US SUMMARY: Fed Leaves Markets Cold; Google Hammered
DJIA 10864.86 loss 35.06 dn 0.3%
NASDAQ 2305.82 loss 0.96 dn 0.04%
S&P 500 1280.08 loss 5.12 dn 0.4%
Dow Future 10846.00 loss 14.00 dn 0.1%
NASDAQ Future 1701.00 loss 18.50 dn 1.1%
S&P Future 1278.25 loss 4.75 dn 0.4%
10-Yr US Treasury: 4.52% up 0.01
(Futures values as of 0550 GMT)
Investors, mildly disappointed, bid stocks a bit lower Tuesday after the Federal Reserve, raising interest rates for the 14th time in nearly two years, failed to give Wall Street a clear signal on when those rate hikes would end. A disappointing earnings report from Google Inc. after the close of regular trading made it likely the losses would continue when trading resumed Wednesday. But Treasurys took the Fed news in stride, finishing mixed.
STOCKS: Google fell 16% in after hours trading in suffering its first earnings miss, with its fourth-quarter results below the market's expectations. Technology stocks dropped in after-hours trading as investors expressed their dismay by selling.
The Fed, in its statement accompanying its quarter-point increase in rates, said "some further policy firming may be needed" to keep inflation under control - leaving the door open for another hike at the next meeting in March and beyond.
The major indexes were already down ahead of the Fed's decision - the last one under outgoing Chairman Alan Greenspan - and the hint of at least one more rate hike left investors uncertain, although most analysts felt the program of continued, measured rate hikes was at an end.
"The knee-jerk reaction was things aren't as sure as everybody thought, but when I look at this, this is right in the middle of what my expectations were," said Chris Johnson, manager of quantitative analysis at Schaeffer's Investment Research. "They left a rate hike in the deck here in case they need it, but that doesn't mean more of the same."
Crude oil futures fell after the Organization of Petroleum Exporting Countries, meeting in Vienna, decided against cutting oil production. A barrel of light crude settled at $67.92, down 43 cents, on the New York Mercantile Exchange.
Other tech shares also dropped in after-hours trading, including Yahoo Inc. and Microsoft Corp.
Looking at the Fed's move Tuesday, analysts said rising energy prices could be one reason why the central bank is keeping its options open. Should those prices spark inflation in other areas of the economy, more rate hikes could be needed to keep prices in check.
"They are determined to do the right thing, determined to keep the huge runup in energy and other commodity prices from infecting the system in a broader way by pushing up core inflation," said Stuart Schweitzer, global investment strategist, JP Morgan Asset and Wealth Management. "That means a period of uncertainty for a while for investors."
In other economic news, the Conference Board's consumer confidence index for January came in at a higher-than-expected 106.3, up from 103.8 in December and better than the 105 reading predicted on Wall Street. While the index rose to its highest level in three years, the news was largely overlooked by investors preoccupied with the Fed.
BONDS: U.S. Treasury prices bounced around Tuesday after the Fed tightened policy and kept the door open for another rate hike.
Short-term interest rate futures see odds of 80% that the federal funds rate will rise to 4.75% from its current 4.50% rate.
This was the second time in a row that the Fed has changed the statement's language.
"The change in language is not catching anyone off guard, most people expected it," said Kevin Flanagan, fixed income strategist at Morgan Stanley.
"They have to tread carefully, they don't need to raise rates so they become restrictive as there is no inflation, so they are fumbling for a neutral funds rate," said Dominic Konstam, head of interest rate strategy at Credit Suisse First Boston in New York.
Still, with the Fed showing a "bias to tighten policy," but not at every meeting this year, the funds rate could easily reach 5% or higher, he added.
In political news, President Bush declared Tuesday night that America must break its long dependence on Mideast oil and rebuked critics of his stay-the-course strategy for the unpopular war in Iraq. "America is addicted to oil, which is often imported from unstable parts of the world," Bush said as he sought to drive the election-year agenda in his annual State of the Union address.
ASIAN SUMMARY: Red-Hot Tokyo Stock Market Cools
USD-Yen 117.16 loss 0.12 dn 0.1%
AUD-USD 0.7574 loss 0.0003 up 0.04%
Nikkei 225 16497.94 loss 151.80 dn 0.9%
Hang Seng 15690.07 loss 63.07 dn 0.4%
Taiwan Index Closed
S.Korea Kospi 1379.43 loss 20.40 dn 1.5%
JGB Yield 1.5550% down 0.0050
(All values as of 0550 GMT)
STOCKS: Japanese stocks consolidated lower after six straight sessions of gains, as investors took some profit in retailers, banks and telecommunications issues.
BONDS: Prices of Japanese government bonds traded little changed, as investors took a cautious stance ahead of the 10-year auction on Thursday. Investors also wanted to wait for Bank of Japan Deputy Governor Toshiro Muto's speech and press conference. Markets will look for any more hints about an eventual tightening of the currently very liberal monetary policy.
OIL: Crude oil prices fell 23 cents to $67.69 for the second straight session after OPEC ministers said the group had decided to hold production steady. Bush outlined a plan to cut Middle East oil imports to the U.S. by 75% by 2025. US weekly energy data Wednesday could be bullish if supplies are tighter.
EUROPEAN OUTLOOK: Stocks To Start Lower On Google Dismay
Euro-USD 1.2162 gain 0.0009 up 0.08%
Stlg-USD 1.7812 gain 0.0023 up 0.1%
USD-Franc 1.2776 loss 0.0007 dn 0.05%
(All values as of 0550 GMT)
European shares are likely to start lower, with prices of government debt and the euro little changed.
STOCKS: Markets are likely to open lower, with technology stocks under pressure from the Google fallout. Investors will also have to consider earnings from key European companies such as Enel, Roche and Suez due this session.
U.K. spreadbettor CMC Markets is calling most European markets lower, with the London FTSE down 17 points at 5743, the Frankfurt DAX down 24 at 5650, and the Paris CAC down 21 at 4927.
Likewise City Index is forecasting early losses in Europe and is already pricing in a fall of some 50 points in the DJIA when it opens later Wednesday.
European markets held to a tight range Tuesday ahead of a U.S. interest-rate decision later in the day, with the telecommunications sector again in the red after a profit warning from Cable & Wireless and a management shakeup at France Telecom.
BONDS: European government bonds are likely to open little changed after the Fed's disappointing statement that rates in the U.S. may rise more.
Investors will consider euro zone and U.S. manufacturing data this session in assessing chances for a rate hike by the European Central Bank next month.
European government bonds were modestly higher late Tuesday ahead of the Fed.
FOREX: The euro opens little changed as players adjust to a still hawkish Fed.
For markets, the Fed's statement means investors have to continue to closely monitor economic data. With expectations that growth will be strong in the first quarter, that likely means the Fed will move further when it meets in March, say analysts.
"Perhaps there was some perceived risk that it (the statement) could be more dovish and (could) more overtly signal the end of the rate-tightening cycle than it did," said Bob Lynch, senior currency strategist at HSBC in New York.
In terms of giving the dollar any black-or-white direction, the Fed gave only "shades of gray," said T.J. Marta, currency strategist at RBC Capital in New York.
Michael Woolfolk, senior currency strategist at Bank of New York, said "this policy statement has given the dollar upside room as market players now have permission to buy dollars on positive economic data." Ahead of Friday's payrolls report, traders are likely to continue squaring off dollar-bearish bets, he said.
The dollar moved broadly lower Tuesday, but snapped back sharply from its worst levels of the day after Federal Reserve policymakers raised their benchmark interest rate and hinted that there could still be more to come.