MarketView for May 21

Summary

Stocks rose on Tuesday, with the Dow and the S&P 500 closing at new all-time highs as Federal Reserve officials' comments eased some concerns that the central bank could start reducing its stimulus program. The Dow climbed to an all-time intraday high at 15,434.50, while the S&P 500 hit a record intraday high at 1,674. The Nasdaq set a fresh 52-week high at 3,512.

Dow component Home Depot gave the market a lift after the world's largest home improvement chain raised its profit outlook, driving its stock to a record intraday high.

JPMorgan also bolstered the Dow, rising more than 1 percent to a 52-week high after the bank's chief executive won a vote of confidence from shareholders.

Stocks extended gains in afternoon trade after New York Fed President William Dudley said he cannot be sure whether policymakers will next reduce or increase the amount of purchases, due to the "uncertain" economic outlook.

Earlier, James Bullard, president of the Federal Reserve Bank of St. Louis, had urged the European Central Bank to consider employing a U.S.-style quantitative easing program to counter slowing inflation and recession in the euro zone.

The Fed's $85 billion-per-month bond buying program has played a significant role in the market's rally and investors have recently become nervous over when the central bank will alter or halt the program.

After a rally of about 17 percent for the major U.S. stock indexes since the start of the year, investors are trying to assess how much further equities can run. Goldman Sachs said in a note to clients dated May 20 that it sees the S&P 500 at 1,750 by the end of the year - up 5 percent from Monday's close - and expects a 12-month rally to 1,825. The bank's economists forecast above-trend growth in U.S. gross domestic product in 2014 - for the first time in six years.

The small- and mid-cap Russell 2000 .TOY continued to face technical resistance at the 1,000-point level, but the index hovered around its all-time closing high.

The housing market's recovery helped Home Depot report higher quarterly sales and earnings, prompting the world's largest home improvement chain to raise its sales outlook for the year. Home Depot was the Dow's second-biggest percentage gainer, rising 2.5 percent to close at $78.71 after hitting an intraday record high of $79.46.

JPMorgan Chase shareholders voted to allow CEO Jamie Dimon to keep his chairman title, sending the bank's shares up 1.4 percent to $53.02 at the close.[ Earlier, the stock set a fresh 52-week high at $53.67.

On Wednesday morning, investors will be parsing testimony by Fed Chairman Ben Bernanke before a congressional panel, the Joint Economic Committee. The minutes of the Fed's latest policy-setting meeting will be released on Wednesday afternoon.

Apple CEO Tim Cook testified before Congress after a U.S. Senate report on the company's offshore tax structure said the iPhone maker has kept billions of dollars in profits in Irish subsidiaries to pay little or no taxes to any government. Apple shares fell 0.7 percent to $439.66.

Approximately 6.15 billion shares changed hands on the three major equity exchanges, slightly lower than the year-to-date average daily closing volume of about 6.34 billion shares.

Rates Are Not Going Up...For Now

Two senior Federal Reserve officials on Tuesday played down the chances that the central bank would signal a readiness to reduce its bond buying at its meeting next month, dampening speculation the Fed's ultra-easy monetary policy might end soon.

New York Federal Reserve Bank President William Dudley and St. Louis Fed chief James Bullard, both of whom will vote at the June 18-19 meeting, made clear further economic progress was needed before they would support curtailing bond purchases.

"Inflation is pretty low in the U.S.," Bullard told reporters after delivering a lecture in Frankfurt. "I can't envision a good case to be made for tapering unless the inflation situation turns around and we are more confident than we are today that inflation is going to move back toward target," he said.

A core inflation gauge closely monitored by the Fed slowed to just 1.1 percent per annum in March, barely half the central bank's long-term 2.0 percent annual inflation goal. In addition, the U.S. jobless rate stood at a lofty 7.5 percent in April. The U.S. central bank has a dual mandate for price stability and maximum sustainable employment.

Underscoring the significant communication challenge the Fed faces if they alter the bond buying program, Dudley cautioned that investors could over-react to the first adjustment in the pace of asset purchases.

Since cutting policy interest rates to almost zero in late 2008, the Fed has more than tripled the size of its balance sheet via a campaign of massive bond purchases to hold down long-term borrowing costs and spur corporate hiring. It decided on May 1 to keep buying at an $85 billion monthly pace, and many economists say mixed economic data warrants keeping up the purchases through year-end.

But persistent warnings from more hawkish Fed officials had fanned talk that it might start to wind back soon. Bullard, who has been a reliable centrist in his policy votes, made clear that he did not share this view.

"I do think we should be willing and ready to change the pace of purchases when the time comes but I don't think we are there yet," he said.

Bernanke could provide more clues on the Fed's next step in testimony to the U.S. congressional Joint Economic Committee on Wednesday at 10 a.m. His remarks will be followed by the release at 2.00 p.m. of minutes of the last Fed meeting, which economists expect to give further details of how it will eventually manage the exit from ultra-easy policy.

Dudley said on Tuesday that he could not be sure whether policymakers would next reduce or increase the amount of purchases due to the "uncertain" economic outlook.

After its last meeting, the Fed said it was prepared to shift its bond buying in either direction as economic conditions warranted, and Dudley's remarks signaled that the Fed was aiming to preserve its flexibility. Echoing past comments by both himself and Bernanke, he said the Fed might adjust the pace of bond purchases as the outlooks for inflation and the labor market change "in a material way."

While tighter fiscal policy has crimped the production, job growth, the retail sector and housing have remained surprisingly resilient.

"At some point, I expect to see sufficient evidence to make me more confident about the prospect for substantial improvement in the labor market outlook," Dudley said. "At that time, in my view, it will be appropriate to reduce the pace at which we are adding accommodation through asset purchases."

The Fed has said it will continue to buy bonds until the outlook for the job market has "improved substantially."

Dudley said the Fed would monitor the impact of fiscal drag as it weighed on policy. Economists say it likely will not be possible until at least until the third quarter to determine how big a blow belt-tightening in Washington has dealt the economy.

In a possible peak at Fed thinking on how it will eventually trim back the size of its balance sheet, Dudley also said the Fed could adjust its two-year old plan for reducing the balance sheet in the years ahead, calling parts of it "stale."

"To the extent that the committee wants to reduce the risk of disrupting market functioning during normalization, it could decide to indicate that it will avoid selling the MBS (mortgage-backed securities) portfolio during the early stages of the normalization process," he said.

"Moreover, to the extent that the committee wants to mitigate the risk of a sharp increase in long-term rates, it could judge that it would prefer not to commit to agency MBS sales."