2008-04-30
It was an incredibly busy day for market participants on Wednesday. The market was bombarded with an FOMC announcement, several economic releases and a plethora of earnings reports. The stock market posted a healthy gain for most of the session on news the U.S. economy expanded by a larger than expected amount in the first quarter, but then retreated into negative territory shortly after the FOMC announcement.
As expected, the Federal Reserve cut the fed funds rate by 25 basis points to 2.00%, bringing its total easing since September to 325 basis points. The discount rate was also cut by 25 basis points to 2.25%. The FOMC cited continued weakness in economic activity.
The Fed’s statement regarding inflation concerns was largely unchanged from the March 18 release. The Fed said readings on core inflation have improved somewhat, but energy and commodity prices have increased, as have inflation expectations. The Fed believes inflation will moderate in the coming quarters and will continue to monitor inflation developments carefully.
Similar to its previous statement, the Fed said its rate cut easing to date and other efforts to improve market liquidity will help “promote moderate growth over time and mitigate risks to economic activity.” However, this release left out the statement that “downside risks to growth remain.” The absence of this comment indicates the Fed plans to stand pat on rates, but as it noted, will act as needed depending on future economic and financial developments.
Basically the Fed is giving the indication that its latest rate-cutting cycle is over. That does not mean the Fed is going to raise rates imminently though. Rather it means the Fed is in a wait-and-see mode. The stock market spiked as high as 1.0% on the release, but quickly reversed course to trade down as much as 0.5%. In the end, the stock market settled with a modest loss, near its worst level of the session. At the same time, the long end of the Treasury curve saw buying interest.
Although the FOMC announcement overshadowed the day’s prior events, there were plenty of important items — most importantly a better than expected reading on the state of the U.S. economy.
Advance first quarter GDP rose by 0.6%, topping the consensus estimate of 0.5%. Although growth remains sluggish, this reading shows the economy is not deteriorating rapidly as many alarmists have claimed. The GDP deflator — an inflation measure — rose at an annual rate of 2.6%. This is better than the expected rise of 3%, but is up from the 2.4% increase in the fourth quarter.
Separately, the ADP Employment Report, a measure of nonfarm private employment, showed an increase of 10,000 jobs in April, easily beating the consensus estimate that called for a decline of 60,000. Although the better than expected data are encouraging, the ADP report has a history of being inaccurate when compared to the government’s monthly jobs report, which will be released on Friday.
In corporate news, Citigroup (C 25.27, -1.05) announced it is raising $4.5 billion in a common stock offering at a 4% discount from Tuesday’s closing price. The dilutive nature of the offering kept Citigroup’s stock depressed, and sent the financial sector (-1.0%) into a laggard position.
The majority of earnings reports were better than expected. Colgate-Palmolive (CL 70.70, -5.08), General Motors (GM 23.20, +2.00), Kellogg (K 51.17, -0.81), Kraft (KFT 31.63, +0.86) and Procter & Gamble (PG 67.05, +1.15) all topped expectations. Time Warner (TWX 14.85, -0.42), however, missed its earnings estimate.
Crude oil had an interesting day of trade, going from a gain of 0.9% to a loss of 2% after the Department of Energy said in its weekly report that crude stockpiles rose by a larger than expected amount. Crude eventually recovered to a loss of just 0.6% at $114.90 per barrel after the dollar (-0.4%) weakened following the FOMC rate cut.
Although the stock market did not end the month of April on a strong note, the bulls are pleased with the end result. The S&P 500 rebounded 4.8%, snapping its five-month losing streak, and marking its largest monthly percent gain since December 2003. Commodities also had a strong month, gaining 5.8% with crude oil rallying 13.1%.
