MarketView for March 16

Summary 

The S&P 500 index closed out its best week in three months with a slim gain on Friday as equities moved to near four-year highs. At the same time, two economic reports that were a bit soft served to hinder further gains by the Dow Jones industrial average and the Nasdaq.

The Dow broke a string of seven straight gains. Had it closed higher, it would have marked the Dow's longest such run in more than a year.

The benchmark Standard & Poor's 500 index rose for a fifth straight week, gaining 2.4 percent in its best weekly performance since mid-December. The Street, buoyant over the economic outlook, have pushed the S&P above 1,400 to its highest level since May 2008 after a surge of almost 30 percent from its most recent closing low on October 3. For the week, the Dow gained 2.4 percent and the Nasdaq was up 2.2 percent.

Energy shares were the big gainers of the as crude prices continued to advance higher, the result of continuing tensions over Iran's disputed nuclear program and the potential for supply disruptions in the region. Occidental Petroleum ended the day up 1.7 percent to close at $100.58.

The Thomson Reuters/University of Michigan's preliminary reading on the overall index on consumer sentiment slipped to 74.3 from 75.3 in February, shy of economists' forecasts for a gain to 76.0 as climbing energy prices pushed inflation expectations higher for next year.

Separate data on Friday showed factory output edged higher last month, despite a fallback in auto production. However, overall industrial output was flat, held back by a second straight monthly decline in mining activity.

The Labor Department said its Consumer Price Index increased 0.4 percent last month after advancing 0.2 percent in January, while inflation pressure, measured by the core CPI excluding food and energy, remained subdued.

The CBOE Volatility Index or VIX fell 6.2 percent to close at 14.47, its lowest point since June 2007.

Transocean ended the day up 4.6 percent to $58.70 a day after it secured three new contracts at a higher rig rate.

Apple closed flat at $585.57 as its new iPad proved to be another hot seller on Friday, as expected. Hundreds of iPad fans lined up at stores across Asia to be the first to get their hands on the tablet computer.

Several banks, including Goldman Sachs Group (GS.N), have shown an interest in buying American International Group's complex and troubled assets tied to the insurer's bailout, the Wall Street Journal said, citing people familiar with the matter. AIG ended the day down 0.2 percent to close at $28.03.

Treasury debt prices fell for an eighth straight day, with benchmark yields touching four-month highs. The dollar weakened broadly.

This week marked the quarterly expiration and settlement of March equity futures and options, an event known as "quadruple witching." As a result, volume was higher than recent sessions. About 7.89 billion shares changed hands on the three major equity exchanges, a number that was slightly above last year's daily average of 7.84 billion shares.

Consumer Prices Rise

Consumer prices chalked up their largest gain in 10 months during February, as the cost of gasoline spiked. However, there was little sign that underlying inflation pressures were building up. Sharply rising gasoline prices put a small dent in consumer confidence early this month. Nonetheless, consumers do not believe the sharp run-up in prices will last.

The Labor Department reported on Friday that its Consumer Price Index rose 0.4 percent in February after advancing 0.2 percent in January. Gasoline accounted for more than 80 percent of the rise. If you exclude the volatile food and energy costs, the so-called core CPI edged up just 0.1 percent.

The CPI rose 2.9 percent last month from a year-ago, unchanged from January but down from a peak of 3.9 percent in September. The core index was up 2.2 percent over the 12 months through February, slowing from 2.3 percent in January. The Federal Reserve said on Tuesday the recent spike in energy costs would likely lift inflation only temporarily. Over a longer horizon, it said inflation was poised to run at or below its 2 percent target.

Gasoline prices have increased 53 cents since the start of the year to an average of $3.88 a gallon in the week to Monday. That helped pull the Thomson Reuters/University of Michigan index on consumer sentiment down to 74.3 early this month from 75.3 in February.

Consumer expectations for inflation one year ahead jumped to 4 percent from 3.3 percent, but the five-year reading rose only slightly to 3 percent, and the survey's director said Americans do not expect the steep climb in gasoline costs to last.

Inflation expectations among investors, as signaled by spreads in the bond market, have also been on the rise, supported by a stream of relatively upbeat economic data. Inflation expectations, however, as measured in the Treasuries debt market, fell back a bit after the CPI report. However, there was some price relief for households. Food costs held steady in February, marking the first time in 1-1/2 years they did not risen, and apparel prices dropped by the most since July 2006.

Tensions over Iran's nuclear program have kept alive fears of oil supply disruptions and have pushed prices higher. With gasoline weighing on the economy's recovery, President Barack Obama has been considering tapping strategic oil stocks to ease the price pressure.

Other data on Friday showed the economy continues to expand moderately. Production at the nation's mines, factories and utilities held steady last month after a 0.4 percent gain in January, the Federal Reserve said.

Manufacturing output rose 0.3 percent, even as automakers cut production by 1.1 percent after two big monthly gains. Carmakers had raised production to meet pent-up demand for popular models in short supply.

The CPI report showed gasoline prices soared 6 percent last month, the largest increase since December 2010. They had risen 0.9 percent in January. While the strengthening jobs market is providing some cushion against rising gas prices at the pump, salaries are not keeping up.

Average weekly earnings, adjusted for inflation, fell 0.3 percent last month after slipping 0.1 percent in January, the Labor Department said. Compared with February last year, weekly earnings were down 0.4 percent. There were also declines in the prices of tobacco, airline tickets and used cars and trucks. Recreation costs also fell. However, new motor vehicle prices recorded their first increase in nine months, reflecting rising domestic demand for autos.

A measure of the amount homeowners would pay to rent or would earn from renting their property - one of the largest single components of the CPI - rose at the slowest pace since April. Rents have risen as Americans have moved away from ownership in the face of persistent declines in house prices.