials believed tighter policy might be needed this year.

The split between policy hawks and doves reflects the challenge the Fed faces in timing the withdrawal of its massive support for the economy. The central bank cut overnight interest rates to near zero in December 2008 and then bought $1.7 trillion in mortgage-related and government debt. It launched its latest bond-buying plan in November.

Tightening financial conditions too early could stifle a tentative economic recovery, while waiting too long could unleash a surge of hard-to-contain inflation. In a policy statement at the conclusion of its meeting on March 15, the Fed said the economy was on a firmer footing but that high unemployment and still-low inflation warranted continuing its support for the recovery.

Despite impatience among its ranks, there is no sign the Fed intends to curb bond buying or move with any haste to tighter financial conditions. In that regard, the Fed stands in contrast to other major central banks around the world, which are on the cusp of raising benchmark borrowing costs to counter rising prices. The European Central Bank is expected to raise rates on Thursday.

The Fed meeting minutes showed officials increasingly concerned about a surge in energy and commodity prices and the possibility an inflationary psychology might take root. They concluded that the current bout of higher inflation would be temporary, but vowed to keep a watchful eye on whether consumers and businesses were beginning to expect higher inflation in the future. Such expectations could become self-fulfilling if built into wage and price decisions.

"A significant increase in longer-term inflation expectations could contribute to excessive wage and price inflation, which would be costly to eradicate," the minutes said.

Staff told policymakers they could bring the bond-buying program to an end as planned June 30 without tapering purchases and not cause any market disruptions. At the same time, several Fed officials said turmoil in the Middle East and the prospect of higher oil prices had made them shift their views of inflation risks to the upside. As a result of these uncertainties, policymakers vowed to plan for an eventual exit from exceptionally easy monetary conditions based on a range of different economic scenarios.

Republicans Propose Major Cuts

Republicans on Tuesday proposed $6 trillion in spending cuts over a decade, including an overhaul of government-run health programs, while also slashing tax rates. The Republicans' 2012 plan, unveiled by House Budget Committee Chairman Paul Ryan, is sure to deepen a battle over government spending with the Democrats as the two sides ramp up to the 2012 election season. And like the 2011 spending-cut plan that Republicans rammed through the House of Representatives, Ryan's initiative attempts to kill off Obama's landmark healthcare reform law. The Democratic-controlled Senate blocked the first attempt and is expected to do so again.

In trying to bring the world's largest economy back to a fiscally sustainable path after a decade of deficit spending, Republicans in the House are proposing an overhaul of two government programs, Medicare and Medicaid, that together account for about one-fourth of all federal spending by providing healthcare for the elderly and poor. These two programs have served as pillars of the nation's social safety net since the 1960s.

While risking a political backlash from senior citizens, Republicans are hoping their plan will resonate with independent voters and Tea Party activists who have been railing about the rapidly escalating U.S. debt burden. Ryan's proposal, a budget blueprint for the fiscal year that starts on Oct. 1, also serves as a conservative rebuttal to the activist government role Obama has pursued.

Under Ryan's plan, retirees who now qualify for Medicare would instead be given vouchers to buy coverage on the open market, in an effort to limit cost growth through competition. At the same time, state governors, many of them facing severe budget constraints, would be given wide discretion over how to administer the Medicaid health program for the poor.

Those changes would mean Medicare recipients would shoulder more their medical costs tand fewer people would qualify for Medicaid, healthcare advocates say. Top tax rates for individuals and businesses would fall to 25 percent from 35 percent.

The plan would cut government spending by $5.8 trillion over the next 10 years, nearly six times the cuts envisioned by Obama's own budget plan. Budget deficits, which have hovered at about 10 percent of the economy in recent years, would be brought down to 2 percent of GDP by 2017. Economists consider deficits of around 3 percent of GDP to be sustainable.

Still, the Ryan plan would not lead to a balanced budget within 10 years -- a feature that could disappoint conservative Republicans who are working on their own budget plan, as well as fiscal hawks who have urged Washington to tackle comprehensive budget reforms before the country faces a Greece-style debt crisis.