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On Friday, Wall Street got a warning shot from a bigger-than-expected jump in U.S. producer prices, excluding food and energy. The core Producer Price Index shot up 0.8 percent in January, the government reported. That increase -- the biggest gain since December 1998 and well above the Street's expectation for a 0.2 percent rise -- fanned inflation fears and bolstered a growing expectation that the Federal Reserve will keep raising interest rates well into 2005.
The PPI report came on the heels of Federal Reserve Chairman Alan Greenspan's remarks to Congress that interest rates were still "fairly low," a signal that they will keep rising.
"I see a weak market as investors digest the earnings news, Greenspan's testimony and the producer prices data, which is clearly inflationary," said Tim Ghriskey, chief investment officer of Solaris Asset Management.
For the week, stocks fell. The blue-chip Dow Jones industrial average ended down 0.1 percent. The Standard & Poor's 500 index finished the week down 0.3 percent and the Nasdaq ended down 0.9 percent.
Inflation pressures, higher interest rates and high oil prices will not only hurt consumer spending, but will also raise the cost of doing business, strategists said. That spells bad news for corporate profits, already headed for a slowdown in 2005.
Complete Article
Wall St Week Ahead: Inflation, Rates Eyed
Sun Feb 20, 2005 10:30 AM ET
By Anupama Chandrasekaran
NEW YORK (Reuters) - Stocks could show some weakness this week as earnings season winds down, while inflation and interest-rate worries stoke investors' concerns about future profits.
Oil prices around $48 a barrel could also keep up the pressure on the markets, strategists said.
On Monday, U.S. financial markets will be closed for the Presidents Day holiday.
Retailers Home Depot Inc. , Gap Inc. , J.C. Penney Co. Inc. and Limited Brands Inc. are scheduled to report their quarterly results in the coming week as the curtain drops on the earnings season.
On Friday, Wall Street got a warning shot from a bigger-than-expected jump in U.S. producer prices, excluding food and energy. The core Producer Price Index shot up 0.8 percent in January, the government reported.
That increase -- the biggest gain since December 1998 and well above the Street's expectation for a 0.2 percent rise -- fanned inflation fears and bolstered a growing expectation that the Federal Reserve will keep raising interest rates well into 2005.
The PPI report came on the heels of Federal Reserve Chairman Alan Greenspan's remarks to Congress that interest rates were still "fairly low," a signal that they will keep rising.
"I see a weak market as investors digest the earnings news, Greenspan's testimony and the producer prices data, which is clearly inflationary," said Tim Ghriskey, chief investment officer of Solaris Asset Management.
For the week, stocks fell. The blue-chip Dow Jones industrial average ended down 0.1 percent. The Standard & Poor's 500 index finished the week down 0.3 percent and the Nasdaq ended down 0.9 percent.
CPI ON THE RADAR SCREEN
Inflation pressures, higher interest rates and high oil prices will not only hurt consumer spending, but will also raise the cost of doing business, strategists said. That spells bad news for corporate profits, already headed for a slowdown in 2005, they noted.
In such an environment, the U.S. Consumer Price Index for January, which will give a reading on inflation at the retail price level, will be closely watched this week.
"The CPI report on Wednesday will be important as investors will be looking to see if the jump in producer prices will translate into a rise in consumer prices," said Michael Sheldon, chief market strategist at brokerage Spencer Clarke.
"If that happens, it will be a negative for the stock market as it will signal that the Fed will have to get more aggressive in raising rates to combat inflation," he added. "Further, higher prices in general and higher interest rates will weigh on consumer spending."
Both the overall CPI and the core CPI, excluding volatile food and energy prices, are expected to have risen 0.2 percent in January, according to economists polled by Reuters.
Other economic data on the week's calendar include the consumer confidence index for February from the Conference Board on Tuesday and durable goods orders for January on Thursday. Weekly oil inventory data and jobless claims figures will also get attention.
"There is a clear danger from energy prices, which have been moving back up again," said Joseph Battipaglia, chief investment officer for Ryan, Beck & Co. "Any suggestion that oil inventories are being drawn down or there are potential supply disruptions will show up right away in the oil market going up and the stock market going down."
On the New York Mercantile Exchange, crude oil for March delivery settled at $48.35 a barrel on Friday.
Oil prices are lower than crude's record high of $55.27 a barrel last October, but are still up about 12 percent so far this year.
(Wall St Week Ahead runs weekly. Comments or questions on this one can be e-mailed to: anupama.chandrasekaran(at)reuters.com)
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2 comments:
Leaving the dollar aside for the moment, the concept that inflation and budget deficits are tied was amply refuted during the nineties. Inflation fell, while deficits rose and then fell, as the economy surged and tax payments soared. The PPI figure, excluding food and energy, last Friday, once you break it down, reflected the annual price adjustments, in order of component weighting, of tobacco, alcohol, light trucks, and autos. Thus, one month does not establish a trend. Also, recent history suggests that corporations have been unsuccesful in passing along these prices to consumers, hence the disassociative behavior of the PPI figures from the CPI data.
The joker in the deck is really the dollar. If you price crude oil versus the Euro, crude prices for the continent have fallen. The repricing of crude, traded in dollars, really reflects the weak dollar and all dollar denominated commodities. This excacerbation of the dollar trade is, today, blamed on the current account deficit, or the U.S. using foreign cash to finance spending habits. This is the real academic debate that will continue.
Three global economies are growing robustly, China, India, and the U.S.(I honestly can't remember Australia's latest data, so I leave them reluctantly out due to my own ignorance). Europe is experiencing what could be best described as just a pulse, while facing significant constraints from an untenable social spending program. Japan's deflationary spiral is a global contagion with immediate impact on the Asian economies, excluding China. These influences, I feel, have more significant impact than a one time blip on the PPI.
Global deflationary pressures, strength of the U.S. economy (including it's increasing power in price constraints(think Wal-Mart and China's relationship)), and Europe's inability to grow at all, will have the most impact on the world's inflation picture. The dollar trade, vis a vis the forex markets as a whole, is trend following, traditionally. Everybody rushes from one side of the boat to the other and back again, not really due to economic realities but from following the trend, because, as some quote "the trend is your freind". This to shall pass, just a matter of "when".
P.S. Just keep in mind, "Global Yield Compression" and statistically insignificant inflation burps, as reported by news agencies with a political axe to grind, the "real" inflation picture is suprisingly bland.
Great comment thanks!
While I don't pretend to have any expertise in economics, it is a relatively new "social science". It has come a long way in the past century. The problem is that each new global situation is truly unique just because of the multiplying variables and changing values involved.
Conservative used to mean avoiding unnecessary risk. Now the economy has been twisted into a means to an end, rather than an end in itself. The more variables that are pushed to extremes, the more risk, the more likely something unexpected may occur, and the more casualties there will be among the relatively powerless.
Bush's strategy of "starving the beast" to force an eventual day of reckoning on the federal budget puts politics and social policy on the front burner at the expense of a stable economy and our children's future indebtedness. It is not only unnecessary and immoral, it serves only a few.
I hope you are right and things are more promising than it would appear. However, what if you aren't right? It would seem to me the potential risk is mind numbing.
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