MarketView for April 27

 

 

Summary 

 

The Nasdaq hit a 10-year high as Wall Street rallied on Wednesday after Fed Chairman Ben Bernanke's first-ever press conference did nothing to short-circuit investors' optimistic outlook on the economy. All three major equity indexes extended gains after comments from Bernanke at his press conference, where he reiterated the Fed's stance that inflation was a transitory problem related largely to commodity price pressures.

 

The Nasdaq closed at 2,869.88, its highest close since December 12, 2000. Among the day's leading gainers on the Nasdaq were retailers and biotechnology names. Nonetheless, volume was nothing to shout about with the number of shares changing hands on the three major exchanges estimated at 7.59 billion shares. The daily average is about 7.73 billion shares traded.

 

The Russell 2000 Index hit an all-time closing high of 858.31 as investors kept buying small-caps, a sector associated with a strong outlook for economic growth.

 

The Fed's policy-setting Federal Open Market Committee said in a statement it intends to complete its $600 billion bond buying program in June as scheduled.

 

At the news conference, Bernanke said there was "a bit less momentum in the economy" and he foresaw "a relatively weak number, maybe less than 2 percent" for growth in gross domestic product in the first three months this year, indicating the Fed is likely to maintain its accommodative policy despite worries about inflation.

 

Biotech stocks helped boost the Nasdaq, as Regeneron Pharmaceuticals Inc surged 28.6 percent to $67.05 after its experimental cancer drug, Zaltrap, being developed with Sanofi-Aventis, extended survival in patients in a late-stage trial.

 

General Electric helped lift the Dow, rising 2.7 percent to $20.65 after the company indicated that GE's earnings growth over the next few years will be the fastest in a decade.

 

Boeing, Whirlpool and WellPoint also moved higher after exceeding Street consensus expectations. Boeing, also a Dow component, rose 0.8 percent to $76.12. Whirlpool gained 0.9 percent to $88.65 and WellPoint added 3.5 percent to $75.54.

 

After the closing bell, Starbucks Corp warned that rising fuel and dairy costs will take a bigger chunk out of earnings than previously anticipated, sending shares down 1.8 percent to $36.54 in extended trade.

 

According to Thomson Reuters data through Wednesday, of the 220 companies in the S&P 500 that have reported earnings, 73 percent have posted earnings above estimates.

 

Fed In No Rush to Change Course

 

Federal Reserve Chairman Ben Bernanke signaled on Wednesday that the Fed is in no rush to scale back its support for the economy with the labor market still in a "very, very deep hole."

 

The Fed trimmed its forecast for 2011 economic growth in a nod to a weak start to the year and bumped up its projections for inflation, which caused some jitters in financial markets.

 

The central bank's policy-setting committee said after a two-day meeting it will complete the purchase of $600 billion in bonds in June to support the economy's recovery, and said it would keep its balance sheet, currently at $2.67 trillion, steady for a time to ensure its support does not fade.

 

It also repeated it plans to keep overnight interest rates, which it has held near zero since December 2008, extraordinarily low for "an extended period."

 

"It is a relatively slow recovery," Bernanke said at a news conference, the first after a policy meeting by a Fed chief in the central bank's 97-year history. "The combination of high unemployment, high gas prices and high foreclosure rates is a terrible combination. A lot of people are having a tough time."

 

Bernanke appeared nervous at the start of the briefing, held at the central bank's headquarters, but he relaxed as the widely watched, nearly hour-long session progressed.

 

A hush fell over the normally bustling floor of the New York Stock Exchange with orders drying up as investors tuned into the central bank chief. "

 

The news conference served multiple purposes for the Fed. It allowed Bernanke an opportunity to push back against stiff criticism from some lawmakers, economists and foreign officials that the Fed's efforts to prop up the U.S. economy with more than $2 trillion in stimulus would spark inflation.

 

It was also an opportunity for Bernanke to seize control of an often very public debate among Fed officials over whether the stimulus course could backfire, providing a new tool to deliver a consensus central bank view directly to markets.

 

In a fresh quarterly forecast, the Fed revised down its growth estimate for 2011 to between 3.1 percent and 3.3 percent from the 3.4 percent to 3.9 percent it saw in January. It said the recovery was proceeding at a "moderate pace," a shift from March when it said it was on "firmer footing."

 

Bernanke said growth may have slowed to less than a 2 percent annual rate in the first three months of this year after a 3.1 percent advance in the fourth quarter of 2010. However, he added: "I would say that roughly most of the slowdown in the first quarter is viewed by the committee as being transitory." The government releases its first estimate of first quarter GDP on Thursday.

 

The Fed lowered its projection for unemployment but said it would stay elevated over the central bank's three-year forecast period. The jobless rate stood at 8.8 percent in March.

 

"The pace of improvement is still quite slow and we are digging ourselves out of a very, very deep hole," Bernanke said.

 

The central bank sharply raised its estimate for 2011 inflation to account for a surge in oil prices. However, it bumped up its core inflation forecasts only marginally and expressed confidence the jump in the cost of oil would not spark broader inflation.

 

Financial markets showed some nervousness. Prices for 30-year U.S. government debt hit session lows on the inflation forecasts, while the price of gold -- a traditional inflation hedge -- hit a record high of almost $1,530 an ounce.

 

The dollar reached a three-year low against six major currencies as Bernanke spoke. Stock markets, which have been pumped up by the Fed's monetary easing, rose on the expectation that the central bank's support will continue. Interest rate futures showed traders continued to bet that the Fed would hold off on raising rates until early 2012.

 

Bernanke faced broad questioning, including on the falling value of the dollar, which has been undercut by the Fed's easing as other major central banks raised interest rates. While deferring to currency policy as an issue for the Treasury Department, Bernanke said a strong, stable dollar was in the interests of the United States and the world economy.

 

To keep its balance sheet from shrinking, the Fed said it will continue to reinvest proceeds from maturing securities it holds, ensuring it would remain a big buyer in debt markets.

 

Bernanke said a decision to stop that strategy would likely be the first step of a policy tightening, although he offered no timeframe on when that might occur.

 

As for an increase in interest rates, he suggested that was still some months off. "Extended period suggests that there would be a couple of meetings before action but unfortunately ... we don't know how quickly a response will be required."

 

Bernanke told a questioner that the trade-off between the benefits of extending the bond-buying program and the potential for wider inflation had become less attractive. "Inflation has been getting higher, inflation expectations are a bit higher," he said. "It's not clear we can get substantial improvements in payrolls without some additional inflation risks."

 

Durable Goods Number Up

 

A key manufacturing gauge rose in March and new orders in February were stronger than initially thought, indicating a vibrant factory sector even as the economy slowed in the first quarter. New orders for manufactured goods meant to last at least three years increased 2.5 percent after an upwardly revised 0.7 percent rise in February, the Commerce Department said on Wednesday.

 

The rise in March durable goods orders exceeded expectations for a 2 percent advance, while orders in February had been previously reported to have dropped 0.6 percent. Though the report -- which showed upward revisions to key categories in February -- did not change views that the economy slowed sharply in the first three months of this year, it confirmed that manufacturing continues to power the recovery.

 

The recovery lost a step in the first three months of the year as harsh winter weather restrained activity and high gasoline and food prices weighed on consumer spending.

 

The slowdown in first-quarter growth was acknowledged by Federal Reserve officials who at the end of a two-day meeting on Wednesday described the recovery as proceeding at a "moderate pace" -- a slight step back from a statement in March when it said the economy was on a firmer footing.

 

Orders for long-lasting manufactured goods last month were buoyed by bookings for motor vehicles, transportation equipment and aircraft. Excluding transportation, orders rose 1.3 percent after a revised 0.6 percent gain in February, which was previously reported as a 0.3 percent drop.

 

The strong manufacturing tone was captured by Whirlpool, who reported a rise in first-quarter net profit rose to $169 million from $164 million a year earlier.

 

Manufacturing has been central to the economy's recovery from the worst recession since the 1930s, even though it constitutes less than 15 percent of economic activity. A weaker dollar, which hit a three-year low against a basket of currencies on Wednesday, is helping the sector.

 

The durable goods report showed non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, rose 3.7 percent last month after an upwardly revised 0.5 percent gain in February.

 

Shipments of non-defense capital goods excluding aircraft rose 2.2 percent after advancing 0.4 percent in February. This component goes into the calculation of the government's measure of gross domestic product. Orders for primary metals rose 3.9 percent in March, while machinery orders jumped 4.2 percent. However, orders for computers and electronic products fell, as did orders for communications equipment.