MarketView for October 12

Summary

Wall Street chalked up their worst week in four months, led lower on Friday by financial shares as results from Wells Fargo and JPMorgan ignited concerns about shrinking profit margins for big lenders. The decline came despite a rally early in the trading session, the result of a report by Thomson Reuters-University of Michigan indicating that consumer sentiment rose unexpectedly to its highest level in five years during the month of October. The report was the latest in a string of encouraging signs about the economy.

Meanwhile,  Wells Fargo ended the day down 2.6 percent to close at $34.25, while JPMorgan Chase closed down 1.1 percent at $41.62 over concerns that their lower net interest margin - the difference between what a bank pays on deposits and what it makes on loans - which could narrow further as the Federal Reserve keeps interest rates near zero.

The lackluster market reaction came despite a report by Wells Fargo and JPMorgan indicating that the two reported record profits. And the decline sparked a selloff in other bank shares.

Expectations are low for S&P 500 companies' results. Quarterly earnings are forecast to fall 3 percent from a year ago, compared with a 2.1 percent drop estimated at the start of the month, according to Thomson Reuters data.

The S&P 500 ended the day right above its 50-day moving average, barely enough to avoid going into the weekend with a technical red flag hanging over the market. And despite several encouraging data points this week, the benchmark S&P 500 fell 2.2 percent - its worst weekly performance since the week ended June 1.

Shares of Workday, a cloud computing company that has yet to turn a profit, soared nearly 74 percent to $48.69 in their market debut, driving some tech analysts to question the lofty valuation.

Advanced Micro Devices fell 14.4 percent to $2.74 a day after the chipmaker said its third-quarter revenue probably fell 10 percent from the previous quarter as a weak global economy and a growing preference for tablets slams the PC industry.

About 5.5 billion shares changed hands on the major exchanges, a number that was below the daily average so far this year of about 6.52 billion shares.

Core Producer Price Index Unchanged

According to a report released by the Labor Department on Friday morning, the core producer price index, which excludes food and energy, was unchanged in September. It was the core PPI’s the best showing for that index since prices held steady in October 2011. In August, core prices rose 0.2 percent. However, if you add back in energy and food prices then the full PPI shows a gain of 1.1 percent in September that comes on the heels of a 1.7 percent gain in August which had been the largest one-month increase in more than three years.

In both months, overall prices were pushed higher by gasoline, which rose 9.8 percent in September following an even larger 13.6 percent gain in August. Food prices, which had jumped 0.9 percent in August, showed a smaller 0.2 percent rise in September.

Wholesale inflation has been stable over the 12 months that ended in September. In that time, overall prices have increased just 2.1 percent. Core inflation is up 2.3 percent over the 12-month period. The government's produce price index measures cost pressures before they reach consumers.

Low inflation means consumers have more money to spend, which helps the economy. It also gives the Federal Reserve more room to keep interest rates low in an effort to spur economic growth. If prices were to begin rising rapidly, the central bank might be forced to raise rates in response.

The 0.2 percent rise in food prices in September was the smallest change since prices dropped for two months in April and May. In June, July and August, prices showed larger gains, reflecting in part this year's severe drought in the Midwest.

That has raised the price of corn, soybeans and other grains. Corn is used in animal feed and most products found in the supermarket, from cereal to cosmetics. More expensive corn prices can push up beef and pork prices. In September, beef and veal prices rose 2.3 percent. The biggest food gain during the month was an 11.1 percent increase in the price of fresh fruits and melons. Blueberries, blackberries and cantaloupes all showed big price gains.

In addition to the gain in gasoline prices, the cost of diesel fuel was up 9.2 percent and home heating oil rose 3.1 percent. Energy prices have eased since September but could rise further because of continued tension in the Middle East. Gas prices averaged $3.81 a gallon nationwide on Wednesday, up three cents from a month ago, according to a survey by AAA's Fuel Gauge.

Outside of food and energy, the price of light trucks was up 0.3 percent in September but computer prices fell 1.5 percent, the biggest drop in a year.

The government will issue its September report on consumer prices on Tuesday. In August, consumer prices rose 0.6 percent. The gain was also because of a big jump in gas prices. Excluding food and energy costs, consumer prices inched up just 0.1 percent.

Consumer Sentiment at 5-Year High

The Thomson Reuters/University of Michigan's preliminary October reading on consumer sentiment saw an unexpected increase in October to the highest level in five years as optimism about the overall economy improved.

In a survey released on Friday the preliminary October reading came in at 83.1, up from 78.3 the month before, marking the highest level since September 2007. The survey's barometer of current economic conditions rose to 88.6 from 85.7 and was above a forecast of 86. The survey's gauge of consumer expectations jumped to 79.5 from 73.5, above an expected reading of 74. Expectations were at their highest since July 2007.

The survey's one-year inflation expectation fell to 3.1 percent from 3.3 percent, while the survey's five-to-10-year inflation outlook fell to 2.6 percent from 2.8 percent, its lowest since March 2009.