Weak growth weighs on stocks; all eyes on Bernanke

0
12

Stock indexes fell early Friday after the government said the U.S. economy grew more slowly this spring than previously estimated.

Bigger news for traders will come in a speech from Federal Reserve Chairman Ben Bernanke. Many hope he will signal some kind of plan to stimulate economic growth.

Many economists doubt Bernanke will unveil any new policy. That might trigger a sell-off, because most of the market’s gains this week were driven by optimism about possible plans by the central bank.

“All of the trading today is going to be centered on the chairman’s comments, and I’m a little fearful that there are a lot of expectations built in that I don’t think Bernanke can deliver on,” said Jack Ablin, chief investment officer at Harris Private Bank.

The U.S. economy grew in the April-June quarter at a meager 1 percent annual rate, the Commerce Department said earlier Friday. That’s lower than its previous estimate of 1.3 percent. The data renewed concerns that the U.S. might be headed for another recession. Nine of the past 11 recessions since World War II have been preceded by a period of growth of 1 percent or less.

The Dow is down 99 points, or 0.9 percent, at 11,050 in early trading. The S&P 500 is down 11, or 1 percent, at 1,147. The Nasdaq is down 17, or 0.7 percent, at 2,401.

The Fed has already pledged to keep short-term interest rates low until mid-2013. Low rates make higher-risk bets such as stocks more attractive. At last year’s conference in Jackson Hole, Wyo., Bernanke signaled that the central bank would buy more government bonds to lower long-term interest rates. Stocks rose steadily during the period when the Fed bought up $600 billion of Treasurys.

The government lowered its estimate for economic growth in the April-June quarter because of fewer exports and weaker growth in business stockpiles. That means the economy expanded only 0.7 percent in the first six months of the year, its worst pace since the recession ended in June 2009.

The yield on the 10-year Treasury note fell to 2.15 percent from 2.24 percent late Thursday. Before the growth report, the yield was 2.19. Bond yields fall as their prices rise.

Demand for Treasurys has been strong in part because of instability in Europe. In the past year, a sovereign-debt crisis in Greece has weighed on continents’ economic power houses, Germany and France.

Germany has balked at proposals to bulk up bailout efforts for Greece, Portugal and Ireland. A group led by Finland is demanding collateral on the bailout loans to Greece. The move shows growing divisions between countries that use the euro. Greece can’t afford to set aside collateral for every nation participating in the bailout. Finland’s move could scuttle the plan.

Greek bonds have fallen to record lows this week on fears that the bailout will fall apart and the nation will default.