MarketView for April 13

Summary

The three major equity indexes chalked up their worst two-week slide since November with a selloff on Friday. The primary reason was disappointing China growth data that in turn initiated concerns that the global recovery was flagging. China reported that its economy expanded 8.1 percent in the first quarter, a rate that was slower than expected and the country's weakest pace in nearly three years.

Government debt prices rose and stocks fell as renewed concerns over Spain's rising borrowing costs and disappointing Chinese growth data heightened concerns over the global economy.

As signs of weakness in the labor market continue, investors have been betting the Fed could unleash further monetary stimulus to boost growth, although comments by Fed officials this week suggested the central bank is on hold as it waits to see whether the recovery gains traction.

In the previous two sessions of back-to-back gains, the S&P 500 had added 2.1 percent as immediate concerns about rising yields in Spain and Italy ebbed and on bets that the Chinese GDP data would surprise on the upside.

Sectors taking the hardest hit were those most closely linked to growth, including materials, energy and financials. The S&P 500 is now down 3.4 percent from this year's closing high, after falling 2.7 percent over the past two weeks. The S&P financial sector index fell 2.5 percent and lost 2.8 percent for the week.

With 6 percent of the S&P 500 components having reported results, three-fourths of companies have reported profits that topped expectations. So it was not surprising to see Bank of America end the day down 5.3 percent at $8.68, while Morgan Stanley chalked up a 5.2 percent loss to end the day at $17.28.

Banks fell overall in Friday's session despite earnings from JPMorgan Chase and Wells Fargo that exceeded Wall Street's expectations. JPMorgan lost 3.6 percent to $43.21. Wells Fargo fell 3.5 percent to $32.84.  Weighing on the Nasdaq, Apple was down 2.8 percent to close at $605.23.

The cost of insuring Spanish debt against default hit 500 basis points or 5 percent for the first time on fears about the high exposure of the country's banking sector to sovereign debt.

The S&P 500 is still up 9 percent so far in 2012, but fell 2 percent over the week. The Dow Jones Industrial Average fell 1.6 percent for the week, while the Nasdaq was down 2.2 percent. This week's losses came on top of the slide in the previous week, which was cut short a day for the Good Friday holiday. In that week, the Dow fell 1.1 percent, while the S&P 500 slipped 0.7 percent and the Nasdaq shed 0.4 percent. For both the Dow industrials and the benchmark S&P 500, this was the worst two-week percentage drop since late November.

Google slid 4.1 percent to $624.60 a day after reporting a second straight slip in search advertising rates, though it also posted a first-quarter profit that exceeded expectations.

Materials and energy shares dropped as copper and oil prices fell after the Chinese data. Adding to concerns, two reports on Friday sent mixed signals to the Federal Reserve about how much room there might be to bolster economic growth.

The Consumer Price Index rose modestly in March among signs that a surge in gasoline costs was ebbing, but inflation still outpaced workers' earnings and threatened to undermine spending.

The Thomson Reuters/University of Michigan survey showed. consumer sentiment slipping modestly in early April as higher gasoline prices hit household budgets even as optimism about the economic outlook lifted consumers' expectations.

Trading volume for the day was light, with about 6.07 billion shares changing hands on the three major equity exchanges, a number that was well below last year's daily average of 7.84 billion shares.

Small Rise in CPI

Consumer prices rose modestly in March amid signs that a spike in gasoline costs was ebbing, but inflation still outpaced workers' earnings and threatened to undermine spending. According to a report released by the Labor Department Friday morning, consumer prices increased 0.3 percent last month. Gasoline prices rose 1.7 percent, a sharp slowdown from February when costs at the pump rose more than three times as quickly. Nonetheless, workers' earnings still fell 0.4 percent in March after adjusting for the increase in prices.

Now the Fed had to try to decipher the mixed signals and determine if and by how much room it might have to continue to stimulate economic growth. The possibility of weaker consumer spending supports arguments for further stimulus, but the consumer price data suggested inflation might not cool as quickly as expected.

Core inflation, which strips out food and energy prices, climbed 0.2 percent, pushed higher by rising rents, medical care costs and used car prices. In the 12 months to March, core CPI increased 2.3 percent after rising 2.2 percent in February. Overall consumer prices rose 2.7 percent year-on-year, down from a reading of 2.9 percent in February. The bottom line is that inflation data was in line with expectations.

At the same time, consumers' expectations for inflation over the coming year declined, reflecting the slower run-up in gasoline prices. And in March, a drop in electricity costs eased some of the bite from high gasoline prices. Electricity costs fell 0.8 percent, the steepest decline since June. Food prices climbed 0.2 percent last month, with poultry prices up by the most since January 2008.

The Fed, which meets on April 24-25 to debate its policy course, cut benchmark interest rates to near zero in 2008 and has bought $2.3 trillion in bonds to push other borrowing costs lower. It has said it will probably hold rates super low until at least late 2014 to help the economy as it limps back from the 2007-2009 recession.