U.S. stocks were indicated to open sharply higher Tuesday as major index futures rose on premarket trading. The Federal Reserve is expected to cut rates sharply at its policy meeting Tuesday, with its decision set for release at 2:15 pm ET. The big question: How much will the Fed cut rates, and what will it say about the economic outlook and its future policy moves?
While market players are taking some chips off the table in terms of bets for a big 100 basis point rate cut Tuesday afternoon, most still doubt the FOMC will disappoint expectations for a gigantic easing, says Action Economics.
Traders were encouraged by better than expected earnings from Goldman Sachs (GS) and Lehman Brothers (LEH). The market largely ignored a larger than expected rise in the February core producer price index and a dip in February housing starts.
Trading was volatile Monday as investors digested news of JPMorgan Chase (JPM) acquiring Bear Stearns (BSC) for $2 per share, and the Federal Reserve cutting the discount rate and taking steps to expand lending to big financial firms.
On Monday, the Dow Jones industrial average finished higher by 21.16 points, or 0.18%, at 11,972.25.
But the strength in select blue chips was not shared by the broader market. The S&P 500 index fell 11.54 points, or 0.9%, to close at 1,276.60.
The tech-heavy Nasdaq composite index was the biggest loser among the major market benchmarks, declining 35.48 points, or 1.6%, to 2,177.01.
Bonds, which soared Monday in a flight to safety, were lower on Tuesday. The dollar index was also lower. Gold futures were higher, as were oil futures on speculation the Fed’s rate cut will bolster the economy and increase demand for energy.
The Fed has been unusually active in the run-up to the FOMC meeting, to say the least. The Fed basically brokered the JPMorgan-Bear deal over the weekend, and took some remarkable steps to ease the stress on financial markets -- its first weekend move in nearly 30 years. The U.S. central bank cut the discount rate on Sunday to 3.25% from 3.5%, and announced that it will lend to the 20 primary dealers that buy Treasury securities directly from it -- a tool not used since the Great Depression. The Fed will also provide up to $30 billion to JPMorgan to help it finance the purchase of Bear Stearns.
Goldman Sachs said its fiscal first-quarter net income dropped 53% on $2 billion in losses on residential mortgages, credit products and investments, interrupting 10 quarters in a row of higher year-over-year earnings. But results still topped the expectations of Wall Street analysts.
"Market conditions are clearly very difficult," said Goldman CEO Lloyd C. Blankfein. "But we saw strong customer activity across many of our franchise businesses in the first quarter. Although market conditions present many challenges at the moment, they also offer considerable opportunities."
Meanwhile, Lehman Brothers reported a 57% drop in fiscal first-quarter net income amid weakness in its fixed-income business, but like Goldman its results also topped analysts' expectations. The firm has been the subject of much market speculation about its financial health in the wake of Bear’s collapse. Lehman CEO Richard S. Fuld Jr. said, "our results reflect the value of our continued commitment to building a diversified platform and our focus on managing risk and maintaining a strong capital and liquidity position."
Treasury Secretary Henry Paulson said the U.S. economy had turned down sharply but declined to label the situation a recession. "We know we're in a sharp downclimb and there's no doubt that the American people know that the economy has turned down sharply. So to me, much less important is the label that's placed on it today. Much more important is what we do about it," he told NBC's Today Show.
In a separate interview on ABC's Good Morning America, he described the economy as being in a "sharp decline."