MarketView for June 15

Summary  

Oh, it was a nasty day on Wall Street as share prices fell and the major equity indexes turned in a beautiful performance, all red across the board on Wednesday, driven lower by escalating Greek debt woes, while the latest economic data was simply frosting on the cake indicating that the economy is facing a troubling mix of higher prices and weak growth. Financials came under fire after Moody's Investors Service said it may cut the credit ratings of French banks, citing exposure to Greek debt.

The day's losses left the S&P 500 within a stone's throw of its 200-day moving average of 1,256.82. If that level is breached, losses would be likely to accelerate.

Declines in insurers' shares outpaced the broader market, with Allstate closing down 2.5 percent at $29.48.

Energy shares were also depressed as signs of economic weakness fed worries about demand, sending crude to its lowest level since February. Chevron ended the day down 2.2 percent at $98.41, making it the greatest drag on the Dow Jones industrial average.

Profit forecasts from companies, including Nucor, Owens Illinois and Ford highlighted concerns about the impact that a lethargic economy could have on earnings.

The CBOE Volatility Index closed up 16.8 percent at 21.32 -- its highest level since March 18.

The data confirmed views that the economy is getting weaker even as prices are rising. Those economic worries have been largely behind a 7 percent slide in the S&P 500 since its near three-year high on May 2nd.

The core Consumer Price Index, which excludes volatile food and energy prices, rose more than expected in May, while the New York Federal Reserve's Empire State manufacturing index unexpectedly shrank in June, falling below zero for the first time since November.

Even with the selling pressure on Wall Street, Pandora Media managed a successful debut as investors shrugged off profit concerns for the online radio service. Pandora's stock rose 8.9 percent to $17.42, but was well off its intraday high of $23.75. At its peak, Pandora's stock was up as much as 48.4 percent from its IPO price of $16.

In the insurance industry, Allstate suffered a setback in its lawsuit against Bank of America Corp's Countrywide unit over toxic mortgage debt, with a Manhattan federal judge moving the dispute to Los Angeles.

Nucor issued a forecast that missed Wall Street's expectations, and its shares fell 2.2 percent to $39.80. Shares of Owens Illinois fell 13.5 percent to $25.54 after the company cut its second-quarter outlook. Ford lost 2.1 percent to $13.15.

Volume picked up, with about 7.99 billion shares changing hands on the three major exchanges, a number that was slightly above the daily average of 7.58 billion shares.

Growth is Down but Prices Are Up

Inflation rose to its highest level in nearly three years in May while a regional factory gauge posted a downward surprise contraction. Consumers did receive some relief on prices from lower gasoline costs which, if sustained, could help the economy emerge from a recent rough patch.

However, a trend that could trouble policymakers at the Fed is the consumer price index, which outside food and energy came in at 0.3 percent for the month of May. That mad it the largest gain since July 2008, though some of the increase could be related to supply disruptions in the auto sector following the Japanese earthquake.

Separate reports showed a surprise contraction for manufacturing activity in New York State for June and a disappointing 0.1 percent rise in May industrial output, though the latter was partly the result of a pullback in utilities.

The housing sector, which was at the epicenter of the financial crisis and recession, also showed little sign of healing. Following a renewed decline in home prices in recent months, a homebuilder sentiment index published by an industry group plunged this month to its lowest since November 2010.

Yet the inflation readings, if sustained, put Fed officials in a tough spot. If the economy weakens further but inflation fails to come down, it would be difficult for them to justify another round of monetary stimulus, particularly given the controversy that surrounded its $600 billion bond-buying program launched back in November.

Inflation proved considerably firmer than expected in May despite lower fuel costs, with the overall CPI rising 0.2 percent, double analyst forecasts. In the year to May, prices climbed 3.6 percent, the largest rise since October 2008. Yet, gasoline prices were down 2 percent last month after increasing 3.3 percent in April. Unfortunately food prices proved less benign, rising 0.4 percent for a second month in a row.

It remains to be seen whether the rise in core inflation was merely a reflection of temporary pass-through from higher energy costs, which peaked in early May but have been abating since. An absence of upward pressure on wages suggests as much, and continues to give comfort to the Fed's more dovish members that the threat of inflation is remote.

The Labor Department data indicated that inflation-adjusted weekly earnings fell 0.1 percent in May, and were down 1 percent over the last year.

Industrial output was still growing and yet it was anemic at best. The Fed data showed production at the nation's mines, utilities and factories edged up 0.1 percent in May, restrained by a second consecutive drop in auto output. Still, manufacturing output rose 0.4 percent, bouncing back from an April slide as factories made up for production lost due to tornadoes in the South. Output at utilities plunged 2.8 percent.