Sun, May 16, 2004 - Page 10 News List

`Inflation dragon' descends on Wall St., bearing gloom

AFP , NEW YORK

The inflation dragon that many thought had been slain is coming back to haunt Wall Street, which is struggling with a new scenario of higher oil prices, rising interest rates and political uncertainty.

The blue-chip Dow Jones Industrial Average fell 1.03 percent to 10,012.87 during the week ending Friday while the broad-market Standard & Poor's 500 index dipped 0.28 percent to 1,095.70.

The technology-heavy NASDAQ composite shed by 0.71 percent for the week to 1,904.25.

A record high in crude oil prices has roiled investors already fearing a resurgence of inflation, which showed signs of returning to the forefront over the past week at the wholesale and consumer level.

The government said consumer prices rose a modest 0.2 percent in April with core prices, stripping out energy and food, up 0.3 percent.

More worrying, core prices were up 1.8 percent in April compared to last year, following year-on increases of 1.2 percent in February and 1.6 percent in March.

Meanwhile wholesale prices were up 0.7 percent, the biggest rise since March last year, led by sharp rises in energy and food costs.

While investors have already been girding for a Federal Reserve move to bring interest rates off their super-low levels, the recent data seem to be suggesting the Fed may have misread the inflation signals and must now act more aggressively that anticipated.

"Price increases are heating up at an alarming rate," said John Silvia at Wachovia Securities.

"The Fed and most forecasters missed the mark on inflation so badly because they failed to appreciate how much and how broadly final demand has accelerated."

"Fed officials have been trying to convince the market that they will be raising rates `at a measured pace,' but the market sees a replay of 1994 when the Fed raised the funds rate by 300 basis points in 12 months," said David Rosenberg at Merrill Lynch.

"The debate over Fed tightening has shifted from `when' to `how much' and `how quickly?'"

Technical analyst Ralph Acampora at Prudential Securities said the market is having a hard time casting off its nerves.

"The recent equity environment seems to be running to script as the market attempts to recoup after the broad-based selling barrage of last week," he said.

"Unfortunately, the three days of stabilization that we have seen through yesterday's session have lacked upside conviction ... We continue to maintain a very selective and defensive posture."

"I think the market is trying to stabilize," said Peter Cardillo at SW Bach. "The Fed needs to take a pre-emptive strike so that the market can focus on earnings and good economic numbers."

Rod Smyth at Wachovia Securities notes that despite a robust economy and corporate earnings, stocks have held back.

"The stock market is a discounting mechanism and is always looking into the future. Thus stocks tend to do best when when investors expect economic acceleration -- for example a year ago," he said.

"Looking forward from today, investors are dealing with the prospect of higher interest rates, persistently high energy prices and political uncertainty. In our opinion these are the reasons why the stock market has been unable to rise above its first quarter highs."

Alfred Goldman at AG Edwards said the market is suffering from uncertainty.

"The market can't make up its mind. Is it a bull or a bear? Does it have horns or claws?" he said.

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