US Market holds on to gains

Federal Reserve’s rate cut and better than expected employment report boost market

The last week that ended on Friday, 02 May, 2008 was quite eventful at US Market. It started with a couple of important news in the merger front. Thereafter market got swayed by Federal Reserve’s next slot of interest rate cuts. Market did react in a bit whimsical fashion to the interest rate cut. The week finally ended with the employment report which came as better thane expected.

The Dow Jones Industrial Average gained 166 points for the week. Tech - heavy Nasdaq gained 54 points. S&P 500 gained 16 points. In percentage terms the three indices gained 0.3%, 0.8% and 0.5% respectively.

After remaining a bit subdued in the earlier part of the week, market picked up momentum in the later part. Infact it can be said that it ended up being a three-day work week. That's because things didn't get really interesting for market participants until Wednesday, 30 April, 2008.

On Wednesday, The Federal Open Market Committee announced today that it cut the fed funds and discount rates by 25 basis points. This left the fed funds rate at 2% and the discount rate at 2.25%. The Fed said economic activity remains weak, while inflation expectations are picking up.

The stock market was in rally-mode ahead of the Fed decision and got an added boost shortly after the headlines hit the wires. In striking fashion, it sold off sharply late in the day and ended Wednesday in negative territory. The knee-jerk explanation was that there was disappointment in the directive and the idea that the Fed didn't sound more hawkish on inflation.

On Thursday, 1 May, the indices soared. Huge gains in the financial and technology sectors powered the advance, as did a noticeable drop in commodity prices that were impacted by a strengthening dollar.

On Friday, 2 May, 2008 the Fed announced intentions to increase its Term Auction Facility to $150 billion from $100 billion, and also allow AAA asset-backed securities to be pledged as collateral. Continuing to act on proactive lines, the Fed increased swap lines with the Swiss National Bank to $12 billion from $6 billion and increased swap lines with the European Central Bank to $50 billion from $20 billion in a multilateral effort to address persistent liquidity pressures.

Also, on Friday, the job report was out where unemployment rate for April fell to 5% from 5.1% in March. April's unemployment rate was less than the consensus estimate of 5.2%. Nonfarm payrolls for April slipped by 20,000, which is less than the revised decline of 81,000 experienced in March and also less than the 75,000 decline economists expected. Importantly, these figures do not reflect the kind of weakness often associated with a recession.

The stock market made a nice move in the wake of the jobs report, but succumbed to some week-end selling interest that pared its gains considerably.

Among major earning reports for the week, Colgate-Palmolive, General Motors and Procter & Gamble - all topped expectations. Humana and Sysco topped expectations, while Verizon reported in-line earnings. Credit card processors Visa and MasterCard both reported their quarterly earnings. Visa topped its estimate by 17%, while MasterCard beat by 30%.

Among major deal news during the week, privately held snack food company, Mars is going to acquire Chicago-based Wrigley for roughly $23 billion, or $80 per share in cash, representing a 28% premium over Friday's closing level. Warren Buffet said that Berkshire Hathaway will provide $6.5 billion in financing.

On the economic report front, advance first quarter GDP rose by 0.6%, topping the consensus estimate of 0.5%.

Also the Conference Board said April consumer confidence fell to 62.3 from 65.9, marking the lowest consumer confidence in roughly five years. The number, however, is better than expected market projected the reading to slip to 61.

Executive Summary

For the week, indices registered modest gains. DJIx and S&P 500, each closed up by 1.3% and 1.1% respectively. Nasdaq closed up by 2.2%. Federal Reserve’s rate cut decision, earning and economic reports dominated the week.

The Federal Open Market Committee announced today that it cut the fed funds and discount rates by 25 basis points. This left the fed funds rate at 2% and the discount rate at 2.25%. Advance first quarter GDP rose by 0.6%, topping the consensus estimate of 0.5%.

For the year, Dow, Nasdaq and S&P 500 are down by 1.6%, 6.6% and 3.7% respectively