Market activity Wednesday revolves around the Fed, and the dollar hangs in the balance.
The Federal Open Market Committee winds down a two-day meeting and is expected to release its statement at 2:15 p.m. The Fed is widely expected to leave rates unchanged but make comments that show it is concerned about the weak economy and inflation. The question is just how hawkish on inflation will it be, and how much will the Fed tilt toward an ultimate change in its bias to a tightening mode.
Keep in mind, the Fed's statement comes after European Central Bank President Jean-Claude Trichet testifies before the European Parliament on the euro zone economy Wednesday. If he keeps to form, Trichet will talk about tackling European inflation and possibly make some dollar crushing comments.
Fed Chairman Ben Bernanke has put his own stake in the ground on the dollar and for that reason it will be interesting to see just what the Fed has to say about inflation. Remember on June 3, Bernanke said dollar weakness is contributing to an unwelcome increase in import prices and consumer price inflation. He also said the Fed is monitoring developments in currency markets, side-by-side with Treasury.
In a note, Miller Tabak's Tony Crescenzi said the action at Tuesday's Treasury auction may be a sign that investors are backing away from the recent view that the Fed will be raising rates in the near future. He said the strong demand for the $30 billion in two-year notes was the best since last October. The auction yield was 2.922 percent, well below expectations and a sign that there's strong demand for the issue, he says.
Crescenzi says he expects the Fed to place more weight on the fragile economy and financial system than on inflation for the time being.
The Dow Tuesday finished off 34 at 11,807 and the S&P 500 was up 3.71 points at 1,314.29. The Nasdaq, for a second day, made the biggest move, falling 17.46 points to 2,368. The dollar fell 0.31 percent against the euro, taking it to $1.5572 per euro. Year-to-date, it is down 6.25 percent.
The two-year finished with a yield of 2.842 percent.
Oil inventory data is reported at 10:35 a.m. Platts expects to see a draw down of 1.7 million barrels of crude and 750,000 barrels of gasoline. But it expects distillates stocks to be up 1.7 million barrels when the Energy Information Administration and American Petroleum Institute release weekly data.
Nymex crude finished a relatively quiet session Tuesday at $137, up $0.26 per barrel.
Drilling for Speculators
While the issue of offshore drilling is brewing on the sidelines, Congress continues to dig into whether speculators in the oil markets are causing sky high prices.
On Wednesday, the Joint Economic Committee takes on the question of whether oil is in a bubble or a new reality. Cambridge Energy Research Chairman Dan Yergin leads off the testimony.
"There's two meanings for speculators," Yergin told me. "There's the technical term. That's the people who provide liquidity and enable people like natural gas producers and farmers to hedge their risk. Then there's the colloquial meaning that ranges from manipulator to risk taker to bubble maker."
Yergin said he is being asked to discuss the influence of financial markets on the price of oil. "Obviously, the financial markets play a much bigger role than they used to. There's a "shortage" psychology in the financial markets, based both upon current market conditions and expectations of a long term shortage," said Yergin, who is CNBC's global energy analyst.
Here's something to consider as well. Dow Jones reported Tuesday that China's diesel imports in May were 34 times greater than a year ago, and for the first time in two years, some of that came from the U.S.
There is some economic data due Wednesday. Durable goods are reported at 8:30 a.m., and new home sales for May will be released at 10 a.m.
Wednesday is an interesting day for earnings. The most widely anticipated appears to be Research in Motion, which has has no fewer than a half dozen analysts in the past week making favorable comments ahead of the earnings report. The latest one was RBC Tuesday, which raised its price target to $165 from $150. RBC is not alone in expecting above consensus results. Analysts expect earnings per share of $0.85.
Earnings are also due from General Mills and Monsanto before the bell, and Oracle after the bell. Bed Bath and Beyond also reports.
Next week starts the second half of the year. Paul Hickey, managing partner at Bespoke, shared an analysis of quarter-end behavior on "Street Signs" Tuesday. He said based on data going back to 2003, he tracked a trend based on the performance of stocks up until the final week of the quarter. If stocks were in the top tier of performance of the S&P, there was a trend for those stocks to outperform in the final week. This happened 70 percent of the time in that period.
The bottom 10 percent of the S&P were consistently the worst performers and average a decline in the last week. Bespoke says this trend indicates that portfolio managers tend to use the final week of the quarter as an opportunity to dump losers.
Hickey told me the trend was apparent in the financial stocks Monday. "They've been the worst performers the whole quarter. If I'm a portfolio manager and I'm loaded to the gills with Lehman, Merrill Lynch and Citigroup at the end of the quarter, I may want to make the portfolio look a little better and get out of those."
By the way, those financial stocks Tuesday were higher while energy, up 15 percent for the quarter, was down 1.5 percent. The S&P financial sector was up 1.5 percent Tuesday but is down 12.5 percent quarter to date.
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