MarketView for February 17

Summary 

A brief decline, the result of some negative economic news was all investors appeared to need on Thursday as they piled into stocks with a vengeance, with market leaders being the most popular. The technology sector showed strength, with Nvidia up 9.8 percent to close at $25.68 a day after posting a bullish revenue forecast on accelerating sales of its processors.

Crude futures rose 1.7 percent as unrest in the Middle East kept focus on supply, boosting shares of energy companies. The futures had declined early in the trading session after data showed both a rise in consumer prices and new claims for unemployment benefits, but the decline did not last for any appreciable period.

Stocks continued to ignore Iran's intention to send two navy vessels through the Suez Canal to the Mediterranean in a move Israel has called a "provocation".

The S&P 500 has doubled its value in less than two years, the quickest 100 percent gain since the Great Depression. However, volume has been light in the most recent leg of the rally, with just 6.7 billion shares changing hands on the three major exchanges, the second-lowest so far in 2011.

The S&P 500 faces little technical resistance before the 1,361 area that marks the 76.4 percent retracement of its slide from the 2007 highs to the low hit on March 6, 2009. A Fibonacci projection of the latest leg of the rally also draws a target near 1,361, suggesting the S&P could face strong resistance at that level.

Dr Pepper Snapple Group posted quarterly profit that beat estimates and gave an upbeat forecast as its shares jumped 5.7 percent to $36.20. Its competitor Coca Cola was the top gainer in the Dow industrials, up 1.8 percent to $64.55. Coke also announced an increase in its dividend.

Core consumer prices rose at the quickest pace in 15 months in January but economists said the turnaround in prices was unlikely to derail the Federal Reserve's plan to continue pumping money into the economy. That excess liquidity has been one of the main drivers of the stocks rally in recent months.

A separate report showed factory activity in the U.S. Mid-Atlantic region rose in February to its highest since January 2004, with an employment sub index reaching its highest point since April 1973.

CPI Rising

Consumer prices, excluding volatile food and energy costs, rose at the quickest pace in 15 months in January, suggesting a long period of slowing inflation had run its course. According to the Labor Department, the core Consumer Price Index increased 0.2 percent after a 0.1 percent rise in December. It was the largest increase since October 2009.

Policymakers are divided about the Fed's next move. Chicago Fed President Charles Evans said on Thursday he saw little inflationary pressure until the U.S. unemployment rate drops significantly. However, his counterpart at the Dallas Fed, Richard Fisher, warned of upward pressures on prices and said he would not support any further stimulus after the Fed's $600 billion bond-buying program expires in June.

The increase in core prices in January, which was a touch above economists' expectations for a 0.1 percent gain, was driven by a 1 percent surge in the cost of apparel and a 2.2 percent jump in airline fares. Shelter costs, which account for 40 percent of core CPI, rose for a fourth straight month.

The outlook for soft inflation was supported by a rise in applications for unemployment benefits last week, which suggested the labor market recovery would remain gradual, restricting wage growth.

The Labor Department said hourly earnings adjusted for inflation fell 0.1 percent in January, a third straight drop.

Investors perceived the inflation report as tame. The data, coupled with rising tensions in the Middle East that led investors to seek safe-haven assets, pushed up prices for U.S. government debt. U.S. stock indexes held near multiyear highs, but the dollar fell broadly.

Overall consumer prices rose 0.4 percent after increasing by the same margin in December, with food and energy accounting for more than two-thirds of the increase. The modest increase in U.S. consumer prices stands in stark contrast to other economies, where surging commodity costs have put central banks on inflation alert.

In China, authorities are considering a range of measures to tame rising prices. Food inflation has also been cited as a factor in the political unrest in the Middle East. Officials from the Group of 20 leading economies were expected to tackle the subject at a meeting on Friday and Saturday in Paris.

In the eyes of the Fed, inflation in the United States remains too low. Minutes of the U.S. central bank's January policy meeting released on Wednesday showed officials expected inflation to stay subdued. In the 12 months to January, core inflation rose 1.0 percent -- a pick-up from December's 0.8 percent gain, but well below the Fed's comfort level of 2 percent or slightly under.

Data on Wednesday showed a build-up in wholesale inflation pressures, with core producer prices rising at their fastest pace in more than two years in January.

Bubbling inflation pressures at the production level were also highlighted in the report on Mid-Atlantic manufacturing from the Philadelphia Fed. The prices paid subindex in February rose to its highest level since July 2008.