Major U.S. stock indexes closed lower in Monday’s session after concerns about the ailing financial sector, including Freddie Mac (FRE) and Fannie Mae (FNM), halted a rally attempt that had been stoked by a pullback in crude oil prices.
The volatility in equities comes on the eve of the second-quarter earnings season and follows comments made earlier today from San Francisco Fed President Janet Yellen, who reportedly said problems in the housing market and banking system could get even worse before the economy recovers.
Bonds were higher. The dollar index finished flat. Gold futures fell.
On Monday, the Dow Jones Industrial Average finished 56.58 points, or 0.5%, lower at 11,231.96. The broader S&P 500 shed 10.59 points, or 0.84%, to close at 1,252.31. The tech-heavy Nasdaq composite index fell 2.06 points, or 0.09%, to end the session at 2,243.32.
Yellen said the risks to inflation, while "not symmetric," have definitely increased, adding that the Fed can't let a wage-price spiral develop, though inflation expectations have been reasonably well anchored. She expects the economy to grow modestly for the balance of 2008 and improve into 2009, while inflation will remain elevated over the next few quarters and core inflation likely to rise as businesses pass on higher costs.
The market remains uncertain what the Federal Reserve plans to do about interest rates in the coming months as last Thursday’s release of the June employment report indicated the U.S. economy remains soft, but oil and food prices remain stubbornly high, fueling inflation worries.
Financial stocks were once again pulling the major indexes down, ignited by concerns over a need to raise funds at Merrill Lynch & Co. (MER). Shares of Freddie Mac (FRE) and Fannie Mae (FNM) swooned on resurgent fears over the government-sponsored enterprises' need for abundant cash to fortify their balance. Lehman Brothers (LEH) analysts estimate that both Freddie Mac and Fannie Mae together may need to raise some $75 billion in capital as well, following an accounting rule change, according to a Bloomberg report.
Action Economics cited another Bloomberg report of a potential sell-off of GSE (agency) debt by Bank of America (BAC) following the merger with Countrywide is being cited as a catalyst for the sudden surge in risk premiums, plunge in stocks and jump in Treasuries.
Yahoo (YHOO) shares were up on reports of activist investor Carl Icahn's latest open letter to Yahoo shareholders, and Yahoo saying it "continues to stand ready to enter into negotiations with Microsoft Corp. (MSFT) for an acquisition of Yahoo." Yahoo also noted that Microsoft CEO Steve Ballmer and Carl Icahn have "teamed up in an apparent effort to force" Yahoo into selling its Search business to Microsoft at a price to be determined in a future negotiation between Mr. Icahn's directors and Microsoft's management. Yahoo strongly believes this would not lead to an outcome that would be in the best interests of its stockholders. Standard & Poor's reiterated it buy rating on Yahoo.
Looking ahead to later in the week, Fed Chairman Ben Bernanke will give the keynote address at the FDIC Forum on mortgage lending in Arlington, Va., Tuesday night. Bernanke and Treasury Secretary Henry Paulson will testify Thursday before the House Financial Services Committee on financial market regulatory restructuring.
There are few noteworthy economic reports this week. The ones that will get the most attention -- the international trade figures for May, June import prices and the preliminary July consumer sentiment numbers -- come out Friday.