Traders Warily Eye Coming Data
Wall Street received a boost from a stronger dollar and lower crude oil prices Monday, but the rest of the week is full of potential inflation land mines hidden inside a series of key economic reports, culminating with the employment report on Friday.
The
Dow Jones Industrial Average
rose 42.78, or 0.41%, to 10,485.65. The
S&P 500
gained 2.86, or 0.2%, to 1174.28. The
Nasdaq Composite
added 1.46, or 0.1%, to 1992.52. All the major indices closed off of earlier highs and overall gains remained timid considering last week's losses.
The dollar provided the early catalyst for stock gains as the greenback rose to a five-month high against the yen and a six-week high against the euro. Dollar gains helped a continued slide in crude oil prices, which dipped 79 cents, or 1.4%, to close at $54.05 per barrel in Nymex trading.
Many commentators keep pointing to the stock market's oversold conditions --as well as an oversold dollar and overpriced oil -- but whether stocks do turn around from their dire performance so far this year will depend on economic realities.
"We may still be technically oversold but as long as interest rates remain the big question, we may remain in oversold conditions for much longer still," says SW Bach & Co. chief market analyst Peter Cardillo.
And there will be a good dose of economic realities this week, including the unemployment report, personal income data, the Chicago purchasing managers index and the ISM survey. After the
Fed's
stark warning last week, every report will be closely examined for anything even remotely resembling inflation.
So Monday was most likely just a relief rally. Dollar strength, which also brought down the price of oil, was mostly ignored last week as the market digested the Fed's message on inflation.
And questions do remain about the dollar's turnaround. Monday's gains were no doubt helped by thin market activity, as the London, Frankfurt and Hong Kong markets were closed. But there is increasing talk of a sustainable turnaround in the greenback, given the prospect for higher rates in the U.S. and the rate differentials with other currencies.
Merrill Lynch notes that Japanese government bond yields have fallen 18 basis points to 1.36% and German bund yields have dipped 8 basis points to 3.78% over the past four weeks. During that same period, U.S. bond yields have risen almost 30 basis points to 4.6%.
A stronger dollar would reduce inflationary pressures from import prices and at least reduce the Fed's need to contain inflation. However, this in turn lessens the chance of rates going much higher and would undercut the dollar's rally.
RealMoney.com
commentator Marc Chandler says that a sustained dollar recovery is unlikely, purely based on current yield differentials. Rates will have to move significantly higher before that can happen, he says. That's not even mentioning the negative impact of the huge twin U.S. deficits and of foreign central banks' diversification on the dollar.
No matter, the dollar's synchronized dance with stocks likely will not last far into this week. Strong economic news would be dollar positive while the bond and stock markets are now on inflation watch.
Bond prices continued lower Monday, with the yield of the U.S. Treasury bond rising to 4.64%, an eight-month high. And higher yields remain a big risk for the rest of the week.
"Bond markets have priced in a lot of bad news, so any news of stable-to-lower inflation or slower growth may trigger a mini bond market rally," predicts Morgan Stanley economist Richard Berner. "However, further significant inflation surprises are likely, so I think investors should sell into rallies."
And, of course, rising yields still will be calling the shots for stocks.
The market's attention has typically focused on the payroll figure in the employment report, which comes out Friday. Much attention will be paid to average hourly earnings, which are expected to have risen 0.2% in March, in line with February's gain.
Wall Street analysts say that inflation, not the pace of growth, is what matters now. Forget the employment picture. But a stronger-than-expected payroll number may mean tight labor markets and higher wages down the line.
The new "inflation watch" paradigm also will have Fed watchers on high alert Thursday. The Fed's favorite inflation indicator is the core personal consumption expenditure price index, which is part of the personal income report.
The market will also scrutinize the March Chicago PMI and the Institute for Supply Management index for evidence of businesses' ability to pass on higher prices to the consumer. Concerns that inflation will seep through pricing power did figure prominently in the Fed's statement last week, as well as in the Fed's latest beige book.
Merrill Lynch chief North American economist David Rosenberg, says he does not share the Fed's view on inflation concerns.
"Yes, there are parts of basic manufacturing that have pricing power but they basically comprise no more than 10% of the economy," he writes. "Then we have the consumer sector -- 70% of the economy -- where pricing power is very hard to come by."
Winners and Losers
Shares of
Sungard Data Systems
(SDS) - Get Report
jumped $2.81, or 8.9%, to $34.36, on news that seven private equity firms are set to announce a deal to buy the data-recovery outfit for $10.8 billion.
As many as 12 executives of
American International Group
(AIG) - Get Report
were subpoenaed by the
Securities and Exchange Commission
in an expanding investigation of the insurance giant's accounting, according to
The Wall Street Journal.
Shares of AIG closed up $1.41, or 2.5%, to $57.02.
Wal-Mart
(WMT) - Get Report
said Easter sales were lower than a year ago, while the launch of spring merchandise was delayed. The retailer, however, still expects sales growth in March to meet or surpass its forecast of 4.1%. Also, Wal-Mart director Thomas Coughlin resigned from its board after a company investigation into his use of gift cards and personal reimbursements. Shares finished up 33 cents, or 0.7%, to $50.99.
Shares of
Hollywood Entertainment
(HLYW)
fell 0.93, or 6.6%, to $13.2 after
Blockbuster
(BBI) - Get Report
said Friday that it was withdrawing its $14.50-a-share hostile takeover proposal. The move leaves Hollywood free to consummate its merger with
Movie Gallery
(MOVI)
, which previously agreed to acquire the video-rental chain for $13.25 a share in cash. Movie Gallery soared $5.39, or 22.4%, to $29.45 while Blockbuster shares fell 0.54, or 5.7%, to $8.92.
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.