No-Confidence Vote for Stocks
Stock investors reacquainted themselves with the specter of stagflation Tuesday, as the image of a restive consumer trying to cope with higher prices sent blue chips hurtling toward their lows for the year.
The
Dow Jones Industrial Average
fell 79.95, or 0.76%, to 10,405.70. The
S&P 500
dipped 8.92, or 0.76%, to 1,165.36. The
Nasdaq Composite
fell 18.64, or 0.94%, to 1973.88. The Dow and S&P 500 are now near their 2005 closing lows of 10,368.61 and 1163.75, respectively, which were touched on Jan. 24. The Nasdaq closed at a level last seen in late October 2004.
Crude oil rose 18 cents to $54.23 a barrel ahead of fresh inventory data on Wednesday and amid indications that OPEC may not further lift its production quotas.
The dollar dipped, after rising to a five-month high against the yen and to a six-week high against the euro yesterday. The greenback fell as the first significant economic indicator to hit Wall Street this week showed consumers are worried about the impact of higher oil prices on their purchasing power.
Consumer confidence, as measured by the Conference Board, dipped to 102.4 in March from 104.0 in February, a bigger fall than the market's forecast of a drop to 103.0. Most of the weakness came in the report's future expectations index, which is heavily influenced by energy prices and tends to be good at predicting spending patterns.
This was not good news for dollar bulls, who have been waiting for this weeks' economic data to point toward a buildup of inflationary pressures and a more aggressive
Federal Reserve
. The bond market, however, was relieved. The 10-year Treasury note rose 12/32 while its yield fell to 4.59%.
But there's ample chance for things to go right for dollar bulls in coming days -- and that contributed to the selling in stocks. At the end of the week comes a March employment report in which the market expects a near-repeat of strong February payroll growth. "The good news is that strong payroll gains will lift cash flows and offset the impact of lowered expectations in all but the immediate future," says HFE chief U.S. economist Ian Shepherdson.
By good news, he means that spending will continue to support the U.S. economy a while longer. But what about inflation, which has become the dreaded word since the Fed pulled the alarm bell last week?
February job growth was hailed as representative of the "Goldilocks scenario" of solid, but not too strong, growth. Hope briefly sprung anew that Alan Greenspan was on his way to engineering a soft landing after three years of expansion.
But that was then, and this is now. The market, facing a Fed that wants to be on top of inflation, is now on the hunt for anything that hints at price pressure. Strong payrolls, and especially hourly earnings, will be the keys for inflation hawks.
But is all this fretting over inflation reasonable? After all, the core rate of inflation stands at 2.4% three years into a period of economic growth, and that's "not all that bad," says Wachovia senior economist Mark Vitner.
But since crude oil prices first passed the $55-a-barrel bar last October, and other commodity prices soared, the propensity of higher prices to move from intermediate to finished goods and to the consumer has noticeably increased.
As a matter of fact, "pipeline pressures" at the producer and consumer levels have never been so strong since the oil shocks of the 1970s, notes Wells Fargo chief U.S. economist Scott Anderson.
The March Chicago PMI on Thursday and the Institute for Supply Management index on Friday will provide fresh clues on the ability of businesses to pass on higher prices to the consumer. These concerns had figured prominently in the Fed's statement last week.
Maytag
(MYG)
,
Whirlpool
(WHR) - Get Report
and other appliance manufacturers, for instance, have been able to raise their prices more than 5% this year to reflect the higher cost of materials such as steel and oil.
But with earnings season less than three weeks away, the market may start wondering who has been hit by higher costs and who's been able to pass on the prices.
General Motors
(GM) - Get Report
for one, warned that sales would be hit as consumers turn away from gas-guzzling SUVs.
The February CPI last week already showed higher costs hitting consumers. But more importantly for Fed watchers will be Thursday's core personal consumption expenditure price index, which is the Fed's favorite inflation indicator.
Core PCE inflation, which comes as part of the personal income data, is expected to rise 0.2% in February, keeping the year-on-year gain at 1.6%. The Fed's preferred target is within 1.5%-2%. But a stronger-than-expected reading, even at 1.7%, could compel the Fed to accelerate the pace, or lengthen the period, of rate tightening.
All of this need not be too worrisome for the inflation outlook by year-end, says Wells Fargo's Anderson, who believes that "the inflation trend has already sown the seeds of its own reversal." Surging oil prices, he notes, already have hit global growth, and that in itself is easing pressures on commodity markets.
In the meantime, the Fed will tighten more. The market wants to know by how much.
Winners and losers
MCI
(MCIP)
has accepted an improved offer from
Verizon
(VZ) - Get Report
of $7.6 billion, rejecting a higher bid from
Qwest
(Q)
. The new bid boosts Verizon's stock-and-cash offer to $23.50 a share from the previous $20.75. Verizon was recently up 31 cents, or 0.9%, to $35.03, while Qwest fell 2 cents, or 0.5%, to $3.73.
The 37-year reign of
American International Group
(AIG) - Get Report
mastermind Maurice Greenberg will end this week with his retirement as chairman. Greenberg was already stripped of his CEO title amid a widening investigation of possible earnings manipulation at the nation's biggest insurer. AIG was up $1.42, or 2.5%, to $58.44.
Hewlett-Packard
(HPQ) - Get Report
has picked
NCR
(NCR) - Get Report
Chief Executive Mark Hurd to succeed Carly Fiorina as CEO of the company. Hurd replaces Fiorina, who left H-P in February due to a disagreement with the board over the direction of the company. Shares of H-P added $1.62, or 8.2%, to $21.41. Meanwhile, NCR fell $5.45, or 14.4%, to $32.45.
In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send
your feedback.