Wall Street investors ply the dog days of summer next week with few economic indicators on the calendar but stiff headwinds from volatile oil prices, rising inflation and slowing global growth.
With crude oil prices spiraling downward, stoking hopes of inflation relief, investors appeared willing to turn a blind eye to consumer price numbers showing US inflation at a 17-year high.
US stocks indexes ended the week to Friday narrowly mixed. The Dow Jones Industrial Average of 30 blue-chip stocks fell 0.63 percent to 11,659.90, while the technology-heavy NASDAQ composite index rose 1.59 percent to 2,452.52.
The broad-market Standard & Poor’s 500 index edged up 0.14 percent to 1,298.20.
The precipitous decline in crude oil futures — 23 percent — from all-time peaks above US$147 a barrel a month ago was lending support to some economists’ views that inflation would cool in the third quarter as high prices slow demand.
That self-correcting scenario would dampen pressure on the Federal Reserve to raise interest rates to curb inflationary risks in the near term as the economy struggles to gain momentum amid a housing crisis, tight credit and rising unemployment.
“With the fall in oil and other commodity prices in the past month, both the markets and Fed officials had started to turn away from inflation risks and focus on growth risks,” Ethan Harris and Michelle Meyer, analysts at Lehman Brothers, wrote in a client note.
“The view — which we agree with — is that with the usual long and variable lags, falling commodity prices and rising unemployment will drive down inflation. No need for the Fed to get its hands dirty when the housing and credit crunch will do the job,” she said.
Wall Street began the week on Monday on an upbeat note as the decline in crude oil prices lifted sentiment.
But despite oil’s continued fall Tuesday, investors took flight after JPMorgan Chase and Swiss banking giant UBS unveiled fresh losses that reminded the market of the year-old credit crunch’s painful presence.
Analysts say the US banking sector would likely continue struggling into next year.
Stocks headed south for a second straight day on Wednesday as oil prices suddenly spiked higher and the government reported retail sales fell 0.1 percent last month.
The weak figures came despite hefty government tax rebates to tens of millions of Americans aimed at spurring consumer spending, which drives two-thirds of growth in the world’s largest economy.
Economists said the report would further pressure the Federal Reserve to keep its short-term interest rate unchanged at 2 percent in the near future, as it has in the past two policy meetings.
Stocks rebounded as Thursday’s modest recovery came despite the government’s report that consumer price inflation last month surged an annual 5.6 percent, the biggest increase since January 1991. The consumer price index (CPI) monthly gain of 0.8 percent was double market expectations.
“The markets are in such a forgiving mood that both the stock and bond markets rallied on Thursday despite what can only be described as an ugly CPI report,” the Lehman Brothers analysts wrote.
Investors will face key economic indicators next week that will shed more light on the worst housing slump in decades, inflationary pressures and the health of the manufacturing sector.
Reports on producer prices, which showed price pressures at the wholesale level and housing construction and building permits are due on Tuesday.
“The biggest problem remains the housing market and its negative impacts on the financial sector,” said Joel Naroff at Naroff Economic Advisors.
On Thursday, the market will have the Philadelphia Federal Reserve’s survey on regional industrial activity for this month, an index that has shown contraction for eight straight months.
“That’s going to be the focus for the market,” Marc Pado at Cantor Fitzgerald said.
Bond prices ended the week to Friday higher. The yield on the 10-year Treasury bond fell to 3.852 percent from 3.950 percent a week earlier, while that on the 30-year bond dropped to 4.473 percent from 4.555 percent.
Bond yields and prices move in opposite directions.
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