Updated from 1:23 p.m. EDT
The sustained surge in crude oil prices helped widen the U.S. trade deficit in June, lifted import prices in July and dampened consumer confidence in August, according to economic reports released Friday.
With investors already fretting over crude prices, which closed up $1.06 at $66.86 a barrel, the data added to heavy selling pressure on the stock market. A disappointing outlook from
further helped convince traders to take some chips off of the table ahead of the weekend.
Dow Jones Industrial Average
ended above its session lows, but still fell 86 points to 10,600. The
fell 7 points to 1230. The
lost 18 points to 2157.
The dip in consumer confidence did help fuel further gains in bond prices, as it cast doubt on the sustainability of economic growth. Treasuries had already rallied this week on expectations that recent strong economic indications won't lead to more inflationary pressures. Inflation erodes the value of fixed-income assets.
The benchmark 10-year Treasury bond was recently up 14/32, its yield falling to 4.25%.
The University of Michigan said its consumer sentiment index dipped to 92.7 in early August compared with 96.5 in July. The number was below the forecast of Wall Street economists who expected the index to fall to 96.0.
The report, however, has to be mitigated against other indicators pointing to improving consumer confidence, including the latest readings from the ABC/Washington Post,
Investor's Business Daily
and TechnoMetrica Market Intelligence surveys.
Factors cited in those more upbeat surveys were the improving outlook for employment and wages.
But oil and gasoline prices continue to surge and, if the trend continues, will ultimately take a toll on consumer spending and the economy.
"Unless there is a sudden drop in gas prices over the next few weeks, this decline in sentiment rightly will be reflected in weaker core retail sales numbers over the next couple of months," says Ian Shepherdson, chief U.S. economist at High Frequency economics.
According to Michael Gregory, interest rate strategist at BMO Nesbitt Burns, consumers have shown the capacity to adapt to higher levels of gasoline prices, but what wears confidence down are sustained increases.
"It's not just the level, but the pace of change," Gregory says. "If
energy prices consistently go up, then that's a real drag on consumer spending," which makes up approximately 70% of the economy.
More bad news for the growth outlook came from the Commerce Department, which reported that the U.S. trade deficit widened to $58.8 billion in June, the second-largest deficit on record.
Following government estimates that the GDP grew at a pace of 3.4% in the second quarter, economists were expecting the U.S. trade deficit had widened to $57.2 billion in June.
The larger-than-expected trade deficit likely will shave off GDP growth estimates by 0.2%, according to Shepherdson.
The widening deficit also has bearish consequences for the dollar, according to Greg Anderson, currency strategist at ABN Amro.
The greenback actually gained slightly against the euro on Friday. But Anderson says that it was hard to draw any conclusions, given a technical glitch that affected the trading system used by most currency traders right after the report came out.
The numbers are not only negative right now but they also show that the momentum is negative and that the deficit is going to continue to worsen, topping $60 billion this year. The deficit worsened in part as the trade deficit with China continued to deteriorate, after a brief respite, but mostly because of the soaring prices of petroleum imports.
With oil prices rising further through July, that doesn't bode well for the trade deficit in that month.
"That's bearish for the dollar. The outlook until now was that the deficit had stabilized," Anderson says.
The strategist expects the euro, which has been making a comeback amid a brighter-than-expected economic outlook in eurozone countries, to test the $1.25 level next week, with temporary upside limited at $1.26.
The catalyst for the move, he says, very well may come from the Treasury's International Capital (TIC) Flows report for June, which comes out Monday morning and is expected to show that less money is available to keep financing the U.S. current account deficit.
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 appreciates your feedback;
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