Investors Smell a Fed Pause Inflation Meter Is Tame,But a 5% Jump in Crude Curbs Stock-Market Rally June 1, 2005 7:22 p.m.
A growing sense that the Federal Reserve may soon pause in its campaign to raise interest rates led to a broad stock-market rally Wednesday.
A sign of the enthusiasm: A huge increase in crude-oil prices failed to knock stocks for a loop, though major indexes did finish off intraday highs. Shares of Exxon Mobil gained nearly 1.7% on the jump in crude.
The Dow Jones Industrial Average rose as high as 118.89 points intraday and finished up 82.39 points to 10549.87. The Standard & Poor's 500-stock index gained by 10.72 to 1202.14 and the Nasdaq Composite Index added 19.64 points to 2087.86.
Trading on the New York Stock Exchange halted about four minutes early due to a malfunction in the system that transmits stock prices to brokers world-wide. The exchange considered reopening trading as late as 4:45 p.m. Eastern time, but decided against the move. Stocks listed on the Nasdaq Stock Market were unaffected, a spokeswoman said.
The 10-year bond rose 28/32, or $8.75 for each $1,000 invested. Its yield, which moves inversely to price, fell to 3.894%. The low rate suggests that stocks are likely a more attractive investment opportunity than bonds.
Stocks were out of the gate early after a key industry report showed the manufacturing sector of the U.S. economy continued to expand in May -- while pricing pressures eased dramatically in the industry. The low inflation reading had investors hoping for a less hawkish Fed down the road.
The Institute for Supply Management, an industry trade association, said its business index fell to 51.4 in May, a slower pace than economists had forecast, and down from 53.3 in April. Any reading above 50 indicates expansion. Economists had expected the ISM's manufacturing index to decline to a 52 rate.
Investors were particularly heartened by the ISM's prices index, which plunged to 58 from 71, suggesting a cooling of inflation in the manufacturing sector. That boosted expectations that the Federal Reserve may pause in the coming months in its campaign to fight inflation by raising short-term rates.
The Commerce Department reported that construction spending rose slightly in April, though investors largely shrugged off the report and focused on the ISM data.
Hopes that the Fed may ease back on the interest-rate pedal were also kindled by comments from the president of the Dallas branch of the Fed, Richard Fisher. In an interview with The Wall Street Journal, Mr. Fisher said that policy makers are in the "eighth inning" of its tightening cycle.
"The next meeting in June is the ninth inning. We'll take a look after that. We may have to go into extra innings in this contest against inflation," he said.
While Mr. Fisher's comments shouldn't be taken as official Fed policy, they do indicate the Fed may "be close to pausing," said Peter Hooper, chief U.S. economist at Deutsche Bank. The comments also "make pretty clear that they're going to tighten once more in June."
The combination of the ISM data and Mr. Fisher's comments led to a slight decline in expectations for a rate increase at each of the next two meetings by central bankers. Fed-funds futures contracts priced in a 3.48% rate by Sept. 20 on Wednesday, down from the 3.56% rate priced in at the close of trading Tuesday.
The Fed has raised the target on the fed-funds rate by a quarter percentage point eight times since last June to 3%. Policy makers next meet on June 29 and 30, followed by a meeting on Aug. 9.
Light, sweet crude futures rose $2.63, or 5%, to $54.60 a barrel on the New York Mercantile Exchange. Weekly inventory data, usually released Wednesday, will be released a day late due to the Memorial Day holiday on Monday.
The euro continued to decline against the dollar, falling to $1.2205. The euro has been in a freefall against the dollar in recent weeks on the perception of disarray among European economies. France's "no" vote to a new European constitution Sunday heightened fears that Europe, and its central currency, the euro, are on a downward slope for the short-term. Dutch voters also rejected the EU constitution today, with 63% giving it a thumbs down, according to early exit polls.
In major market action:
Stocks rose. On the Big Board, where 1.4 billion shares traded, 2,470 stocks rose and 892 fell. On the Nasdaq Stock Market, where 1.8 billion shares changed hands, 1,995 stocks advanced and 1,090 declined.
Bonds gained. The 10-year Treasury note rose 28/32, or $8.75 for each $1,000 invested, to yield 3.899%. The 30-year bond rose 1 20/32 to yield 4.239%. Yields move inversely to prices.
The dollar strengthened. It traded at 108.77 yen, up from 108.53 yen late Tuesday, while the euro fell against the dollar to $1.2205 from $1.2305.
