MarketView for February 19

 

 

 

Summary 

 

Share prices logged enough of a positive gain on Friday so as send all three major equity indexes into positive territory as the markets closed out their best week of the year. Nonetheless, there are concerns on the Street that the eventual withdrawal of easy money will hurt Wall Street. Furthermore, there is a bit of a credibility gap as to whether the Street really believes the Fed's reassurance that its benchmark rate will remain near zero for an extended period of time.

 

Meanwhile, Morgan Stanley recommended investors buy a number of bank stocks, including Bank of New York Mellon, which closed up 3.5 percent at $28.66, and Northern Trust, which rose 4.1 percent to close at $54.60.

 

The Dow Jones industrial average ended the week up 3 percent, the S&P 500 with a gain of 3.1 percent, making it the best performance for those two indexes since late November. The Nasdaq rose 2.8 percent, its best weekly showing since late December.

 

The latest inflation data indicated that consumer prices rose less than expected in January, thereby supporting the view that the Fed was not facing urgent pressure to raise its benchmark fed funds rate.

 

FedEx saw its share price close up 2.1 percent to $81.76 and led gains in the industrial sector of both the S&P 500 and on the Dow Jones transportation average. U.S. Steel rose 4.6 percent to $53.29, which was good news for the materials sector of the economy.

 

Among those not doing so well,, Dell saw its share price fall 6.7 percent to $13.47, a day after the company reported a quarterly gross margin that missed Street expectations. Schlumberger saw its share price fall 2.9 percent to $63.90 after a Wall Street Journal report said the company is in advanced talks to buy rival Smith International. Smith, on the other hand, saw its share price rise 13 percent to $37.70.

 

Fed Says Do Not Worry, Rates Are Not Moving Upward...For Now

 

The Federal Reserve did its best on Friday to reduce speculation that an unexpected increase in its discount rate signaled a change in monetary policy, stating borrowing costs in the economy would remain low. New York Fed President William Dudley said the central bank's pledge to keep benchmark borrowing costs low for an extended period of time "is still very much in place."

 

Dudley described Thursday's move to lift the discount rate -- at which banks can borrow from the Fed -- as a small technical change that carried no broader signals about monetary policy. The benchmark federal funds rate for overnight interbank borrowing remains pegged near zero, an all-time low.

 

Dudley said the economy has started to recover but noted that growth will remain modest. He also said access to credit is limited and the unemployment rate "unacceptably high," all of which should keep price pressure under control.

 

Other Fed officials also stressed the increase in the discount rate did not represent a speeding up of the central bank's plans for raising its main interest rate. St. Louis Federal Reserve Bank President James Bullard said investors belief in high probability of a rise in the Fed's benchmark rate this year was "overblown" and that the discount rate rise should not be seen as a policy signal.

 

After the Fed raised its discount rate by a quarter percentage point to 0.75 percent Thursday after the markets closed, three other Federal Reserve officials had stressed that the move did not represent a new tightening of the Fed’s monetary policy.

 

Meanwhile, the dollar rose in value, Treasury bond prices fell and stock prices fell slightly in after hours trading immediately after the Fed move. Despite the assurances from the Fed, Wall Street remains concerned that the change represents the start of a new era of tighter monetary policy.

 

Although Fed Chairman Ben Bernanke had flagged the discount rate change last week, markets had not expected the Fed to act so soon. The move was well ahead of central bank's March 16 policy meeting, thereby prompting the Street to price in a greater chance of a rise in the federal funds rate late this year.

 

A government report on Friday showed consumer prices rose by less than expected in January, while prices excluding food and energy fell for the first time since 1982. That helped bond prices reverse some of Thursday’s losses.

 

Dennis Lockhart, president of the Atlanta Fed, said in a speech that "monetary policy, as evidenced by the fed funds rate target, remains accommodative," adding "this stance is necessary to support a recovery that is in an early stage and, in my view, still fragile."

 

Thursday's move was the first increase in any of the Fed's lending rates since the financial crisis blew up in 2007 and the first rate change since December 2008.

 

Still, stock markets were on the defensive, as the Fed's action follows China's moves to curb lending to slow the world's third largest economy. That served as a reminder that the period of cheap cash that led to last year's stock market rally may be slowly drawing to an end.

 

Before the financial crisis, the discount rate was typically a full percentage point above the federal funds rate. Thursday's decision begins to move it back nearer to its traditional premium and it said it would assess over time whether it needed to further widen the spread between the two rates.

 

Some other central banks around the world have begun to tighten policy. In the United States, however, the Fed has said record low interest rates are still warranted with the unemployment rate near 10 percent.

 

Other changes announced on Thursday included shortening the typical maximum maturity for primary credit loans to overnight from 28 days, effective March 18, and raising the minimum bid rate for the Fed's Term Auction Facility, another scheme put in place to foster market liquidity.

 

CPI Benign

 

The consumer price index was benign for the month of January as consumer prices rose less than expected in January, while prices excluding food and energy fell for the first time since 1982. According to the report released by the Labor Department on Friday morning, the seasonally adjusted CPI rose 0.2 percent last month, the result of an increase in energy costs. The index was up 0.2 percent in December. Compared to January last year, prices rose 2.6 percent.

 

Consumer energy costs rose 2.8 percent last month after rising 0.8 percent in December. Food prices climbed 0.2 percent following a 0.1 percent gain in December. If you remove the volatile energy and food sectors, the core measure of consumer inflation fell 0.1 percent in January, the first decline since December 1982. Core prices rose 0.1 percent the prior month. When compared to January of last year, the core inflation rate rose 1.6 percent after increasing 1.8 percent in December.

 

Crude Up 11 Percent in Two Weeks

 

Oil prices continued to rise Friday as a refinery strike in France and worries over Iran's nuclear program suggested petroleum supplies may tighten in the future.

 

Benchmark crude added 32 cents to $79.38 a barrel on the New York Mercantile Exchange. Oil prices have increased more than 11 percent in the past two weeks. In London, Brent crude fell 6 cents to $77.72.

 

Energy prices dipped overnight after the Federal Reserve announced that it will bump up the so-called "discount" lending rate. That sent the dollar to its highest level since May. Crude, which is priced in U.S. currency, tends to fall in price as the dollar rises and makes oil barrels tougher to buy for investors holding foreign money.

 

Meanwhile protesting refinery workers in France at a refinery for oil giant Total have been striking since Jan. 12. The U.S. imports gasoline and other fuels from Europe, and continued disruptions have helped push energy prices higher.

 

At the pump, retail gasoline prices increased for the second day this week, adding less than a penny overnight for a national average of $2.623 a gallon, according to AAA, Wright Express and Oil Price Information Service. A gallon of regular unleaded is 11.4 cents cheaper than a month ago and 67.4 cents more expensive than a year ago.

 

In other Nymex trading in March contracts, heating oil was up less than a penny to $2.0543 a gallon, and gasoline added 1.56 cents to $2.0848 a gallon. Natural gas gave up 14.6 cents to $5.026 per 1,000 cubic feet.