MarketView for March 17

Summary 

A better than expected inflation report sent the Dow Jones industrial average to a 17-month high on Wednesday, while adding some support to statement released on Tuesday by the Federal Reserve's that it is retaining its plan to keep interest rates lat the near zero level. At the same time, trading volume remained light ahead of the "quadruple witching" on Thursday and Friday, when four different types of options and futures contracts expire at once.

The seven-session winning streak for the blue-chip Dow is the longest since an eight-day run in August 2009, when it rose 4.9 percent. In the last seven sessions, the Dow has gained 1.7 percent, but volume has been lackluster.

After the closing bell, Nike saw its share price a gain 3.4 percent to $73.29 after the company posted a net profit that was ahead of Street expectations.

During Wednesday's regular session, Massey Energy chalked up a gain of 5.8 percent to close at $53.15, a day after it announced the acquisition of privately held Cumberland Resources.

Hartford Financial Services Group saw its share price rise 4.8 percent to $28.58, a day after the company announced a plan to repay the U.S. Treasury. Discover Financial Services also said it would repay government bailout funds. However, Discover's shares slipped 0.4 percent to $15.24

PPI Drops Sharply

The Labor Department reported Wednesday morning that the producer price index or PPI fell 0.6 percent, the largest decline since July, after increasing 1.4 percent in January. Even excluding volatile energy and food costs, core producer prices rose just 0.1 percent last month. The steep decline in producer prices gives the Federal Reserve leeway to hold interest rates exceptionally low for an extended period as it has promised.

When compared with February’s numbers of last year, the PPI increased 4.4 percent, but at the same time slowing from a 4.6 percent year-on-year increase. The report came a day after the Federal Reserve renewed its promise to hold benchmark interest rates exceptionally low for an extended period, arguing that substantial resource slack would likely keep inflation subdued for some time. It left overnight rates in a range of zero to 0.25 percent.

If you discount the energy and food sectors, the so called core producer price index rose 0.1 percent, down from January's 0.3 percent increase. Core prices last month were lifted by a 0.5 percent rise in the index for passenger cars. It was the largest increase since June. The core producer price index was up 1.0 percent when measured on a year-over-year basis.

The unemployment rate stands at 9.7 percent and is likely to remain elevated for some time, which suggests inflation will stay low. Labor costs are typically the biggest single business expense, so as long as they remain weak, price pressures probably will not build significantly.

The Labor Department attributed the February fall in wholesale prices to a 2.9 percent drop in energy costs, which was also the largest decline in seven months and represented a sharp reversal from January, when energy costs rose 5.1 percent.

Gasoline prices fell 7.4 percent after an 11.5 percent rise in January. Food prices rose 0.4 percent after rising by the same margin in January.

However, oil prices have been creeping higher in recent weeks, climbing to more than $82 per barrel on Wednesday. The price dipped below $70 a barrel as recently as February 5.

No Change in OPEC Targets

OPEC announced on Wednesday that it was keeping its crude targets unchanged so as to allow prices to remain at their present levels, while at the same time supposedly sending a message of stability to economies struggling to emerge from recession. The decision came as no surprise because several influential OPEC members had already stated that OPEC would choose the status quo — unchanged since December 2008, at least on paper.

Back then, OPEC announced the last of a series of cuts aimed at bringing its output down by 4.2 million barrels per day — a move that helped engineer a rebound in crude prices, which had collapsed to the low $30s from a mid-2008 high of almost $150 per barrel.

Since then, however, production has crept up, with individual members cheating on their quotas to bring production by the 11 OPEC nations under output limits to about 27 million barrels a day, or nearly 2 million barrels more than what was agreed on at the December 2008 meeting. At the same time, an OPEC statement paid lip service to the need to honor quotas, declaring that "member countries reiterated their commitment to their individually agreed production allocations."

In fact, however, the group appears accepting of the present level of overproduction as long as prices stay around $80 per barrel, a point mentioned by OPEC Secretary General Abdalla Salem El Badri.

"We tried to push but not that much," he said, when asked whether OPEC cheaters were pressured to cut back on their output. "The situation in the world economy and the situation in the world prices make it comfortable for everybody" to have present output maintained, El Badri said.

The daily overproduction cushion of nearly 2 million barrels in reality gives OPEC leeway it would not have were all members complying, while at the same time giving OPEC room to push members harder on honoring their individual output targets, should demand decline and oversupply takeover.

El Badri said the group was ready to pump more if the world demands it, putting spare OPEC capacity at a daily 6 million barrels.

Oil prices rose above $82 a barrel Wednesday after the OPEC decision. They were also supported by a report showing crude inventories growing less than expected last week and by a weaker dollar, which fell after Tuesday's comments by the Fed that it would keep a key interest rate near zero to help foster economic growth.

World oil demand is expected to rise this year due to surging economic activity in Asian countries, especially China. The International Energy Agency, which advises oil-consuming countries, predicts that the world's appetite for crude will average 86.6 million barrels a day this year, or 1.6 million barrels a day more than 2009's 86.5 million barrels. Nonetheless, oil markets remain concerned about shaky demand in the U.S. Crude consumption there and in other top industrialized nations is expected to contract in 2010 for the fifth consecutive year.