Fed leaves key rates unchanged; rally fades

By Charley Blaine and Elizabeth Strott

The Federal Reserve decided today to leave its two key rates alone in a gamble that helping a slowing economy now is more important than tackling the inflation pressures of rising energy and commodity prices.

Inflation is a problem, the Fed said, and traders saw that as a promise that the central bank may raise rates before long.

Stocks initially jumped on the news, but the rally slipped in the last hour of trading on a rebound in crude oil, a faded rally in financial stocks and a big selloff in aerospace giant Boeing (BA, news, msgs).

The Dow Jones industrials, up as much as 117 points at 3 p.m. ET, fell back to a gain of just 4 points, or 0.04%, at 11,812. The Nasdaq Composite Index, however, was up 33 points, or 1.4%, to 2,401, and the Standard & Poor's 500 Index was up 8 points, or 0.6%, to 1,322.

The Dow's fade is misleading, however; 22 of the 30 stocks were higher on the day, led by Microsoft (MSFT, news, msgs), up 2.2% to $28.35. (Microsoft is the publisher of MSN Money.

But Boeing, down 6.9% to $69.64 after Goldman Sachs downgraded the stock to "sell," American Express (AXP, news, msgs), off 2.8% to $40.94, and General Motors (GM, news, msgs), down 2.9% to $12.81, subtracted nearly 69 points from the Dow by themselves. Boeing's close was its lowest since January 2006.

Technology, supermarkets and health care stocks were the market leaders.

After the bell, shares in BlackBerry maker Research In Motion (RIMM, news, msgs) tumbled 7.3% to $131.90 from a regular close of $142.34 after earnings missed Wall Street estimates by a penny. Shares of database developer Oracle (ORCL, news, msgs) also moved lower after the company's profit outlook for the first quarter disappointed investors.

Late today, The Wall Street Journal said that Anheuser-Busch (BUD, news, msgs) is prepared to reject InBev's (INB, news, msgs) unsolicited $46.35 billion acquisition offer as early as this week, setting the stage for a hostile takeover battle for America's largest brewer.

Anheuser-Busch shares were up 1% to $61.76 in regular trading today and down slightly to $61.60 in after-hours trading.

While financials fell back at the close, gains in such key technology stocks as Microsoft, Apple (AAPL, news, msgs) and Qualcomm (QCOM, news, msgs) helped tech stocks.

Along with the 22 Dow gainers today, 375 S&P 500 stocks had gains, as did 86 stocks in the Nasdaq-100 Index ($NDX.X), which finished up 30 points, or 1.6%, to 1,934.

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The Fed and its big bet

The Fed, meanwhile, held its key federal funds rate at 2% -- the level since April 30. It also left its discount rate at 2.25%.

Today's decision had been telegraphed by Fed officials, especially Chairman Ben Bernanke.

While the central bank said economic activity "continues to expand, partly reflecting some firming in household spending," there are problems.

"Labor markets have softened further," the statement said, "and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters."

But, the Fed said, "the upside risks to inflation and inflation expectations have increased."

The federal funds rate is what banks charge each other for overnight loans and forms the basis for most U.S. interest rates. The discount rate is what the Fed charges financial institutions for short-term loans.

The Fed is making two big bets with today's decision:

• Oil and other commodity price increases will moderate in coming months.

• The billions of dollars that the Fed has pumped into the economy -- plus tax rebate checks -- will boost investment and consumer spending.

However, the Fed's statement conceded that there are few signs that either is occurring yet. That may be why it thinks the risks of inflation are rising -- and why traders see a rate increase coming.

It is anyone's guess when the Fed might raise rates. Trading in futures on federal funds suggest an increase to 2.25% might come in October or December.

Crude is lower but rebounds off lows

Crude oil closed at $134.55 a barrel, down $2.58 from Tuesday. But it had been as low as $131.95. Typically, when oil prices rise, stocks fall back. Natural gas closed at $12.75 per million British thermal units, down nearly 2% from Tuesday.

Crude oil is up more than 40% so far this year and more than 7.5% in June alone. Natural gas futures are up 74% on the year and 11% in June.

Crude's rise has been driven by global demand, a falling dollar and continued geopolitical tensions. Nationally, gasoline is over $4 a gallon for the first time, gutting auto and truck sales and threatening the viability of nearly every U.S. airline.

One reason for oil's rebound: Arjun Murti, the Goldman Sachs analyst who last month said oil may rise to between $150 and $200 a barrel within two years, increased his price forecasts because production is failing to keep up with demand, Bloomberg News reported.

U.S. benchmark West Texas Intermediate crude oil may average at $118 a barrel this year, higher than an earlier forecast of $108 a barrel on May 5, Goldman analysts led by Murti wrote in a report dated June 18. Oil futures in New York have averaged $110.31 a barrel so far this year. The price was also raised for 2009 to $140 from $110, and for 2010 to $150 from $120.

Energy prices -- New York close

	Wed.	Tues.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$134.55	$137.00	-$2.45	5.65%	40.19%
Heating oil (per gallon)	$3.7492	$3.8136	-$0.0644	2.25%	41.51%
Natural gas (per million BTU)	$12.7530	$13.0110	-$0.2580	8.97%	70.43%
Unleaded gasoline (per gallon)	$3.3941	$3.4635	-$0.0694	1.37%	36.27%

Research in Motion, Oracle outlooks disappoint

BlackBerry maker Research In Motion reported a higher first-quarter profit on Wednesday, but the results and outlook fell short of analyst expectations and its shares dropped sharply in after-hours trading.

RIM earned $482.5 million, or 84 cents a share, in the quarter ended May 31, up from $223.2 million, or 39 cents a share, a year ago. The company said that revenue surged to $2.24 billion -- up 107% from a year ago. It added 2.3 million subscribers, about 100,000 more than it expected.

But while the per-share profit came within the outlook the company gave in April, it missed analyst expectations by 1 cent, Reuters said.

The problem may well be that way too many investors had bought the stock expecting much more. Research In Motion is up 25% in 2008 -- and, because the shares slumped early in the year, 52% just since the end of January.

"The numbers in fact look perfectly fine in every respect except one," said Duncan Stewart, president of Duncan Stewart Asset Management in Toronto. "It appears as if they are forecasting earnings for the next quarter to be slightly lower than the consensus estimates. Every other metric is better."

Oracle shares were off 4.1% to $21.62 in after-hours trading from a regular close of $22.55. The selling began when the company projected first-quarter earnings at 26 to 27 cents a share; Wall Street has been expecting at least 27 cents.

Fourth-quarter net income rose 27% to $2 billion, or 39 cents a share, up from $160 million, or 31 cents, a year ago. Revenue after adjustments rose 24% from a year earlier to $7.28 billion, beating the average analyst estimate of $6.93 billion.

Sales of new software licenses climbed 27% to $3.14 billion from $2.48 billion. New software licenses are a key indicator of future results because customers also sign maintenance contracts that typically cost 20% of the product price per year. Customers may also expand the number of workers using a program that they have already purchased.

"These are strong results and evidence that Oracle's hard-charging sales culture and ever more diversified product line-up is paying off," said analyst Andy Meidler at Edward Jones.

Nike says U.S. orders are flat

Nike (NKE, news, msgs) shares were down 4.5% to $63 a share from a regular close of $65.97 because sales growth in the United States was weak.

The athletic equipment-and-apparel maker said it earned $490.5 million, or 98 cents a share, in its fiscal-fourth quarter, up 12% from $438 million, or 86 cents a share, a year ago. Earnings were 2 cents ahead of Wall Street estimates. Revenue of $5.1 billion was up 16%; analysts had expected $4.95 billion.

But the company said advanced orders for goods through November were flat. Orders globally, however, were up 11%, with European orders up 10% and Asian orders up 31%.

Short hits from the markets -- 4 p.m.

	Wed.	Tues.	Chg.	Month chg.	YTD chg.
Treasurys
13-week Treasury bill	1.760%	1.795%	-0.035	-4.86%	-43.95%
5-year Treasury note yield	3.541%	3.536%	0.005	3.93%	2.49%
10-year Treasury note yield	4.115%	4.105%	0.010	1.71%	1.98%
30-year Treasury bond yield	4.657%	4.658%	-0.001	-1.06%	4.44%
Currencies
U.S. Dollar Index	73.290	73.600	-0.310	0.47%	-4.44%
British pound in dollars	$1.9759	$1.9720	0.0039	-0.37%	-0.67%
Dollar in British pounds	£0.5061	£0.5071	-0.0010	0.37%	0.68%
Euro in dollars	$1.5679	$1.5574	0.0105	0.77%	7.28%
Dollar in euros	€ 0.6378	€ 0.6421	-0.0043	-0.76%	-6.78%
Dollar in yen	107.81	107.80	0.01	1.34%	-3.61%
Canadian dollar in U.S. dollars	$0.991	$0.989	$0.0029	-1.55%	-0.15%
U.S. dollar in Canadian dollars	$1.009	$1.013	-$0.0033	1.58%	0.15%
Commodities
Gold	$882.30	$891.60	-$9.30	-0.56%	5.29%
Copper	$3.7730	$3.7865	-$0.01	4.63%	24.07%
Silver	$16.6070	$16.7390	-$0.13	-1.53%	11.31%
Corn	$7.3000	$7.1250	$0.18	21.82%	60.26%
Crude oil (NYMEX) (per barrel)	$134.55	$137.00	-$2.45	5.65%	40.19%

Barclays to boost capital; UBS hires Lazard

British bank Barclays (BCS, news, msgs) this morning said that it plans to raise capital by $8.85 billion by issuing new shares, a move to help offset losses related to the mortgage-market mess. The biggest investor in the new offering will be Qatar Investment Authority, with Qatar's government holding company, Challenger, also investing in Barclays. Japan's Sumitomo Mitsui Banking Corp. and China Development Bank will also participate.

Barclays has "done well in our view to raise significant amounts of capital on these terms," said analysts at Deutsche Bank.

Shares of Barclays rose 4.5% to $25.81 this afternoon.

Meanwhile, Swiss bank UBS (UBS, news, msgs) has hired Lazard to conduct a strategic review of its businesses, The New York Post reported. UBS has raised $28 billion in capital and has written down $38 billion on bad bets related to subprime-mortgage securities.

Separately, rumors circulated Tuesday that British bank HSBC (HBC, news, msgs) was interested in UBS.

UBS shares rose 3.2% to $22.73 in New York today.

New-home sales, mortgage applications fall

New-home sales fell in May from the prior month, according to a report from the Commerce Department.

Sales of new homes fell 2.5% to a seasonally adjusted annual rate of 512,000 units last month. Economists had expected a 2.1% drop in May.

Sales rose an unexpected 3.3% in April.

New-home sales are down a whopping 40.3% from May 2007.

The number of homes on the market hit a three-year low of 453,000, representing a 10.9-month supply.

A report from the National Association of Realtors showed a 9.3% decline in mortgage applications last week. Applications fell 25.7% from the same week last year.

Jabil Circuit's big earnings report

Electronic parts manufacturer Jabil Circuit (JBL, news, msgs) said it earned $38.4 million, or 19 cents per share, in its fiscal third quarter -- a huge jump from the $6.2 million, or 3 cents per share, the company earned in the same period last year. Excluding items, Jabil earned 26 cents per share, ahead of analysts' estimates of 20 cents.

Jabil shares jumped 15.6% to $16.57 on the day, tops among S&P 500 stocks.

Jabil also increased its fiscal-fourth-quarter forecast to between 21 cents and 25 cents per share, or adjusted earnings of 29 to 33 cents per share.

The Street is looking for earnings of 29 cents per share.

Slowdown helps Olive Garden and Red Lobster

Americans hit by the weak economy but who still wanted to dine out turned to the Olive Garden, Red Lobster and LongHorn Steakhouse.

Result: Shares of Darden Restaurants (DRI, news, msgs), which owns all three chains, were up 6.8%, fifth-best among S&P 500 stocks, as the company surprised Wall Street with its fiscal-fourth quarter results.

Darden said it earned $103.3 million, or 72 cents per share, up 5% from $98.5 million, or 67 cents per share, a year ago.

Sales jumped 25% to $1.8 billion. The company also increased its quarterly dividend by 2 cents to 20 cents per share.