US stocks pull back ahead of new economic data

By Kristin Roberts

NEW YORK: Stocks rolled back on Wednesday as investors stepped cautiously ahead of key economic data that may offer clues on the Federal Reserve's next move. Trading was choppy and volume was moderate a day after the Nasdaq soared to log its biggest one-day percentage gain ever. The uncertainty surrounding Friday's wage inflation report fought off early optimism stirred by friendly economic data.

"I think this morning everybody got excited because some numbers came in showing a little bit of a slowdown, which everybody loves because they see a slowdown and they see that the Fed can take its foot off the interest-rate accelerator," said Wit SoundView managing director Adam Weisman. "But the rally didn't hold because there was not a lot of volume," he said.

The Nasdaq composite lost 58.57 points, or 1.69 per cent, to close at 3,400.91. The gauge bobbed in and out of positive territory all day, ending lower on weakness in top technology names. The drag of tech sector leaders also pressured the Dow Jones industrial average, beating back strength in retail and finance names. The blue-chip Dow slipped just 4.80 points or 0.05 per cent, to 10,522.33 after holding its head above water for most of the session. Retailers Wal-Mart Stores and Home Depot were the Dow's strongest names on Wednesday. Broader measures of the market slumped as well, with the Standard & Poor's 500 down 1.85 points, or 0.13 per cent, to 1,420.60. The Wilshire 5000, which tracks nearly the entire U.S. equity market, fell 27.67 points, or 0.21 per cent, to 13,052.96.

"Today's reaction is a follow-through from yesterday where there is some pleasure that stocks would go up so strong and some disappointment that they went up so fast without much participation," said technology strategist Arnold Berman at Wit SoundView. "The economic numbers may matter some, but the big numbers come out on Friday," Berman said. Early buying was sparked by a Commerce Department report that new U.S. homes sales dipped some from the previous month. Analysts said the new homes market showed signs of cooling after six interest-rate increases by the Federal Reserve since last June.

In a separate report, the Chicago Purchasing Management Index (PMI) fell to a seasonally adjusted 53.9 in May, while economists polled by Reuters had expected a reading of 56.9. Any reading above 50 in the barometer, which measures regional manufacturing activity, indicates expansion. Those figures bolstered the view of some Wall Street strategists that the economy is slowing and that the Fed is succeeding. "These latest data reinforce our view that the Federal Reserve will be heading back to more moderate 25-basis-point tightening steps in June and August following the aggressive recent 50-basis-point federal funds rate hike," said PaineWebber economist Maury Harris. "However, with unemployment being relatively low and related wage inflation fears being relatively high, it will take a couple of months' worth of slowdown evidence to stop Fed tightening altogether," he said.

That follows comments from Thomas Galvin, chief investment officer at Donaldson, Lufkin & Jenrette and Merrill Lynch's chief economist, Bruce Steinberg, who also said the economy is showing signs of slowing.

Still, investors will be on data watch for the rest of the week, with the National Association of Purchasing Management index of industrial activity due on Thursday and jobs data scheduled for release on Friday. The central bank has singled out the tight U.S. labor market as a key concern as it fights inflation. The Fed meets next in late June to decide whether to raise borrowing costs again. Since last June, the Fed has increased interest rates six times - in five steps of 25 basis points each, followed by 50 basis points this month. "Investors are more interested in the employment report and the fear of the (Federal Reserve meeting in June) than putting their hands on one number that is good," said King Nussbaum Inc. market strategist for Ehrenkrantz Barry Hyman.

On Wednesday, bond prices rallied on the friendly economic data. The 10-year U.S. Treasury note advanced 23/32, with the yield falling to 6.28 per cent from Tuesday's close of 6.38 per cent. The 30-year bond surged 1-10/32, with the yield declining to 6.00 per cent from Tuesday's 6.09 per cent. Stock trading volume was moderate, in line with the recent trend of slow sessions, compared with the first quarter's record trading pace. The New York Stock Exchange saw 955.8 million shares change hands while the Nasdaq logged 1.53 billion shares traded. Among the most active stocks, Qualcomm Inc. dropped 10 points to 66-3/8 on increasing doubts that a deal with China's second-largest telephone carrier will bear fruit in the near term, analysts said. Life insurer Conseco Inc. was the most active stock on the Big Board, gaining 1-5/16 to 6-1/4.

(C) Reuters Limited 2000.