MarketView for June 20

Summary 

Investors and traders took a bit of a hiatus on Wednesday after the Federal Reserve acted to aid the fragile economy with stimulus measures thatare  relatively minimloa when compared to expectations..

Stocks rallied in the hope that the Fed would extend Operation Twist, a bond-buying program designed to lower long-term rates and stimulate growth. However, hopes of additional Fed action went unfulfilled.

In addition, the Fed slashed its economic projections for this year and cut forecasts for the next two years as well. Taken together, it left some investors wondering why the Fed did not signal a third round of quantitative easing.

Concerns about weakened demand were highlighted by Dow component Procter & Gamble, which cut growth forecasts early on Wednesday. Shares of the world's largest household product maker fell 2.9 percent to $60.39.

Another disappointing outlook came from Bed Bath & Beyond, which projected a weaker-than-expected profit for the current quarter after the market closed. Shares of the home goods chain fell 10 percent to $66.25 in extended trading.

Trading was volatile after the Fed announcement about midday. Declines picked up during Fed Chairman Ben Bernanke's afternoon news conference but then were mostly erased. The Nasdaq composite index even ended slightly higher.

The Fed said it will extend until the end of 2012 Operation Twist, a simulative program aimed at lowering long-term interest rates by swapping $267 billion in Treasury securities. The program had been scheduled to end this month.

The benchmark S&P 500 index has been up for the past four days in a row and accumulated gains of about 7 percent from a five-month low hit earlier in June as many investors anticipated some Fed action to aid the flagging recovery.

Tech stocks were the day's biggest gainers, rising 0.2 percent. Jabil Circuit led the sector as expectations rose that it had retained a key mobile phone customer, sending shares 6.8 percent higher to $20.75. Adobe Systems fell 3 percent to $31.99 after the company cut its full-year revenue outlook and warned about weak demand in Europe.

Wall Street continued to keep a close watch on Europe for any development out of the region with respect to its sovereign debt issues. German Chancellor Angela Merkel said that both of Europe's bailout funds included mechanisms for buying state debt on the secondary bond market but stressed that this was a "purely theoretical" question and was not being discussed.

Volume was light, with about 6.57 billion shares changing hands on the three major equity exchanges, a number that was below last year's daily average of 7.84 billion shares.

Fed Continues Operation Twist

The Fed on Wednesday delivered another round of mediocre monetary stimulus and said it was ready to do even more to help an increasingly fragile U.S. economic recovery. The central bank expanded its "Operation Twist" by $267 billion, meaning it will sell that amount of short-term securities to buy longer-term ones to keep long-term borrowing costs down. The program, which was due to expire this month, will now run through the end of the year.

Fed Chairman Ben Bernanke, speaking at a news conference after a two-day policy meeting, said Fed was concerned Europe's prolonged debt crisis was dampening domestic economic activity and employment.

"If we are not seeing sustained improvement in the labor market that would require additional action," he said. "We still do have considerable scope to do more and we are prepared to do more."

The Fed reduced its own estimates for domestic. economic growth this year to a range of 1.9 percent to 2.4 percent, down from an April projection of 2.4 percent to 2.9 percent. It also reduced its forecasts for 2013 and 2014, as well.

In addition, officials said they expect the job market to make slower progress than they did just a couple months ago, with the unemployment rate now seen hovering at 8 percent or higher for the rest of this year. It stood at 8.2 percent in May.

Meanwhile, a number of economists apparently believe the Fed is likely to eventually launch a more aggressive program to buy bonds outright. It has already purchased $2.3 trillion in debt in two earlier bouts of so-called quantitative easing.

Wall Street's top bond firms still see a 50 percent chance the Fed will launch a third round of so-called quantitative.

Hiring has slowed sharply, factory output has slipped and consumer confidence has eroded, with Europe's festering crisis and the prospect of planned U.S. tax hikes and government spending cuts casting a shadow on the recovery.

The economy grew at only a 1.9 percent annual rate in the first quarter - a pace too slow to lower unemployment - and economists expect it to do little better in the second quarter.

The Fed, which has held overnight interest rates near zero since December 2008, reiterated its expectation that rates would stay "exceptionally low" through at least late 2014. Six of the Fed's 19 policymakers do not expect an increase until sometime in 2015.

Richmond Federal Reserve Bank President Jeffrey Lacker, who has dissented at every meeting this year, voted against the decision to extend Twist.

At his news conference, Bernanke pushed back against the notion that the Fed's earlier bond-buying was not effective, and that the central bank was running out of policy ammunition.

"I do think that our tools, while they are nonstandard, still can create more accommodative financial conditions and still provide support for the economy, can still help us return to a more normal economic situation," he said.

Even though Greek voters on Sunday supported candidates who back taking painful steps to stay in the euro currency union, Europe's debt crisis remains a threat to the global economy and many central banks are eyeing economic conditions warily.

Minutes from meetings of the Bank of Japan and Bank of England released on Wednesday suggest officials are poised to ease policy again. China cut benchmark rates on June 7, while the European Central Bank could take action at its July 5 meeting.