MarketView for February 18

Summary 

Share prices were higher on Thursday, sending the major equity indexes into positive territory for the third consecutive day, as the Street corporate results and manufacturing data as continuing evidence that the economy remains on an upward track. Nonetheless, stock index futures fell sharply after the closing bell on word that the Fed was raising the discount rate that it charges banks for emergency loans.

The Fed move, despite being a signal the economy is on the right track, marks a retreat from the easy money policy, albeit a small one. However, look for bank stocks to take the brunt of any fall in share prices on Friday.

S&P 500 futures fell 9.7 points about 5 p.m. and were below fair value, a formula that evaluates pricing by taking into account interest rates, dividends and time to expiration on the contract. Dow Jones industrial average futures lost 68 points and Nasdaq 100 futures shed 13 points.

During the regular session investors accentuated the positive news, focusing on improved mid-Atlantic manufacturing data and setting aside a lackluster outlook from Wal-Mart and a surprising increase in weekly jobless claims. Wal-Mart held down gains after the world's largest retailer forecast results for the current quarter that could miss Wall Street's estimates.

A report by the Labor Department released Thursday morning; higher-than-expected weekly applications for jobless insurance along with a report showing higher producer prices in January, were more than offset by data showing gains in the Philadelphia Fed's business activity index and a 10th straight monthly rise in the Conference Board's index of leading economic indicators.

Shares fell 1.1 percent.

Some Economic Data Is Less Than Ebullient

The number of workers filing first time applications for unemployment insurance rose unexpectedly last week, increase by 31,000 claims to a total of 473,000, while at the same time the producer price index also rose more than expected in January, none of which was viewed as being helpful for the economic recovery. According to the Labor Department prices paid at the farm and factory gate rose a faster-than-expected 1.4 percent from December as higher gasoline prices and unusually cold temperatures helped boost energy costs.

The rise in jobless insurance claims dealt a setback to hopes the economy was on the verge of job growth and could increase political pressure on President Barack Obama, who has made tackling unemployment his number one priority.

Disappointment over the claims and producer inflation data was partially offset by reports showing stronger gains in factory activity in the Mid-Atlantic region and a 10th straight monthly rise in a gauge of the economy's prospects.

The Philadelphia Federal Reserve Bank's business activity index rose to 17.6 in February from 15.2 the prior month, while the Conference Board's index of leading economic indicators rose 0.3 percent last month after December's 1.2 percent gain.

The Federal Reserve, citing improvement in financial market conditions, announced on Thursday it would raise the interest rate it charges banks for emergency loans. The discount rate rises to 0.75 percent from 0.50 percent, effective Friday.

The hard-hit labor market has lagged the economic recovery that started in the second half of 2009. Gross domestic product grew at a 5.7 percent annual rate in the fourth quarter, but still failed to ignite jobs growth.

Economists were caught by surprise by the strong rise in producer prices, but most said they did not expect the upward trend to be sustained, pointing to spare factory capacity and sluggish wage growth. About three-fourths of the increase in PPI last month was due to a 5.1 percent jump in prices for energy goods. Energy costs were pushed up by a spike in prices for gasoline, liquefied petroleum and home heating oil.

Stripping out the volatile food and energy costs, core producer prices rose 0.3 percent last month after being flat in December. The core index, which had been forecast to rise 0.1 percent, was lifted by a surge light motor truck and pharmaceutical prices.