Jul 2004 Financial News

US Stocks Close Higher as Fed Rate Increase Met Expectations

Jul 01, 2004

06-30-04 05:21 PM EST The Wall Street Journal Online

Wall Street greeted the central bank's expected quarter-point increase in interest rates with a muted response Wednesday, sending major indexes marginally higher as the Federal Reserve made its first direct step to throw a wet blanket on inflation.

The Dow Jones Industrial Average closed up 22.05 points at 10435.48, while the Nasdaq Composite Index moved ahead 12.86 to 2047.79 and the Standard & Poor's 500-stock index edged up 4.64 to 1140.84.

The central bank lifted its target on the federal-funds rate, which banks charge each other for overnight loans, by a quarter point to 1.25% -- the first increase in four years. The Fed also downplayed inflationary pressures, pinning the blame on transitory factors like commodity prices, and sounded more bullish about the employment picture.

Meanwhile, in its much anticipated statement, the Fed retained language that it would raise rates at a "measured" pace, though said this time it said it would "respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability," leaving the door open for bigger increases.

"The Fed included language that made clear that a measured pace was a forecast, not a commitment," said Steve East, chief economist at Friedman, Billings, Ramsey in Arlington, Va. He thinks the central bank will increase rates by a total of three quarters of a percentage point by the year's end.

In other economic news Wednesday, the Chicago branch of the National Association of Purchasing Management said its purchasing managers' index sank to 56.4 in June from 68 in May. Manufacturing slowed in the Midwest, while inflation pressures increased, hiring declined and new orders fell, the private survey found. Readings above 50 signal expansion.

The Chicago numbers are often viewed as a precursor to the national Institute for Supply Management's survey activity in the national manufacturing sector. After the Chicago report, Lehman Brothers cut its forecast for the June ISM index reading, due out Thursday, to 58.5 from 61. A survey of economists predicted a reading of 61.1, down from a reading of 62.8 last month.

Steve Stanley, chief economist at RBS Greenwich Capital in Greenwich, Conn., said the ISM index doesn't gyrate nearly as much as the regional gauge.

"Economists and market participants consistently overreact to the volatile Chicago numbers," he said. "The Chicago area tends to be heavily skewed toward the auto sector, which has been the weakest industry within manufacturing, so today's results may simply reflect the May and June declines in auto assemblies."

Among stocks to watch, Research in Motion shares surged 15% after the company swung to a first-quarter profit of 28 cents a share, reversing a loss of five cents from a year ago. Earnings excluding a litigation charge came in at 36 cents a share, topping Wall Street's expectation.

General Mills climbed 3.1% after it reported fourth-quarter earnings of 72 cents a share, up from 59 cents a share a year ago, and Monsanto posted third- quarter earnings of 93 cents a share compared to 66 cents a share a year earlier. The biotechnology company's shares grew 3.5%.

And Taser International jumped 8.8% after the company received a contract valued at more than $1.8 million from the U.S. military for weapons and accessories.

In major U.S. market action Wednesday:

Stocks inched higher. On the Big Board, where 1.47 billion shares traded, 2, 431 stocks rose and 872 fell. On the Nasdaq Stock Market, where 1.75 billion shares changed hands, 1,912 advanced and 1,237 declined.

Bonds gained. The 10-year Treasury note rose about 3/4 point, or $7.50 for each $1,000 invested, to yield 4.593%. The 30-year climbed more than 7/8 point to 5.300%. Shorter-dated Treasurys also climbed; the two-year note gained about 1/4 point, yielding 2.694%.

The dollar was mixed. It traded at 108.83 yen, up from 108.37 yen late Tuesday in New York. The euro advanced to $1.2196 from $1.2083.

Oil prices surged. Crude oil for delivery in August settled up $1.39, or 3.9%, at $37.05 a barrel.