Stocks Dented By Fed Minutes; Dow Breaks 8-day Winning Streak

NEW YORK (MarketWatch) -- U.S. stocks closed lower Wednesday as the Dow Jones Industrial Average ended an 8-day winning streak, after minutes from the Federal Reserve's last meeting on interest rates confirmed the central bank's focus on inflation and dashed hopes it would soon cut rates to boost a slowing economy.

"The idea of a rate cut has been somewhat reduced," said Kevin Kruszenski, head of trading at KeyBanc Capital.

The Dow Jones Industrial Average closed down 89.23 points at 12,484.62, as 25 of its 30 components dipped into negative territory.

The blue-chip average had risen without interruption over the past eight sessions -- a winning streak not seen in over four years - which also gave investors a reason to consolidate recent gains.

Among the biggest decliners were shares of General Motors Corp. , IBM , Citigroup Inc. and Wal-Mart Stores Inc. .

"People thought that the Fed had moved closer to a neutral bias" (where growth and inflation risks are seen as equal and where the next Fed policy move is as likely to be a rate cut as a rate hike), said Keybanc's Kruszkenski.

However, the Fed's minutes showed that while central bankers "are moving closer to neutral, they're taking their time," he said.

When the Fed left interest rates unchanged three weeks ago, it tweaked the tone of its accompanying statement by removing a key phrase indicating that further rates hikes might be needed.

But in the meeting's notes, central bankers said they made the change to reflect increased risks to growth, even though "further policy firming might prove necessary to foster lower inflation."

The S&P 500 fell 9.52 points to 1,438.87, while the Nasdaq Composite dropped 18.30 points to 2,459.31.

Stocks opened under pressure after the International Monetary Fund cut its outlook for global growth, while a drop in gasoline supplies briefly boosted crude oil prices.

"This market is concerned about higher commodity price on the heels of the IMF cutting global growth forecasts," said Jay Suskind, director of trading at Ryan, Beck & Co. "This brings back concerns about stagflation [a combination of slowing growth and inflation]."

"We're also concerned about the Fed, which is boxed in there between a slowing economy and an inflationary economy, which historically has not brought good things," Suskind said.

Among blue chips, Citigroup fell 1.2%. The bank said it was cutting 17,000 jobs worldwide in a bid to save $4.6 billion a year by 2009. The stock had gained on Tuesday after the New York Times reported that the bank might cut or reassign 26,000 positions.

Alcoa shares rose 0.5% after it kicked off the first-quarter earnings season after the close on Tuesday with a 9% rise in profits and an upbeat outlook for the year.

"This is a good start to the season, although rising commodity prices easily accounted for the increase in profits, so it was somewhat sector specific," said Marc Pado, market strategist at Cantor Fitzgerald, in a note.

Bed Bath & Beyond , Genentech and BlackBerry maker Research In Motion were due to report quarterly results after the close of trade on Wednesday.

In the broad market for equities, 1.569 billion shares traded on the New York Stock Exchange while 1.976 billion shares exchanged hands on the Nasdaq stock market. Declining issues outpaced gainers by 11 to 5 on the NYSE and by 19 to 10 on the Nasdaq.

By sector, banks and biotechnology were among the biggest decliners, while pharmaceuticals and airlines posted modest gains.

Earnings expectations and the Fed

Investors are already bracing for a sharp deceleration in earnings growth. Thomson Financial expects S&P 500 earnings to rise only 3.3% for the first quarter, marking the first time that earnings growth dips below 10% in 14 quarters.

The lowered bar may help companies beat expectations but investors will focu on earnings forecasts for the rest of the year.

"The positive in the market place is that earnings expectations have been tempered so much that earnings surprises could still come to the upside," said Ryan, Beck's Suskind. "But when earnings come out, investors will turn not to what was, but to what will be."

Cantor's Pado believes earnings growth will have to top 5% "to move the market to a sustainable position above [its] previous highs."

The market stumbled in late February and through early March amid concerns that a meltdown in the subprime mortgage market may worsen the downturn of the housing market, hit consumption, and take down the economy.

Yet, Fed officials have again confirmed they remain concerned about inflation remaining above their preferred target range, dashing market hopes that the central bank would soon cut interest rates to stave off a hard landing for the economy.

In the meantime, "as earnings come out, investors will examine the results of financials, housing stocks and anything to do with consumers, for any signs of where we are" in terms of the impact of subprime and a slowing economy, Suskind said.

And confirming the market's expectations, the National Association of Realtors said that U.S. home prices will probably fall this year, for the first time in at least 38 years. In its monthly housing outlook, the real estate industry group said tighter lending standards will cut into home sales even further than had been projected, driving prices lower.

Homebuilding stocks were again falling, with the Philadelphia Housing Sector Index closing lower, dented by the likes of Lennar Corp. , Toll Brothers Inc. and KB Home .

Other markets

Bonds fell after the Fed's minutes, with the benchmark 10-year Treasury bond erasing earlier gains to finish down 1/32 at 99 7/32, yielding 4.726%.

The dollar gained slightly against most rivals, while the British pound was higher on reports of a possible rule change that would allow foreign profits by U.K. multinationals to be repatriated without tax.

Crude oil futures rose 12 cents to close at $62.01 a barrel following the release of bullish weekly energy supply data.

Gold futures rose 20 cents to $681.70 an ounce. Among miners, Gold Fields Ltd. rose 0.7%, erasing earlier gains after the South African firm said it has not been approached by a bidder, as was suggested by a Bloomberg report.

Corporate news

Chevron said it expects results in the quarter to benefit from a $700 million gain on the sale of its interest in manufacturing assets in the Netherlands, partially offset by the effects of lower refinery utilization. In the first two months of the first quarter, Chevron said combined U.S. liquids and natural gas production fell 3% when compared with the fourth quarter, while combined international liquids and natural gas production fell 1%.

Royal Dutch Shell agreed to pay $353 million to European investors to settle a lawsuit over its restatement of proved oil reserves in 2004.

Costco Wholesale said it's hiking its quarterly dividend 12% to 14.5 cents a share.

DaimlerChrysler is sending an executive to New York to meet bidders for its Chrysler arm -- but Kirk Kerkorian is not on the invited list, The Wall Street Journal reported. Meanwhile, The Globe and Mail reported that Magna International will team up with Onex for a Chrysler bid.

The Journal also reported that the Nasdaq Stock Market is in talks to buy the Philadelphia Stock Exchange. The Philly exchange, known for options trading, is worth around $250 million to $300 million.

Thomas H. Lee Partners and Bain Capital may increase their $27 billion offer for Clear Channel Communications , according to a report in The New York Post.

By Nick Godt