March 25, 2023

Breathing Room for Emerging Markets Watching Money Flee

JAKARTA, Indonesia — When the Asian financial crisis hit in 1997, sales plummeted 95 percent and stayed down for six months at the IGP Group, Indonesia’s dominant manufacturer of car and truck axles. Four-fifths of the company’s workers lost their jobs.

When the global financial crisis began in 2008, IGP’s sales briefly dropped nearly one-third, and a quarter of the employees were put out of work.

The latest downturn, which began in early August, has been much more modest. IGP’s axle shipments are down 10 percent in the last month from a year ago. The company’s work force has barely shrunk, to 2,000 from 2,077 at the end of July, though IGP plans to reach 1,900 by the end of this year.

“These are challenging times, but I don’t think they will be the same as in 2008 or 1998,” Kusharijono, IGP’s operations director, who uses only one name, yelled over a clanking, cream-colored assembly line here for minivan rear axles.

From Indonesia and India to Turkey and Brazil, capital flight from developing economies to the United States is already causing hardship for millions of businesses and workers. More was expected if the Federal Reserve decided to retreat from its economic stimulus campaign of buying billions of dollars in bonds each month.

That it decided on Wednesday not to stop may relieve some companies, government leaders and economists who worried that rising interest rates in the United States would draw tens of billions of dollars out of emerging markets and cause local currencies to fall further against the dollar.

Investors have been moving money into dollar-based investments that offer higher yields.

But the Fed’s announcement Wednesday afternoon took currency traders by surprise, and the dollar plunged against major currencies. The dollar fell a little more than 1 percent against the euro and the yen after the announcement, giving companies in the developing economies a little more breathing room. On Thursday, currencies in Thailand, Indonesia, the Philippines and Malaysia, which have fallen sharply in recent months, headed higher, with the Indonesian rupiah gaining about 1.5 percent against the dollar by late morning in Asia.

The economic slowdowns in the developing economies seem less severe so far than in other recent downturns. While previous exoduses by investors from volatile emerging markets have caused waves of bank failures, corporate bankruptcies and mass layoffs, the latest retrenchment has been much milder so far. That partly reflects the belief that when the Fed does move, it will scale back its bond purchases very gradually, business leaders and economists around the world said in interviews this week. The effects have also been limited partly because banks, companies and their regulators in many emerging markets have become much more careful about borrowing in dollars over the last two decades, except when they expect dollar revenue with which to repay these debts.

In 1997 and 1998, “the whole problem began with the banking sector. Now I think the banking sector is much better,” said Sofjan Wanandi, a tycoon who is the chairman of the Indonesian Employers’ Association and part owner of IGP.

Trading in currency and stock markets seems to suggest that some of the worst fears over the summer are starting to recede. The Brazilian real has recovered about 8 percent of its value against the dollar since Aug. 21 and a little over a third of its losses since the start of May, when worries began to spread about the vulnerability of emerging markets to a tightening of monetary policy. Stock markets from India to South Africa have rallied from lows in late August, with Johannesburg’s market up 14.7 percent since late June after a swoon earlier than most emerging markets.

“While the Fed hasn’t started the tapering process as yet, there has been a considerable withdrawal of money in the emerging markets and especially in India since May. In my opinion, the major effect has already taken place,” said Sujan Hajra, the chief economist at AnandRathi, an investment bank based in Mumbai.

One lingering question is how much inflation will accelerate in emerging markets. Many of their industries depend heavily on commodities like oil that are priced in dollars.

Keith Bradsher reported from Jakarta, Simon Romero from Rio de Janeiro and Ceylan Yeginsu from Istanbul. Neha Thirani Bagri contributed reporting from Mumbai.

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Summers Seen as Costly in Political Terms

Mr. Merkley had patchy cellphone reception at the Pendleton Round-Up, a rodeo in eastern Oregon. Mr. McDonough was dealing with other business and could not be reached, so Senator Merkley left a message with his staff.

That spotty phone call — reflecting the revolt of a number of prominent Democrats, many of them from the liberal wing of the party, but not limited to it — helped to seal Mr. Summers’s fate. Not even an official nominee yet, Mr. Summers, a former Treasury secretary under President Bill Clinton and a key architect of Mr. Obama’s economic stimulus program, faced long odds in winning Senate confirmation. On Sunday, Mr. Summers pulled out of contention, citing a potentially “acrimonious” battle that could harm the economy and Mr. Obama’s presidency.

Senate Democrats did not “want the fight,” said one Congressional aide, speaking on condition of anonymity. “They don’t want another fight that divides Democrats, and brings back to the forefront a bunch of the issues we dealt with during the crisis and the bailout.”

The aide continued: “And they don’t want to spend the political capital to get this guy through.”

Ultimately, they got their way.

In its search for a new Fed chairman, the White House had for months centered on Mr. Summers, who smarted after being passed over for the position when Mr. Obama decided four years ago to name Ben S. Bernanke to a second term as chairman. This time, with Mr. Obama determined to replace Mr. Bernanke after eight years in office, the White House has weighed other candidates, including Janet L. Yellen, the Fed’s vice chairwoman, and Donald L. Kohn, a former Fed official. But many top economic policy officials in the administration considered Mr. Summers, who worked intimately with them during the financial crisis, by far the best candidate.

The White House assigned Rob Nabors, a deputy chief of staff, to work with him, and recruited two former campaign consultants, Jim Messina and Stephanie Cutter, to talk him up to the press.

But a number of Senate Democrats, rather than waiting for the nomination process to play itself out, raised concerns as soon as his name surfaced this summer: his reputation for being a divisive colleague, his perceived role in coddling Wall Street and the lax regulation of derivatives, and complaints that he did not support smaller community banks as much as the nation’s giant financial institutions, among other issues.

In July, those senators strongly signaled to the White House that they preferred Ms. Yellen. Senator Sherrod Brown of Ohio drafted and circulated a letter of support for her, which 20 colleagues signed, including Richard J. Durbin of Illinois, the No. 2 Democrat. “It wasn’t a subtle maneuver,” one aide said.

A diffuse group of Democratic senators opposed to Mr. Summers’s nomination might not have scuttled it. But the lawmakers were concentrated on the banking committee, where Fed candidates must win a majority vote before they can go for a full Senate confirmation. The senators and staff members on the committee batted around the pros and cons of Mr. Summers for weeks, at times airing their concerns with a White House that some officials described as receptive and some as dismissive.

After returning from the long Congressional summer recess, Mr. Merkley made an attempt to parse out his colleagues’ positions on Mr. Summers during caucus lunches. He found that as many as four were opposed to, or queasy about, the potential nomination.

Mr. Merkley and Mr. Brown were strong no votes. Senator Elizabeth Warren of Massachusetts had misgivings and preferred Ms. Yellen, though her colleagues were not sure how she would vote in committee.

In time, two more senators admitted their concerns. Jon Tester of Montana decided he would oppose Mr. Summers. And Heidi Heitkamp of North Dakota expressed some misgivings about Mr. Summers, a Senate aide confirmed, though those concerns were never aired in public.

The Senate Banking Committee consists of 12 Democrats and 10 Republicans. Every Democrat in the no column would have to be balanced with a yes vote from a Republican to win the support of the committee. By Mr. Merkley’s count, Mr. Summers might have needed as many as five Republican votes.

For the White House, that would have left two options, Senate aides said, both unpalatable. The first would have been to lean on the Democratic “no” votes, asking members to agree to pass Mr. Summers out of committee even if they intended to vote against him on the Senate floor. But the White House had not laid the groundwork for such a strategy. Some Democratic offices had not heard from White House representatives about the nomination at all.

The second option would have been to barter for Republican votes. Aides described that strategy as possible: many Republicans would have been willing to vote for Mr. Summers, they said, for a price. But handing the Republicans leverage in the midst of the debt ceiling and budget debates would have weakened the White House’s hand.

White House advisers, including Mr. McDonough and Valerie Jarrett, were opposed to any such trade-offs. Mr. Summers, with his own well-honed political antenna, picked up the signals from Washington.

Ms. Yellen has again become the presumptive front-runner, as she had been for much of the spring. Senate Democrats, for their part, have made their thoughts on her known. Despite lukewarm Republican support, she would almost certainly sail out of committee and clear a full Senate confirmation vote, too.

“I don’t think it’s any secret that Larry was not my first choice,” Senator Warren said in an interview on MSNBC on Monday. “I think the president is taking his time, he’s thinking through this and we’re having a good and thoughtful discussion, which is a good thing to have in Washington.”

Jeremy W. Peters and Binyamin Appelbaum contributed reporting.

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Rising Rates Did Little to Curb July Home Sales

The National Association of Realtors said on Wednesday that existing-home sales rose 6.5 percent to a seasonally adjusted annual rate of 5.39 million units.

The increase in home sales exceeded Wall Street’s expectations and could make the Federal Reserve more comfortable with its plans to start winding down its economic stimulus program. Mortgage rates have been climbing in anticipation that the Fed will soon taper its stimulus.

While some of July’s surge in home resales may reflect buyers rushing to lock in mortgage rates before they rise further, the data inspired some confidence that the housing recovery was strong enough to withstand higher borrowing costs.

“The basic take-away is that the rise in mortgage rates has been manageable,” said Ryan Sweet, an economist with Moody’s Analytics.

After being devastated by a financial crisis and the 2007-9 recession, the home market appeared to turn a corner early last year, helped by steady job creation and extremely low interest rates.

July’s increase was the fastest pace of sales since November 2009, when a home buyer tax credit was expiring. Such a strong rate of growth could prove temporary, however.

Applications for mortgages to buy homes rose slightly last week, but they have fallen sharply since the spring and remain near a seven-month low, a separate report from the Mortgage Bankers Association showed.

“We expect to see some moderation in activity in the coming months, as higher mortgage rates take some of the air from the recovery,” said Millan Mulraine, an economist at TD Securities.

Since early May, interest rates for 30-year mortgages have risen more than a percentage point. Last week, the average rate for a 30-year mortgage climbed 12 basis points, or hundredths of a percent, to 4.68 percent while refinancing activity slumped, the Mortgage Banker Association said.

The Fed is currently buying $85 billion a month in Treasury and mortgage-backed bonds, but it is expected to scale back purchases as early as September.

Economists polled by Reuters had expected home resales to increase to an annual rate of 5.15 million units in July.

The median price for a previously owned home rose 13.7 percent in July from a year earlier to $213,500. The inventory of unsold homes on the market rose 5.6 percent, for an unchanged 5.1-month supply.

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No Clarity From Fed on Stimulus, Upsetting Wall Street

The confusion over exactly when the Federal Reserve will begin scaling back its huge economic stimulus efforts only deepened Wednesday, with the release of a summary of the deliberations at the central bank’s last meeting in late July.

There were hints that some members of the divided committee are comfortable with beginning to ease the Fed’s program of buying $85 billion a month in government bonds and mortgage securities as soon as their next meeting in mid-September. But there were also indications that another camp within the policy-setting group favors waiting until December, or even later.

The only thing that was clear is that the Fed intends to keep Wall Street — and the rest of the world — guessing.

For one thing, a number of participants at the Federal Open Market Committee raised concerns that economic growth in the second half of the year would prove disappointing, which would tend to encourage them to delay any changes in their current policy,

In June, the Fed’s chairman, Ben S. Bernanke, indicated the stimulus program could be scaled back this year if economic data continued to be relatively positive. But he avoided setting any target dates to begin what many investors refer to as the Fed’s coming “taper.”

The minutes of the meeting did little to clarify the issue. While “a few members emphasized the importance of being patient and evaluating additional information before deciding on any changes to the pace of asset purchases,” a few others “suggested that it might soon be time to slow somewhat the pace of purchases,” the summary of the July 30-31 meeting said.

As a result, longtime Fed watchers came up with analyses so different from one another that it seemed as if they might be reading different documents.

In a report issued shortly before the stock market closed, IHS Global Insight concluded that “the Fed is unlikely to taper at the mid-September meeting,” and predicted a move in December instead.

One minute later, experts at Barclays offered their view that the minutes of the July meeting “do not alter our outlook for a tapering of purchases in September.”

Other institutions, like Goldman Sachs, hedged their bets. “Over all, we think this information is consistent with September tapering, but this is by no means certain,” the firm said.

With Mr. Bernanke all but certain to step down as Fed chairman early next year, most analysts expect the Fed to initiate the tapering process before he leaves office, and to do so at one of the meetings remaining this year — either September or December — where Mr. Bernanke is scheduled to conduct a news conference after the session. The committee will also meet in October, but Mr. Bernanke is not scheduled to address the media then.

On Wall Street, investors were just as uncertain as economists. After selling off immediately after the minutes were released at 2 p.m., stocks briefly rallied, only to fall back more deeply into negative territory by the end of the trading day. The most widely followed measure of the stock market among professionals, the Standard Poor’s 500-stock index, fell 9.55 points, or 0.58 percent, to 1,642.80. The Dow Jones industrial average lost 105.44 points, or 0.7 percent, to 14,897.55. The Nasdaq composite index declined 13.80 points, or 0.38 percent, to 3,599.79.

Bond prices also dropped after the release of the Fed’s minutes, sending interest rates higher. The price of the Treasury’s 10-year note fell 20/32, to 96 20/32, while its yield rose to 2.89 percent, its highest level since July 2011. It was at 2.82 percent late Tuesday. While the difference between a start to the tapering on bond purchases in September vs. December might not seem very significant to most people, the Fed’s decision-making is already affecting such things as the value of 401(k) retirement accounts, mortgage rates for home buyers and currency values in many emerging markets of the world.

By pumping $85 billion a month into the economy through the bond purchases, the Fed has helped push up prices for many kinds of assets, especially stocks. The indications that the infusions might soon come to an end has generated increased volatility both on Wall Street and in stock exchanges around the world.

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European Central Bank Keeps Key Rate at 0.5%

“The picture seems to be better from all angles than it was a year ago,” Mr. Draghi said at a news conference after the E.C.B.’s decision to leave its benchmark interest rate unchanged at a record low of 0.5 percent.

Mr. Draghi was referring to questions about the euro zone’s integrity, though, and less to the immediate prospects for an end to recession and record unemployment.

The fragile state of the euro zone economy means that any decision to raise interest rates is still a long way off, Mr. Draghi indicated. Policy makers expect “the key E.C.B. interest rates to remain at present or lower levels for an extended period of time,” Mr. Draghi said, repeating a pledge he first made a month earlier.

In London on Thursday, Britain’s central bank, the Bank of England, also decided to hold interest rates steady.

The Bank of England held its interest rate at 0.5 percent, already a record low, and made no change to its program of economic stimulus, leaving the target at £375 billion, or about $570 billion. In Britain, which does not use the euro, the government had reported last week that the economy grew 0.6 percent in the second quarter from the previous quarter and that all main industries were reporting faster growth for the first time in three years.

For Mr. Draghi, it has been about a year since he defused fears of a euro zone breakup by promising to do “whatever it takes” to keep the common currency together. That expression of resolve helped check the euro zone’s decline, but was not enough to push the region onto a growth pathagain.

Asked to take stock of the state of the euro zone today, Mr. Draghi listed numerous improvements, including stronger exports from countries like Spain and Italy; lower market interest rates for government bonds; and progress by political leaders in reducing their deficits and improving economic performance.

“We are seeing possibly the first signs this significant improvement in confidence and interest rates is finding its way to the economy,” Mr. Draghi said.

But he took a more cautious view than many analysts of recent surveys of business sentiment, which have raised hopes that the euro zone economy could be emerging from recession. The surveys “tentatively confirm the expectation of a stabilization of economic activity at low levels,” Mr. Draghi said.

At least one analyst detected a nuanced shift in Mr. Draghi’s assessment.

“If there was any change at all, his description of economic prospects sounded slightly more optimistic,” Jörg Krämer, chief economist at Commerzbank in Frankfurt, said in a note to clients.

“Slightly” is the key word. Credit for businesses remains scarce, Mr. Draghi noted, and the labor market is weak. Unemployment in the euro zone was stuck at a record high of 12.1 percent in June, according to official data published Wednesday, though there was an infinitesimal decline in the total number of jobless people: 24,000 fewer people were out of work in May out of a total of 19 million.

Even if the euro zone economy does emerge from recession soon, economists say, growth will be weak and it will take years before joblessness in countries like Spain — where more than a quarter of the work force is unemployed — returns to tolerable levels.

With E.C.B. interest rates already at record lows, Mr. Draghi has in recent months been trying to use his powers of persuasion to talk down market rates and make credit more available to businesses and consumers. Last month, he broke with precedent by promising to keep rates low for an extended period. Before then, the E.C.B. had refused to offer so-called forward guidance.

Julia Werdigier contributed reporting from London.

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Rally Continues, Fanned by the Fed

The stock market, which has been marching higher for a week, got extra fuel on Thursday after the chairman of the Federal Reserve said the central bank would keep supporting the economy.

The Dow Jones industrial average and Standard Poor’s 500-stock index surged to nominal highs, and the yield on the 10-year Treasury note continued to decline.

Stocks from companies that benefit most from a continuation of low interest rates, like home builders, recorded some of the biggest gains.

The Fed chairman, Ben S. Bernanke, made the comments in a speech late Wednesday after American markets had closed, saying the economy needed the Fed’s easy-money policy “for the foreseeable future.”

The economy needs help because unemployment is high, Mr. Bernanke said. His remarks seemed to ease investors’ fears that the central bank would pull back on its economic stimulus too quickly.

The Fed is buying $85 billion a month in bonds to keep interest rates low and to encourage spending and hiring.

Stock index futures rose overnight. Stocks surged when the market opened on Thursday and stayed high for the rest of the day.

“It’s back to the old accommodative Fed, so the markets are happy again,” said Randy Frederick, managing director of Active Trading and Derivatives at the Schwab Center for Financial Research.

The market pulled back last month after Mr. Bernanke laid out a timetable for the Fed to wind down its bond-buying program. He said the central bank would most likely ease back on its monthly purchases if the economy strengthened sufficiently.

On Thursday, the S. P. 500 index jumped 22.40 points, or, 1.4 percent, to 1,675.02, surpassing its previous high close of 1,669 from May 21. The index rose for a sixth consecutive day, its longest streak in four months.

The Dow rose 169.26 points, or 1.1 percent, to 15,460.92, above its own previous high of 15,409, set May 28.

The Nasdaq composite rose 57.55 points, or 1.6 percent, to 3,578.30.

In government bond trading, the benchmark 10-year Treasury note increased 27/32 to 92 29/32; its yield fell to 2.57 percent, from 2.67 percent on Wednesday. The yield was as high as 2.74 percent on Friday after the government reported strong hiring in June. Many traders took that report as a signal that the Fed would be more likely to slow its bond purchases sooner rather than later.

The Fed has also said it plans to keep short-term rates at record lows, at least until unemployment falls to 6.5 percent. Mr. Bernanke emphasized on Wednesday that the level of unemployment was a threshold, not a trigger. The central bank might decide to keep its benchmark short-term rate near zero even after unemployment falls that low.

Corporations began reporting earnings this week for the second quarter, which ended 11 days ago. SP Capital IQ forecast that companies in the S. P. 500 would report average earnings growth of 3 percent compared with the second quarter last year.

The price of gold gained for a fourth straight day, climbing $32.70, or 2.6 percent, to $1,280.10 an ounce, after falling close to a three-year low. Gold is rising because the prospect of continued stimulus from the Fed could weaken the dollar and increase the risk of inflation. That, in turn, increases the appeal of gold as an alternative investment.

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E.U. Proposes Giving Countries Time to Cut Deficits

But the Brussels-based European Commission also cautioned against the temptations of debt-fueled economic stimulus, stressing in its annual review of economic policy recommendations that Europe instead needs to dismantle rigid labor regulations and remove other “structural” obstacles to growth.

The mixed message marked Europe’s latest response to an economic crisis that has led to six consecutive quarters of negative growth, left even previously robust northern economies battling recession and pushed overall unemployment to nearly 12 percent and to more than twice that in Spain and Greece.

“The fact that more than 120 million people are at risk of poverty or social exclusion is a real worry,” said José Manuel Barroso, the president of the European Commission, at a news conference. “There is no room for complacency,” he said, describing the situation in some countries as a “social emergency.”

Addressing concerns that Europe has pushed too hard for spending cuts, Mr. Barroso — using an economists’ euphemism for austerity — said “we now have the space to slow down the pace of consolidation.” But he also warned that “growth fueled by public and private debt is not sustainable.” This, he added, is “artificial growth.”

He complained that a bitter policy debate that has often cast austerity as the enemy of growth “has been to a large extent futile and even counterproductive.”

Five year after the global financial crisis swept in from the United States, most European countries, with the notable exception of Germany, are still stuck in economic doldrums and show scant sign of even the modest recovery achieved by the United States and Japan, which have both opted for more government-funded stimulus than Europe.

This dismal record has put champions of fiscal rigor at the European Commission under intense pressure to back off unpopular budget cuts and instead follow the prescriptions of John Maynard Keynes, the late British economist who urged that government spending be ramped up in times of crisis.

The policy recommendations announced Wednesday in Brussels don’t suggest any U-turn in policy but they do confirm a slow but steady shift away from swiftly limiting deficit spending. Olli Rehn, the commission’s senior economic policy maker, announced that seven countries would be given more time to reach a deficit target of 3 percent of gross domestic product.

France, Poland, Slovenia and Spain, he said, will be given an extra two years, while Belgium, the Netherlands and Portugal will each get an extra year.

Mr. Rehn said that Europe still needs “fiscal consolidation” in the long-run but added that its pace this year would be “half what it was last year and to some extent it will be slowed further.” The decision to give France more time, he said, was based on expectations that its socialist president, François Hollande, would push through long-stalled reforms to cut the cost of hiring workers and boost the country’s flagging competitiveness. A key part of this, Mr. Rehn said, is pension reform.

Mr. Hollande responded angrily to the commission’s proposals, particularly those concerning the pension system. “The European Commission cannot dictate to us what we have to do,” French media quoted the president as saying. Mr. Hollande insisted that the shape of any pension reform, a highly contentious issue in France, “is up to us, and to us alone.”

France’s legislature earlier this month enacted a modest trim of labor regulations but Mr. Hollande, under fire from within his own party and deeply unpopular with the public at large, faces an uphill struggle to implement reforms that, when attempted by his predecessors, led to large street protests and labor unrest.

The extension granted to France and others immediately raised eyebrows among some analysts, who said these countries might use them as an excuse to relax their reform efforts. “Countries are going to interpret these recommendations in self-serving ways,” said Mujtaba Rahman, the director for Europe for the Eurasia Group, a research group. “The commission argues its rules are being applied intelligently, but countries such as France will use this to argue they have prevailed on Europe to end austerity.”

Wrangling over how to best address Europe’s crisis has created deep splits, dividing richer countries from poorer ones and triggering a widespread public backlash against the European Union and established political elites in individual countries. It has also divided policymakers in Brussels.

In a remarks published Wednesday by German media, the energy commissioner, Gunther Oettinger, scoffed at assurances that France is working to get its economic house in order and said “too many in Europe still believe that everything will be fine.” France, he said, “is completely unprepared to do what’s necessary,” while Italy, Bulgaria and Romania “are essentially ungovernable.” The European Union, he added, “is ripe for an overhaul.”

Mr. Barroso, the commission president, declined to comment on Mr. Oettinger’s remarks.

Andrew Higgins contributed reporting.

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Questions Remain as Market Falls for Second Day

The stock market fell again on Thursday and the Standard Poor’s 500-stock index closed below a crucial technical level after disappointing financial forecasts from eBay and other companies cast doubt on the market’s recent strength.

The S. P. 500 ended below its 50-day moving average of 1,543.04 for the first time this year, giving more weight to analysts’ concerns that the market’s recent rally was losing momentum, particularly after two days of sharp declines this week.

The Nasdaq 100 and the Russell 2000 indexes both have closed below their 50-day averages this week, adding to the overall technical pressure on the market.

Technology led the day’s fall. Shares of eBay dropped 5.9 percent to $52.82, a day after the e-commerce company posted results and gave a disappointing earnings forecast for the second quarter. The S. P. technology sector index lost 1.4 percent.

Apple shares extended their slide from Wednesday, when the stock broke below $400 on an intraday basis for the first time since December 2011. The stock tumbled 2.7 percent to close at $392.05 on Thursday.

The CBOE volatility index, Wall Street’s fear index, gained 6.4 percent to 17.56. The VIX, as it is known, is up roughly 46 percent for the week so far. It still remains well below its recent highs, but the gains could signal a change in the market trend.

“There’s definitely technical damage,” said Bruce Zaro, chief technical strategist at Delta Global Asset Management. “I think that the period we had that had volatility tamped way down has likely ended.”

Stocks have rallied for much of the year on expectations that the American economy would continue to strengthen and that the Federal Reserve would keep its economic stimulus in place.

More recent data on the economy has been less upbeat. On Wednesday, reports showed that factory activity in the mid-Atlantic region cooled in April and that the index of leading economic indicators, a gauge of future economic activity, fell in March for the first time in seven months.

The Dow Jones industrial average slid 81.45 points, or 0.56 percent, to close at 14,537.14. The S. P. 500 dropped 10.40 points, or 0.67 percent, to 1,541.61. The Nasdaq composite index fell 38.31 points, or 1.20 percent, to 3,166.36.

After the bell, a number of prominent technology companies reported their financial results, including I.B.M., whose shares fell 4.2 percent to $198.45 in after-hours trading after its earnings missed analysts’ expectations.

After hours, shares of Google rose 2 percent after it released first-quarter results. It closed at $765.91. Shares of Microsoft shot up 2.7 percent to $29.57 after posting its results.

During Thursday’s regular session, volume was roughly 7.05 billion shares traded on the New York Stock Exchange, the Nasdaq and the NYSE MKT. In comparison, the average daily closing volume is about 6.36 billion this year.

Volume has been heavier on negative days this week, as many investors have anticipated a pullback for some time after stocks’ strong run to start the year and moved quickly to take profits.

The S. P. 500’s moving average was also the floor of the trading range during the last month, making 1,543 a crucial technical support, according to Richard Ross, global technical strategist at Auerbach Grayson.

Mr. Ross and other analysts noted that the S. P. 500 had posted negative second quarters in the last three years.

The S. P. health care sector also experienced big declines, with the UnitedHealth Group down 3.8 percent at $59.69, after the insurer lowered its 2013 revenue outlook.

Other decliners included Morgan Stanley, whose shares dropped 5.4 percent to $20.31 after the bank reported revenue from fixed-income and commodities trading fell sharply from a year earlier. Shares of Bank of America, which posted disappointing results on Wednesday, fell 2.2 percent to $11.44 on Thursday.

The earnings of companies in the S. P. 500 are expected to have risen 1.9 percent in the first quarter, up from the 1.5 percent estimate at the start of the month, based on actual results from 82 companies and estimates for the rest, according to Thomson Reuters data.

Of companies that have reported, 72 percent have topped analysts’ expectations for their earnings, but only 43.9 percent have exceeded revenue forecasts.

In the bond market, interest rates slipped. The price of the Treasury’s 10-year note rose 4/32, to 102 27/32, while its yield dipped to 1.69 percent, from 1.70 percent late Wednesday.

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Fed Is Weighing a Reaction to Stirrings of Recovery

The economy added an average of 187,000 jobs a month from September to February, slightly faster than the average monthly pace from 2004 to 2006, the best years of the last economic upswing. The government plans to release a preliminary estimate Friday morning of March job creation.

Some Fed officials have suggested in recent weeks that if economic growth continues on its present trajectory, the central bank should begin to roll back its economic stimulus campaign by the middle of the year, ahead of expectations.

But the Fed’s chairman, Ben S. Bernanke, and his allies remain wary that another surprising spring will be followed by another disappointing summer. Janet L. Yellen, the Fed’s vice chairwoman, who is viewed as a potential successor to Mr. Bernanke, reflected that caution in a speech on Thursday.

“I am encouraged by recent signs that the economy is improving and healing from the trauma of the crisis, and I expect that, at some point, the F.O.M.C. will return to a more normal approach to monetary policy,” she said, referring to the Federal Open Market Committee, which sets policy for the central bank.

For now, she said, the Fed needs to remain focused on reducing unemployment.

Ms. Yellen also commented obliquely on her own future. Asked whether the economics profession, and central banks, needed more women in positions of power, she responded that such a need was “something we’re going to see increase over time, and it’s time for that to happen.”

The Fed announced last year that it intended to hold short-term interest rates near zero so long as the unemployment rate remained above 6.5 percent. It also said that it would buy $85 billion a month in Treasury and mortgage-backed securities to accelerate the decline. By expanding its asset holdings, the Fed continuously increases the scale of its effort to stimulate the economy.

Stronger data has raised hopes that the economy is once again growing fast enough to reduce the unemployment rate, which stood at 7.7 percent in February, little changed from 7.8 percent in September. But more than 20 million Americans are unable to find full-time jobs and it is not yet clear that the recent uptick in the economy is sustainable. The yield on the 10-year Treasury note fell to 1.77 percent on Thursday, indicating that some investors are pessimistic about the economy’s prospects.

In recent months, weekly claims for unemployment benefits have declined. But the Labor Department reported on Thursday that claims spiked in the latest week to the highest level in four months, although it cautioned that the estimate was unusually imprecise because the week included Easter.

“House prices are going up more than I would have expected six months ago,” Ms. Yellen said. “I think it’s making people feel a whole lot better.” She added: “I don’t have any doubt that our policies are contributing to the lowest interest rates, whether it’s borrowing for a car or borrowing for a mortgage. I believe that that is not only caused by our policy, but our policy is contributing.”

John C. Williams, the president of the Federal Reserve Bank of San Francisco, said on Wednesday in Los Angeles that he might support a reduction in the volume of the Fed’s asset purchases by summer and a suspension of the program before the end of the year.

“I’m hopeful that the economy has finally shifted into higher gear,” said Mr. Williams, who supported the purchases last year.

Esther L. George, president of the Federal Reserve Bank of Kansas City, reiterated on Thursday her view that the Fed should scale back immediately. Ms. George cast the sole dissenting vote at the last two meetings of the Fed’s policy-making committee. She told an audience in El Reno, Okla., on Thursday that she was more concerned than her colleagues that the Fed’s efforts to suppress borrowing costs could result in financial instability and faster inflation.

Ms. Yellen and other officials, however, seem inclined to postpone any decisions. The pace of economic growth has remained weak relative to the pace of job growth. The most recent round of federal spending cuts has only just begun to show results. And Fed officials have overestimated the strength of the recovery repeatedly in recent years, only to find the economy needed still more help. Caution may now dictate doing more rather than less.

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After a Tease, Stocks End Lower

Resisting expectations of a correction, Wall Street stocks traded higher for most of Thursday, with the Dow Jones industrial average within striking distance of a record high, but at the end of the session the major indexes retreated into slightly negative territory.

Investors found reasons to keep pushing markets higher following a sharp two-day rally, despite a read on economic growth that was weaker than expected.

But at the close, the Dow Jones industrial average was down 0.2 percent, the Standard Poor’s 500-stock index fell 0.1 percent and the Nasdaq composite index lost 0.1 percent.

Earlier, the Dow had risen 0.5 percent, taking it about 16 points shy of its October 2007 closing high.

The Commerce Department said Thursday that the economy grew 0.1 percent in the fourth quarter, a weaker pace than expected, although a slightly better performance in trade led the government to scratch an earlier estimate of a contraction in gross domestic product.

Separately, the number of Americans filing new claims for unemployment benefits fell more than expected last week, suggesting the labor market recovery was gaining some traction.

“The G.D.P. revision is positive but nothing to write home about, especially since it missed estimates,” said Adam Sarhan, chief executive of Sarhan Capital in New York.

While markets suffered steep losses earlier in the week on concerns over European debt, they have since recovered, with the gains fueled by strong data and comments from Federal Reserve chairman, Ben S. Bernanke, that showed continued support for the Fed’s economic stimulus policy.

“Bulls are still leading the market with the pullback bought up quickly, but we’re in a wait-and-see period after the big move we’ve had,” Mr. Sarhan said.

So far in February, the S.P. 500 has gained 1.2 percent, the Dow is up 1.6 percent and the Nasdaq has added 0.6 percent.

Investors will also be keeping an eye on the debate in Washington over government budget cuts that will take effect starting Friday if lawmakers fail to reach an agreement on spending and taxes. President Obama and Republican Congressional leaders arranged to hold last-ditch talks to prevent the cuts, but expectations were low that any deal would be produced.

“Investors have come to the realization that sequestration isn’t the end of the world and that it will eventually be fixed,” said Oliver Pursche, president of Gary Goldberg Financial Services in Suffern, N.Y. “But going into March, the risk is that the economy slows down and disappoints investors.”

J.C. Penney shares slumped 20.9 percent after the department store reported a steep drop in sales on Wednesday. Groupon also slumped on weak revenue, with the stock off 24 percent.

Sears Holdings started the day higher, after its earnings and sales beat expectations, but then fell 3 percent.

European shares ended modestly higher, while Asian markets closed sharply ahead.

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