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Was today just manic enough on Wall Street to mark a short-term bottom in the stock market?
The Dow industrials slumped 227 points early in the day on Federal Reserve Chairman Ben S. Bernanke’s depressing assessment of the economy, rallied 295 points from the low (to a net gain of 68 points) as oil fell more than $6 a barrel and stayed there, then sank again in the final hour with financial stocks, as usual, leading the way down.
The Dow ended off 92.65 points, or 0.8%, to 10,962.54 -- the first close below 11,000 since July 2006. That extended the index’s decline from its October peak to 22.6%. Trading volume today was massive on the New York Stock Exchange.
 The market is "alternating between euphoria and depression. Sometimes in the same hour," said Steve Todd, editor of the Todd Market Forecast in Crestline, Calif.
But it’s often when the market looks the nuttiest that it’s on the verge of wringing itself out.
The bulls got one sign they’ve been waiting for: The so-called VIX index, which measures Wall Street’s fear level by tracking activity in put and call option contracts on the Standard & Poor’s 500 index, jumped above the 30 level for the first time since mid-March.
The last four times the index has been above that threshold -- in August, November, January and March -- it foreshadowed that the market sell-off of that moment was cresting, and that a rally (however fleeting) was imminent. Go here for more on the VIX’s recent history, including a chart.
The VIX surged as high as 30.81 early today before falling back to close at 28.54, up from 28.48 on Monday.
Something else that could push the bears back, for better or worse: The Securities and Exchange Commission’s new plan to curb short selling of major financial stocks, as reported here.
Still, financial-stock sellers -- short and otherwise -- continued to drive many big-name issues to new multiyear lows today, indicating no let-up in fears about the state of the banking system. They have TVs on Wall Street; they can see those lines outside IndyMac Bank branches.
Investors are betting "there are going to be a lot more shoes to drop" in the financial sector, said Art Hogan, veteran trader at Jefferies & Co.
Fannie Mae fell $2.66, or 27%, to close at $7.07, Freddie Mac tumbled $1.85, or 26%, to $5.26, Bank of America slid $1.63, or 8.1%, to $18.52 and Citigroup was off 66 cents, or 4.3%, to $14.56. For Citi, that was the lowest closing price since the company was created by the October 1998 merger of Citigroup and Travelers Group.
Photo: Edvard Munch's Expressionist masterpiece "The Scream." Solum, Stian Lysberg/AFP/Getty Images
Federal Reserve Chairman Ben S. Bernanke didn’t call it a recession today, but he might as well have.
In his semiannual congressional testimony on the economy, the Fed chief delivered a sober assessment that left no doubt about the central bank’s priorities.
Remember his tone in June, hinting that the Fed might soon raise interest rates to battle inflation pressures? Forget that -- despite another scary inflation report today.
 Bernanke’s speech "strongly suggests that Fed officials do not have their fingers on the tightening trigger," Goldman Sachs economists said in a note.
The Fed chief said policymakers felt that "considerable uncertainty surrounded their outlook for economic growth and viewed the risks to their forecasts as skewed to the downside."
Asked whether he thought the country was officially in recession, he said: "People are very worried, so I certainly would never make the claim that even if we were not in a technical recession, that it wasn’t a serious situation."
The stock market took this hard at first, with the Dow Jones industrial average diving 227 points early on. But the market has since rebounded, helped by a drop in oil prices that also appears to be driven by Bernanke’s recession-like tone.
Near-term crude futures in New York were down $6.71 to $138.47 a barrel at about 11 a.m. PDT. The Dow was basically flat at 11,060.
But Bernanke’s comments brutalized the dollar. The euro spiked to a record high of $1.604 today from $1.592 on Monday.
Photo: Ben Bernanke before the Senate Banking Committee today. Joshua Roberts/Bloomberg News
The Bush administration acknowledged today that it couldn't afford to leave mortgage giants Fannie Mae and Freddie Mac on their own to face another ravaging by Wall Street.
The government announced plans to provide financial backup to the battered companies amid fears that they could face failure as home loan defaults keep rising.
Treasury Secretary Henry M. Paulson Jr. said the Bush administration’s proposal, which will need Congress' approval, would boost the companies’ ability to borrow from the Treasury if needed, and would allow the Treasury to buy stock in the companies to bolster their capital.
Separately, the Federal Reserve today said it would permit the companies to borrow directly from the central bank if they needed short-term cash.
Shares of Fannie Mae and Freddie Mac, which combined own or guarantee about $5 trillion in home loans -- roughly half the entire U.S. market -- both lost more than 45% of their value last week amid furious selling tied to rising concerns about the companies’ solvency.
 Paulson last week insisted that the companies’ finances were sound. But the deepening pessimism about the firms on Wall Street, and the spillover into financial markets in general, left the government little choice but to step up with a potential rescue plan -- even though it is sure to be perceived as yet another government bailout of private interests.
Because of the companies’ size and their importance in providing funding to the mortgage market, "we must take steps to address the current situation," Paulson said in a statement this afternoon.
Key elements of the proposal the White House will send to Congress:
--Bigger credit lines with the Treasury: As a "liquidity backstop," the Treasury would temporarily increase the lines of credit Fannie Mae and Freddie Mac have with the agency. The companies currently can borrow up to $2.25 billion each from the Treasury, although they’ve never tapped those lines. The current lines long have been minuscule compared with the growth of the companies' assets (now $843 billion for Fannie, $803 billion for Freddie).
The Treasury didn't spell out the size of the new credit lines.
--Possible stock purchases by the Treasury: To ensure that the companies have "access to sufficient capital to continue to serve their mission," the Treasury would get temporary authority to buy stock in either of the companies "if needed."
"Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer," Paulson said.
The idea of an equity infusion may be the most contentious issue in the Treasury's plan because it will be seen as a bailout of the companies' current shareholders, which include some of the nation's biggest investment firms. But any equity stakes the Treasury would take almost certainly would result in severe dilution to current investors, if not wiping out their stakes entirely.
Some experts, including former Federal Reserve Bank of St. Louis President William Poole, have said that nationalizing the companies -- turning them back into government agencies -- is the only practical solution to the challenges they face from surging losses on defaulted home loans.
--New oversight by the Federal Reserve: To protect the financial system from "systemic risk" going forward, the Federal Reserve would be given a "consultative role" in setting capital requirements and other "prudential standards" for Fannie Mae and Freddie Mac. This looks like an admission of a lack of faith in the companies' current regulator, the Office of Federal Housing Enterprise Oversight.
In its separate announcement today, the Fed said it granted its New York branch the authority to lend to Fannie Mae and Freddie Mac "should such lending prove necessary." The Fed normally lends to commercial banks, and, since March, has opened its borrowing window to brokerages as well, in an attempt to ease the credit crisis stemming from the bursting of the housing bubble.
Daniel Mudd, chief executive of Fannie Mae in Washington, said in a statement that the company "appreciates today’s announcements and the expressions of support."
Freddie Mac's CEO, Richard Syron, said the McLean, Va.-based company was "heartened" by the Treasury and Federal Reserve announcements.
Whether Wall Street is comforted will be evident in the action in the companies' stocks Monday and the reaction of the credit markets to Freddie Mac's plan to issue $3 billion in short-term debt, part of its routine financing program.
Photo: Henry M. Paulson Jr. by Karim Jaafar/AFP Photo
Falling oil prices, a rallying dollar, a hint of more financial support for banks and brokerages from the Federal Reserve -- that combo was enough today to stir a little fear in the stomachs of Wall Street’s bears.
Stocks surged in the final two hours of trading, lifting broad market indexes to their best gains in at least a month. The rally had the scent of "short covering" -- buying by traders who were closing out previous bearish bets.
The Standard & Poor’s 500 index jumped 1.7% to 1,273.70, its biggest advance since it rose nearly 2% on June 5. The Nasdaq composite gained 2.3% to 2,294.44, its best day since May 1.
The 30-stock Dow index continued its laggard ways, adding 152.25 points, or 1.4%, to 11,384.21.
Crude oil slid for a second day, and the difference today was that investors seemed to believe the turnabout might have some legs. Crude futures in New York were off $5.33, or 3.8%, to $136.04 a barrel, pushed down in part by a rebound in the dollar (a stronger greenback can lure traders away from commodities).
 The dollar, in turn, got a boost from Fed Chairman Ben S. Bernanke’s wide-ranging speech this morning, in which he laid out the central bank’s plan for strengthening financial-industry regulation.
More pertinent for markets at the moment, Bernanke also said the Fed was looking at extending its emergency lending program to major securities firms into 2009, if needed. The program was put in place in mid-March after the collapse of brokerage Bear Stearns Cos., to give securities firms a borrowing option if their peers on Wall Street cut them off.
The Fed had intended to end the special lending program in mid-September. But this obviously isn’t a "mission accomplished" situation for Bernanke & Co. quite yet.
Not surprisingly, battered financial stocks led today’s rebound after their latest trouncing on Monday. An index of 89 financial issues in the S&P 500 jumped 5.7%, the largest one-day rally since April 1.
Financial issues have been heavily shorted by Wall Street’s bears. In a short sale a trader borrows stock and sells it, expecting to repay the loan later with new shares bought at a lower price.
With financial stocks down drastically in the last month -- and with the news a little less grim for at least a day -- it made sense for some shorts to close out their trades by buying back the stocks, said Joe Saluzzi, a principal at Themis Trading in Chatham, N.J.
"This felt like a short-covering rally," he said, noting how the buying became more pronounced toward the closing bell, as the market failed to reverse.
Mortgage giant Fannie Mae, which had plummeted 16.2% on Monday, jumped $1.88, or 11.9%, to $17.62 today.
Among other financial issues, Bank of America surged $2.01, or 9.3%, to $23.54. Lehman Bros. rose $1.43, or 6.9%, to $22.27.
The stock market looks like it dodged a couple of bullets today, but the modest rebound in the Dow Jones industrial average during the half-day session couldn’t salvage the week.
And take a guess which commodity closed at yet another record high.
The Dow added 73.03 points, or 0.6%, to 11,288.54, but lost 0.5% for the holiday-shortened week and stayed in bear-market territory, off 20.3% from its October peak.
 The broader market was much worse, for the day and the week. Investors continued to unload some of the stocks that held up best for them in the second quarter, particularly smaller issues. The Russell 2,000 small-stock index lost 1% today and 4.6% for the week, and is down 22.2% from its all-time high reached nearly a year ago.
The slow-motion crash in bank stocks also continued, suggesting no easing of the latest jitters over the financial system. On the new-lows list today yet again: Bank of America, Wachovia, Comerica, U.S. Bancorp and Zions Bancorp, among others.
The government’s report of a net loss of 62,000 jobs in the economy in June nearly matched expectations, so that was a relief to some on Wall Street.
Should it have been? The debate over whether we are, or aren’t, actually in a recession will go on, but to some analysts there’s no question anymore.
Merrill Lynch & Co.’s econo-bear, David Rosenberg, says the lesson from history is that "you don't have six consecutive monthly declines in payrolls and not be in an outright recession."
For stock investors, the issue is what the slowdown/recession/whatever will mean for corporate earnings. Analysts have a dismal view of results for the quarter just ended: Operating earnings of the S&P 500 companies are expected to be down 12.4% from a year earlier, according to Wall Street estimates tracked by Thomson Reuters.
Yet those same analysts still believe the second half will bring a big turnaround. They’re expecting a 12.7% year-over-year gain in S&P earnings in the third quarter. . . .
Read on »
Thursday is looking like a big mess for financial markets. And since everybody's bracing for trouble, maybe we won't get it, and investors can limp off to their July 4th barbecues without much additional damage to their portfolios or their psyches.
Maybe.
In any case, it'll be a short day for Wall Street ahead of the Friday holiday: Stock markets will close three hours early, at 10 a.m. PDT, because who needs an extended holiday weekend more than the New York Stock Exchange's overworked mainframe computer?
Here's what on tap today:
--Pared payrolls: The government will release its June employment report at 5:30 a.m. PDT. The consensus expectation is that the economy lost a net 60,000 jobs last month, according to Bloomberg's regular survey of about 80 economists. That would make it a sixth straight month of job losses.
A much bigger number could fan the belief that a recession is underway, which would hardly be a confidence-builder for the stock market, fresh into an official bear market Wednesday on the Dow index and the Nasdaq.
 What's scary is that, if we're about to fall into recession, we aren't even close to the level of payroll cuts in previous downturns. The economy lost an average of 65,000 jobs a month from January through May. That was just about one-third the 181,000-a-month average of the last recession (March-November 2001).
--Euro rate hike: Jean-Claude Trichet, head of the European Central Bank, has been threatening for months to raise interest rates to fight inflation -- because, hey, that's what central bankers are supposed to do, oui? At their meeting today ECB policymakers are almost certain to make good on that threat, lifting their key rate from 4% to 4.25%.
Not a big deal? Tell that to the dollar, which is nearing a new low against the euro. The European currency jumped to $1.589 on Wednesday from $1.579 on Tuesday. Its record high was $1.599 on April 22.
The Federal Reserve's key rate is 2%. Higher rates in Europe give the continent an edge in attracting capital. That underpins the euro.
And what happens as the buck weakens? Commodity exporters, who price their stuff in dollars worldwide, earn less. We just hand them another reason to keep prices of raw materials, including (especially?) oil, on the rise.
So let's get out there and enjoy the weekend, before the next $10-a-barrel jump in crude.
Photo: A wag of my finger to you, Monsieur Bernanke! Jean-Claude Trichet. Pier Paolo Cito/Associated Press
Bill Strazzullo had warned his clients against chasing any rally that might follow the Federal Reserve’s unprecedented steps to prop up the financial system in mid-March.
The veteran trader, a partner at the small financial advisory firm of Bell Curve Trading in Freehold, N.J., told me on March 21 that he was sure the credit crunch wasn’t over and that its effects on the economy were just beginning.
It looks like Strazzullo got it right. Bank and brokerage stocks are in meltdown mode again this month, and they led the plunge in the market on Thursday that slashed 358 points off the Dow industrials and left the index at its lowest since September 2006.
So, what now, Bill? He told me Thursday that he’s still longer-term bearish. But in the near term he thinks that this market sell-off could be reaching a crescendo. "I don’t want to be an aggressive seller here," he said.
 He’s advising his clients with short sales (bets on lower prices) to take some of their profits, particularly in battered financial issues.
Some of the selling this week could be tied to end-of-quarter portfolio shifts by nervous investors. With the turn of the calendar page on Tuesday, that kind of selling pressure would end.
Still, Strazzullo doubts that the market is going to turn sharply higher anytime soon, even if it gets a dose of good news. For one thing, he notes that many investors who bought into the spring bounce -- and now are underwater -- may be eager to exit at the first uptick in prices. Once bitten, twice shy, after all.
It’s the fundamentals that really worry him, though. He sees the American consumer as severely strapped financially, a view that was validated by the latest consumer confidence report this week.
"Consumers have never been this insecure," Strazzullo said.
That may not be a novel thought, but I think it’s one that more people on Wall Street are just beginning to ponder.
As for new help for the economy or the markets from Congress or the Federal Reserve, "there are no more rabbits to pull out of the hat," Strazzullo said, echoing what even many market bulls will concede.
The tax rebate checks are spent. And the Fed is boxed in on interest rates: It doesn’t want to cut its key rate further, from the current 2%, because of inflation pressures and because policymakers know that another cut could devastate the dollar all over again.
Something else came to light on Thursday that I didn’t discuss with Strazzullo, but left me a little chilled: reports that the Fed is talking about loosening restrictions on private-equity firms that want to invest in banks.
Why do that? Obviously, because many loss-ridden banks, large and small, are desperate for capital to bolster their balance sheets.
Anything that helps keep the financial system from crumbling ought to be welcomed, you’d suppose. But remember: When the Fed began doling out hefty new loans to cash-strapped banks and (for the first time) brokerages in March, Wall Street figured, "Mission accomplished!"
Evidently not.
A few notes from around the markets today:
-- As Federal Reserve meeting days go, this one was fairly uneventful for markets. Blue-chip stocks finished modestly higher and Treasury bond yields were mixed after the Fed, as expected, kept its key short-term rate at 2%. It was the first Fed meeting without a change in rates since August.
The central bank suggested in its post-meeting statement that the economy wasn't in such bad shape after all. "Although downside risks to growth remain, they appear to have diminished somewhat," the Fed said -- obviously discounting the abysmal consumer confidence survey results reported Tuesday.
-- "Inflation has been slightly higher than expected and there are prospects that inflation will move up further," the central banker said. "We give weight to preventing the higher rate of inflation from becoming entrenched."
 The Fed's Ben S. Bernanke? No, that was the Norwegian central bank's deputy governor, Jan F. Qvigstad, in a statement today after the Norges Bank raised its benchmark interest rate to 5.75% from 5.5%.
Bernanke & Co. continue to talk a good game about inflation concerns, but other central banks are taking action by tightening credit, the usual step to show you're serious about damping price pressures. Norway's rate hike followed similar moves recently by China, Mexico, Turkey, Brazil, India and South Africa.
Who cares what other central banks do? The dollar does. It slid today against many other currencies after the Fed's statement. (There go your hopes for that Oslo pub-crawl tour.)
It was just a few weeks ago that Bernanke strongly signaled the need for a rebound in the dollar to combat rising prices of imports, including oil. Yet there was no mention of the greenback in today's Fed statement, notes Joe Battipaglia, chief investment officer at brokerage Stifel, Nicolaus & Co. in Florham Park, N.J.
Never mind, Dr. Bernanke?
-- The Fed's relatively upbeat take on the economy must not have been persuasive to investors in financial-company shares, which have been battered by expectations of mounting loan losses. The BKX index of 24 major bank stocks jumped as high as 65.44 early in the session, a 4.9% leap from Tuesday's finish. But the index gave almost all of that back by the closing bell, ending at 62.62, up just 0.4% for the day.
That's still above the 10-year closing low of 60.87 reached Monday. But as Jay Shartsis, head of options trading at RF Lafferty & Co. in New York, reminds: "Every time the financial stocks look like they can't possibly go any lower, they go lower."
The BKX is down 29% year to date, compared with a 10% drop in the Standard & Poor's 500 index.
Like a hypnotherapist, the Federal Reserve keeps trying to talk us into an economic recovery.
"You will not need lower interest rates to feel better," Chairman Ben S. Bernanke tell us in so many words -- something he and his fellow Fedsters are likely to repeat again today as they gather and, almost certainly, hold their benchmark rate at the current 2%.
But the latest survey of consumer confidence shows that the Fed's relatively hopeful message isn't registering. Americans feel downright terrible about the economy as it is, and their expectations for the near future are even more depressed, according to the Conference Board's June consumer confidence report, issued Tuesday.
The overall confidence index, derived from questionnaires sent to 5,000 families, fell to 50.4 this month, down from 58.1 in May and the lowest since 1992.
 Worse, the expectations index in the survey -- how people figure things will look in six months -- dropped literally off the chart, to 41.0. That was the lowest figure in the 40 years of the survey, and broke through the previous low of 45.2 reached in December 1973 -- just as the economy was beginning to plunge into recession from the effects of the surge in oil prices that followed the Arab embargo announced that fall.
But something else in the latest survey really disturbed Lynn Franco, director of the Conference Board's consumer research center in New York, she tells me: The percentage of people who expect their income to drop in the next six months jumped to a record 15.9%. Even in December 1973, when consumers' overall expectations for the economy were dismal, only 10.8% expected their income to decline in the following six months.
Just 12.3% of consumers are expecting a rise in income over the next six months, compared with 19.4% a year ago.
It's true that consumer spending hasn't collapsed in recent months, thanks in large part to the federal tax rebate checks most families received. But once that money is gone, how do you have a consumer-led economic recovery in the second half with so many people feeling so bad about the big picture and about their personal financial situations?
Would lower interest rates help at this point? Maybe not. But in times of serious trouble it's always better for the Fed to have more bullets in the gun than fewer -- and right now, with its key rate at 2%, there aren't many bullets left.
What's more, with energy and food price inflation showing no signs of abating, Bernanke and other Fed officials have been talking in recent weeks about the need to begin raising interest rates as early as this fall to beat back price pressures.
Hike rates on consumers who are struggling to fill their gas tanks and have enough cash left over for groceries? It's true that quite a few other central banks around the world already have taken that unpopular policy route this year. But they're operating in economies that, for the most part, still are growing at a healthy pace.
The U.S. economy, by contrast, may not officially be in recession, but as Franco put it, never mind the terminology -- "to the consumer right now it feels like a recession."
Photo: And they thought they had it bad! President Nixon, right, listens to his energy policy advisor, John A. Love, in November 1973, one month after the Arab oil embargo was announced. Credit: John Duricka / Associated Press
A few notes from around the markets today:
-- Can the Dow defend its lows? The blue-chip Dow industrials this morning briefly slid below their multiyear closing low of 11,740.15 reached on March 10, dropping as low as 11,725 after the latest bleak reports on consumer confidence and home prices. But the market then bounced higher. At about 10:30 a.m. PDT the Dow was up 35 points to 11,876.
 A new closing low for the Dow would reinforce the bears’ case that the spring upturn in the market was nothing but a sucker’s rally. Most other major market indexes, though, have more of a cushion between their current levels and their March lows. For more on what ails blue chips, in particular, see this post.
A new Dow low also could further complicate life for Federal Reserve policymakers, who meet on Wednesday and are virtually certain to leave their key short-term interest rate unchanged at 2%. The last thing Fed Chairman Ben S. Bernanke and peers need is another confidence-crushing event that could put more pressure on them to cut rates further -- while inflation pressures mount.
-- The state goes to the well. California today will set yields on its offering of $1.5 billion in general-obligation municipal bonds, the latest sale to raise money for the state's large backlog of infrastructure projects. Treasurer Bill Lockyer, as usual, gave small investors a chance to put in orders for the tax-free bonds ahead of institutional investors.
But the retail order period, Friday and Monday, didn’t bring in the level of orders the state saw at its bond sales earlier this year -- despite a rise in muni yields in recent weeks. Lockyer said small investors ordered $704 million in bonds, or 47% of the total offering. By contrast, the state got about $900 million in orders for its bond offering in early April. The state always pays its debts, but some investors still may be queasy about the projected $15-billion budget deficit for the new fiscal year.
-- Just leave it to Wall Street? Possible quote-of-the-day from the U.S. Senate hearing today on whether Congress should do something to kick investors and speculators out of commodity markets, or limit their presence, in an attempt to bring down prices of oil and other raw materials:
"Prohibiting investment opportunities for institutional market participants effectively substitutes the judgment of Congress for the judgment of trained financial investment professionals," said James Newsome, president of the New York Mercantile Exchange. "It would be premature to adopt a legislative solution for an unproven and unsubstantiated problem."
But let's not forget -- and I'm sure Congress won't -- that the judgment of "trained financial investment professionals" brought us the subprime mortgage debacle.
Photo: Fed Chairman Ben S. Bernanke
The Federal Reserve talks a lot about inflation.
The Bank of Mexico does something about it.
The Mexican central bank today surprised markets by raising its benchmark short-term interest rate to 7.75% from 7.5%, the first increase since October.
The bank said it tightened credit because "the recent inflation dynamic is worrying."
 Like most of the world, Mexico is battling rising cost pressures, particularly in food products.The country’s consumer price index rose 4.95% in the 12 months through May, well above the central bank’s target range of 2% to 4%, notes Nick Bennenbroek, head of currency strategy at Wells Fargo & Co.
Still, the bank’s move was unexpected because the government on Wednesday announced a deal with major food companies to freeze prices on more than 150 pantry items through the end of the year, in an attempt to ease the squeeze on consumers.
That was supposed to forestall an interest-rate hike. Instead, it looks like the Mexicans are taking the inflation battle seriously enough to risk slowing their economy with higher interest rates.
In the currency markets, at least, the Bank of Mexico’s decision is a hit. The peso has edged up to a five-year high against the dollar. The buck is worth 10.27 pesos this morning, down from 10.32 on Thursday and 10.36 a week ago. That’s not a big move, but it’s the trend that counts.
Interestingly, the Mexican stock market is suffering less today than the U.S. market. The Mexican IPC index was down about 0.6% at 10:45 a.m. PDT, compared with a 1.6% drop in the Dow industrials.
The U.S. inflation rate -- 4.2% for the year through May -- isn’t much lower than Mexico’s. But when Fed policymakers meet next Wednesday, they’re almost certain to leave their key rate at 2%, despite the recent barrage of rhetoric about being inflation-vigilant.
Given this week’s renewed carnage in bank and brokerage stocks on Wall Street, it’s clear the Fed is boxed in: Tighter credit could be a certain death sentence for many financial companies that are teetering on the edge.
Photo: Guillermo Perea/EPA
Central bankers have been busy over the last 24 hours trying to fine-tune markets’ expectations for interest rates.
The gist of their revised message: "We aren’t expecting to boost rates aggressively anytime soon." That is helping to pull government bond yields down modestly today after their recent surge.
Federal Reserve and European Central Bank officials have been talking tough on inflation for weeks, strongly hinting that they would tighten credit sooner than later to combat rising price pressures.
But they now appear to think that they put too much of a fear factor into financial markets, particularly in light of the fragile state of the U.S. economy.
The Wall Street Journal’s lead story today carries the headline, "Fed Mood Tilts Away from Rate Increase." It says the Fed could consider raising its benchmark short-term rate (now 2%) in August, but that policymakers would prefer to wait until fall.
Reuters has a good story here that wraps in the Fed’s attempt to calm markets and similar efforts on Tuesday by the ECB and the Bank of England.
The suddenly less hawkish tone on interest rates is bringing buyers into the Treasury bond market today. The two-year T-note yield fell to 2.92% by about 9:30 a.m. PDT, from 3.04% on Monday. The yield has jumped from 2.38% on June 6.
Not that the inflation news was cheery today: The Labor Department said its wholesale inflation gauge (the producer price index) soared 1.4% in May, the biggest rise since November, stoked as usual by surging food and energy costs.
The core inflation rate, excluding food and energy, was up 0.2% in May. While that looked tame enough, Bank of America Economist Peter Kretzmer notes that the 12-month change through May was 3% -- the highest core wholesale inflation rate since 1991.
Longer-term bond yields, which are highly sensitive to inflation expectations, remain sticky today. The 30-year T-bond yield is holding at about 4.78%, compared with 4.79% on Monday.
Maybe you can start dusting off those overseas vacation plans, after all: The beleaguered dollar suddenly is on a hot streak.
The greenback is rallying today against the euro, the yen, the Canadian dollar and other major currencies, lifting a closely watched index of the dollar’s value to its highest level since February.
The DXY dollar index, which measures the buck’s moves against six key currencies, was at 74.13 at about noon PDT, the highest since Feb. 27. The index has jumped 2.4% this week, a big move compared with its usual shifts.
 The euro has slumped to $1.535 today from $1.542 on Thursday. The European currency peaked at $1.599 in mid-April.
Just a week ago the dollar was hammered by the government’s report of a jump in the unemployment rate in May to 5.5% from 5%. Anything that dims faith in a country’s economy usually is bad news for its currency.
But this week, sentiment toward the buck has rebounded sharply -- although not necessarily for reasons that will make average Americans feel good.
One factor is the growing belief that the Federal Reserve will begin raising short-term interest rates this fall to combat inflation. The Fed has encouraged that idea with tough talk on inflation, including a throw-down-the-gauntlet speech on Monday by Chairman Ben S. Bernanke.
"There has been a pretty significant shift in expectations on rates," said Kathy Lien, currency strategist at DailyFX.com. Higher interest rates could attract more global investors to U.S. bonds, underpinning the dollar.
Today, although the "core" rate of inflation in the government’s May consumer prices report remained relatively tame, Treasury bond yields are mostly higher after dipping early in the session. That’s a sign investors continue to bet on a credit-tightening move by the Fed later this summer or early in fall.
The dollar also is getting a boost today from a blow to the euro’s image, after Irish voters rejected the European Union’s new governing treaty -- raising new doubts about prospects for greater political unity to tackle Europe’s problems. Bloomberg has a good story here.
The Irish vote "weakens the appetite foreign investors have for euro-denominated assets," said Michael Woolfolk, currency strategist at Bank of New York Mellon.
For the Bush administration and the Fed, almost anything that strengthens the dollar is welcome at this point, because a healthier buck could put downward pressure on prices of oil and other commodities, as I explain here. Crude oil today is trading lower, off $1.86 to $134.88 a barrel around noon PDT.
Photo: Michael Probst/Associated Press
Wall Street woke up this morning determined to have a nice day. But by the closing bell, the drugs had worn off.
You can thank the usual buzz killers: oil and the Federal Reserve.
The next test for rickety markets comes on Friday with the government’s report on May consumer price inflation.
Today, the Dow industrials were up as much as 186 points early on, nearly recouping Wednesday’s drop, after the government said retail sales rose 1% last month, the biggest jump since November. That was a clear sign that many consumers were spending their tax rebate checks, just as the Bush administration had hoped.
What’s more, a $46-billion takeover bid for Anheuser-Busch Cos. by Belgium’s InBev left the impression that foreigners, at least, may believe that U.S. stocks are cheap.
 And even oil cooperated, for a while, with near-term futures falling as much as $4.83 a barrel, to $131.55.
But there seems to be no way to keep the oil bulls down for long these days. The price rebounded by the end of trading, closing up 36 cents at $136.74 a barrel -- even in the face of a stronger dollar, which usually pulls commodity prices lower. As oil recovered stocks sank. The Dow closed at 12,141.58, up 57.81 points, or 0.5%; broader indexes were weaker.
Wall Street also was spooked by the latest Fed missile launched in the war of words on inflation. Charles Plosser, president of the Fed’s Philadelphia bank, said on CNBC that the central bank must "act preemptively" to damp inflation pressures. That added to the growing belief that the Fed will begin boosting short-term interest rates by fall. (And if the consumer keeps spending, that gives the Fed more cover to make a move.)
"It looks like they do want to start raising rates," said Ray Remy, head of fixed income at Daiwa Securities in New York.
Plosser’s comments helped spark another big sell-off in Treasury bonds that pushed the yield on the two-year T-note to 3.04%, the highest since Dec. 31. (How much have investors’ rate expectations changed in the last week? Just last Friday they were willing to buy two-year T-notes at a yield of 2.38%. D’oh!)
The Fed’s new inflation paranoia places more than the usual importance on the May consumer prices report due Friday. Most analysts figure prices were up 0.5%.
But Ian Shepherdson of High Frequency Economics warned in a report today that "the unpredictability of food, home heating oil and utility prices means a slightly bigger increase is also possible."
Get the drugs ready.
Photo: Charles Plosser. Federal Reserve Bank of Philadelphia
"It can’t get much worse," you figure if you still own a bank or brokerage stock.
To which the market responds: Try me.
Financial shares were bludgeoned again today, driving many to new multiyear lows and leading Wall Street’s retreat.
It’s hard to overstate how drastically investors’ views of these stocks have changed over the last two weeks. Consider: Sellers of Newport Beach-based mortgage lender Downey Financial were willing to take as little as $4.47 a share to get out of the stock today. Two weeks ago the price was 76% higher, at $7.85.
Bank of America, which was trading at $33.87 two weeks ago, has fallen nearly 15% since, to $28.85.
 This selling wave is an acceleration of a downturn that began for many financial issues early in May, following a bounce in the stocks in late March and in April.
What has changed in the last few weeks? Rumors about financial trouble at Lehman Bros. cropped up as June began, and there was more than a kernel of truth in them: Lehman on Monday said it would report a $2.8 billion loss in its latest fiscal quarter -- far exceeding analysts’ worse fears -- because of another round of write-downs on commercial-property mortgages and other investments.
The bigger industry issue this week has been deepening fear that the Federal Reserve, with its sudden focus on inflation risks, might begin to raise interest rates this fall.
One of the Fed’s main goals in slashing its benchmark short-term interest rate to the current 2% was to make sure loss-ridden financial firms could borrow cheaply as they try to repair their eroded balance sheets. If the Fed tightens credit, that repair job becomes a lot tougher, which means many financial companies will take longer to get back to health -- if they can get there at all.
And in the meantime, as Lehman showed, the bleeding from loans and investments gone bad hasn’t stopped.
In its report today on regional economic trends, the Fed included a specific warning about banking troubles in its Western region, including California. Since mid-April, the report said, credit quality at Western banks has "eroded a bit further, mainly for loans related to the housing sector, with the most significant adverse impacts on asset portfolios noted for smaller community banks."
That may help explain heavy selling this week in shares of small- and mid-size California lenders such as EastWest Bancorp, Cathay General Bancorp and FirstFed Financial.
The Federal Reserve just released its latest report on regional economic activity, the so-called beige book. The new report says data from the Fed’s 12 district banks "suggest that economic activity remained generally weak in late April and May."
No surprise there, although it sounds less upbeat than Fed Chairman Ben S. Bernanke’s comments on Monday that "the risk that the economy has entered a substantial downturn appears to have diminished over the past month or so."
You sure, Mr. Chairman?
Here are some of the report’s more interesting highlights of what was happening in the Fed’s Western region, which encompasses California as well as Alaska, Arizona, Hawaii, Idaho, Nevada, Oregon, Utah and Washington:
-- Overall, economic activity in the region "changed little" during the survey period. "Upward price pressures were subdued for most products but remained severe for food and energy-intensive items."
-- "Retail sales were weak and demand growth slowed for service providers. Manufacturing activity held steady or grew slightly on net, while producers of agricultural and natural resource products saw strong sales."
 -- "Demand remained very weak for new and used vehicles, especially for larger vehicles with low fuel efficiency, for which sales were described as ‘dismal.’ "
-- "Housing markets remained exceptionally weak despite scattered reports of improved sales." Demand for commercial real estate "continued to soften" in some regions. "Contacts noting reduced leasing activity and lower sales prices for commercial properties in the San Francisco Bay Area and further increases in vacancy rates for commercial property in Las Vegas and San Diego."
-- "The tourism industry saw mixed but somewhat weak performance on net. Hotel bookings and visitor spending were characterized as weaker or declining in Southern California and also in Hawaii, where recent airline bankruptcies reportedly have held down visitor counts; in contrast, hotel occupancy rates in parts of Alaska have been at record levels."
-- In the aerospace business, "new orders have slowed for makers of commercial aircraft and parts, although production activity remained at high levels due to existing order backlogs."
-- "Lenders continued to tighten credit standards, which remained especially strict for residential mortgages and construction loans. Credit quality eroded a bit further, mainly for loans related to the housing sector, with the most significant adverse impacts on asset portfolios noted for smaller community banks."
Photo: A row of Toyota trucks on a dealer lot in L.A. Andrew Gombert/EPA
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