Struggling Wall Street Is Bracing for Hawkish Fed Message.
Whipsawed by fresh worries on the financial sector, Wall Street enters the summer season with investors in a sour mood ahead of a meeting of increasingly hawkish Federal Reserve policymakers.
Market jitters have risen amid high oil prices, troubles in the banking sector and the prospect of higher interest rates despite soft economic conditions. Auto sector troubles also have intensified. In the week to Friday, the blue-chip Dow Jones Industrial Average skidded 3.77 percent to end at 11,842.69, closing below 12,000 for the first time since March. The Standard & Poor's 500 broad-market slumped 3.10 percent to 1,317.93 and the tech-heavy Nasdaq composite fell 1.97 percent on the week to 2,406.09.
Sentiment faces yet another test in the coming week, when the Federal Open Market Committee headed by Fed chief Ben Bernanke is expected to signal a tougher position on inflation that could eventually mean higher interest rates.
"All eyes will be on the FOMC which is slated to announce its latest policy decision on Wednesday," said Meny Grauman, economist at CIBC World Markets. "The markets seem convinced that the Fed will hold rates at 2.00 percent, but there is considerably more uncertainty about whether the Fed will signal a tightening bias."
The Fed's shift in tone has been closely watched by analysts. After slashing rates by 3.25 points over the past few months in an effort reignite growth, the Fed has signaled that it is unlikely to cut rates further and may boost rates if inflation gets out of hand.
"The Fed is approaching a danger point, in our opinion," said Ethan Harris, senior economist at Lehman Brothers. "It is very unusual for it to contemplate hiking rates when the unemployment rate is steadily moving above its inflation-neutral level."
Market troubles over the past week were fueled by growing worries about the banking sector. Citigroup's warning of more writedowns from real-estate losses and a need for fresh capital from regional bank Fifth Third fueled fears about the sector.
"Each day the Street is seeing similar news -- such as higher energy costs, financial losses, worries of inflation, and continuing housing slumps. The bleak news is keeping investors from stepping into the market," said Colleen King at Schaeffer's Investment Research.
Gerard Cassidy at RBC Capital Markets said bank stocks are headed for a "dead cat bounce" or a brief rebound from their troubles as they recognize losses from real-estate investments. "Though we expect the bank stocks to rally as much as 20 percent into second-quarter earnings announcements, we believe the fundamental trend is still bearish for banks stocks," he said. "Credit problems are expected to deteriorate over the next 12 months, which should drive stock prices lower in the second half of 2008, in our opinion."
Fred Dickson at DA Davidson & Co. said the troubles for banks are being watched because credit needs to flow to help any economic rebound. "Wall Street is growing more concerned over deteriorating profits and weakening balance sheets at not only the regional banks but also at global banks as more institutions 'fess up and state their need for additional capital or their view that the current credit market crisis hasn't materially begun to wind down," he said. Bank stocks, he added "need to bottom out before the broader stock market can begin a meaningful sustainable rally."
To make matters worse, the auto sector is facing its own troubles as Ford and General Motors slash output of profitable but fuel-hungry trucks to adapt to changes in demand in light of record fuel costs. Standard and Poor's cut its credit rating on the two along with privately held Chrysler. "We have renewed concerns about all three automakers' future cash outflows in light of the prospects for US sales for the rest of 2008 and into 2009," said S&P analyst Robert Schulz.
Bonds rallied as investors set aside inflation concerns and looked for safety. The yield on the 10-year Treasury bond fell to 4.137 percent against 4.261 percent a week earlier and that on the 30-year bond eased to 4.702 percent against 4.802 percent. Yields and prices move in opposite directions.
In the coming week, the Fed meeting is the main attraction but markets will also see data on new and existing home sales, durable goods orders and the final estimate of US economic growth in the first quarter.
Whipsawed by fresh worries on the financial sector, Wall Street enters the summer season with investors in a sour mood ahead of a meeting of increasingly hawkish Federal Reserve policymakers.
Market jitters have risen amid high oil prices, troubles in the banking sector and the prospect of higher interest rates despite soft economic conditions. Auto sector troubles also have intensified. In the week to Friday, the blue-chip Dow Jones Industrial Average skidded 3.77 percent to end at 11,842.69, closing below 12,000 for the first time since March. The Standard & Poor's 500 broad-market slumped 3.10 percent to 1,317.93 and the tech-heavy Nasdaq composite fell 1.97 percent on the week to 2,406.09.
Sentiment faces yet another test in the coming week, when the Federal Open Market Committee headed by Fed chief Ben Bernanke is expected to signal a tougher position on inflation that could eventually mean higher interest rates.
"All eyes will be on the FOMC which is slated to announce its latest policy decision on Wednesday," said Meny Grauman, economist at CIBC World Markets. "The markets seem convinced that the Fed will hold rates at 2.00 percent, but there is considerably more uncertainty about whether the Fed will signal a tightening bias."
The Fed's shift in tone has been closely watched by analysts. After slashing rates by 3.25 points over the past few months in an effort reignite growth, the Fed has signaled that it is unlikely to cut rates further and may boost rates if inflation gets out of hand.
"The Fed is approaching a danger point, in our opinion," said Ethan Harris, senior economist at Lehman Brothers. "It is very unusual for it to contemplate hiking rates when the unemployment rate is steadily moving above its inflation-neutral level."
Market troubles over the past week were fueled by growing worries about the banking sector. Citigroup's warning of more writedowns from real-estate losses and a need for fresh capital from regional bank Fifth Third fueled fears about the sector.
"Each day the Street is seeing similar news -- such as higher energy costs, financial losses, worries of inflation, and continuing housing slumps. The bleak news is keeping investors from stepping into the market," said Colleen King at Schaeffer's Investment Research.
Gerard Cassidy at RBC Capital Markets said bank stocks are headed for a "dead cat bounce" or a brief rebound from their troubles as they recognize losses from real-estate investments. "Though we expect the bank stocks to rally as much as 20 percent into second-quarter earnings announcements, we believe the fundamental trend is still bearish for banks stocks," he said. "Credit problems are expected to deteriorate over the next 12 months, which should drive stock prices lower in the second half of 2008, in our opinion."
Fred Dickson at DA Davidson & Co. said the troubles for banks are being watched because credit needs to flow to help any economic rebound. "Wall Street is growing more concerned over deteriorating profits and weakening balance sheets at not only the regional banks but also at global banks as more institutions 'fess up and state their need for additional capital or their view that the current credit market crisis hasn't materially begun to wind down," he said. Bank stocks, he added "need to bottom out before the broader stock market can begin a meaningful sustainable rally."
To make matters worse, the auto sector is facing its own troubles as Ford and General Motors slash output of profitable but fuel-hungry trucks to adapt to changes in demand in light of record fuel costs. Standard and Poor's cut its credit rating on the two along with privately held Chrysler. "We have renewed concerns about all three automakers' future cash outflows in light of the prospects for US sales for the rest of 2008 and into 2009," said S&P analyst Robert Schulz.
Bonds rallied as investors set aside inflation concerns and looked for safety. The yield on the 10-year Treasury bond fell to 4.137 percent against 4.261 percent a week earlier and that on the 30-year bond eased to 4.702 percent against 4.802 percent. Yields and prices move in opposite directions.
In the coming week, the Fed meeting is the main attraction but markets will also see data on new and existing home sales, durable goods orders and the final estimate of US economic growth in the first quarter.
1 comment:
Ilhami, brownie points to you if you can tell where all the typefaces are from.
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