Inflation comments sour sentiment
RTGAM
Take one tentative stock market rally, add a Fed official's comments about inflation and watch the rally fizzle. This was the recipe for Wednesday, when North American stocks came out of the gate with a jump but then stumbled in the afternoon, leaving major indexes down for the day and dashing hopes for a turnaround following the big selloff on Tuesday.
The inflation comments came from Charles Plosser, chief executive officer of the Federal Reserve Bank of Philadelphia, during a speech at the Birmingham Rotary Club. A lot of the speech was mere throat-clearing, but his thoughts on how the U.S. Federal Reserve must approach rate cuts in the face of troublesome inflation were particularly arresting.
Here is the part that took investors by their lapels and shook them: "There are those who have expressed the view that in times of economic weakness, the Fed must not worry about inflation and should focus its entire effort on restoring economic growth by dramatically driving interest rates down as far and as rapidly as possible. To borrow a line attributed to that famous, or perhaps infamous, Union Admiral David Farragut at the Battle of Mobile Bay, it is sort of a 'damn the torpedoes, full speed ahead' approach to policy. But the Fed has a dual mandate for a reason. Price stability is a necessary component for achieving sustained economic growth. Ignoring price stability during times of economic weakness risks undermining our ability to achieve economic growth over the long run. It fuels higher inflation down the road and risks inappropriate risk taking and recurring boom/bust cycles. This would be counterproductive."
Before the speech: According to fed funds futures - via David Rosenberg, North American economist at Merrill Lynch - investors believed that the Fed would cut rates by half a percentage point on March 18 and would bring rates down to just 2 per cent by August.
After the speech: Cue the selloff, as investors suddenly felt less certain that the Fed would come to their rescue.
The Dow Jones industrial average, which had rallied as much as 125 points, ended the day at 12,200.1, down 65.03 points or 0.5 per cent. The S&P 500 closed at 1326.45, down 0.8 per cent, weighed down by Apple Inc., CME Group Inc., Chevron Corp. and Microsoft Corp. In Canada, the S&P/TSX composite index, up 135 points mid-day, ended at 12,867.2, down 64.75 points or 0.5 per cent, in a decline was fed in part by lower oil prices. The biggest losers included Research In Motion Ltd., EnCana Corp., Canadian Natural Resources Ltd. and Petro-Canada.
Copyright 2001 The Globe and Mail
Wednesday, February 6, 2008
Cue the selloff, as investors suddenly felt less certain that the Fed would come to their rescue
North American stocks point up
North American stocks point up
RTGAM
After the dramatic sell-off on Tuesday, North American investors appear to be ready to creep back in to the stock market, if futures activity is any indication. S&P 500 futures indicated a 4.4-point rise on Wednesday, to about 1348. Dow Jones industrial average futures indicated a 27-point rise, to about 12,347.
Good results from Walt Disney Co., which beat analyst expectations, could explain part of the rise. The shares rose in Germany. But investors may be ready to buy stocks that are deemed to be cheap following the widespread decline in North American stocks on Tuesday that left few sectors untouched.
In European trading in the afternoon, stocks were a mixed bad. The U.K.'s FTSE 100 was down 0.3 per cent and Germany's DAX index was up 0.4 per cent. However, investors will have to weigh overnight selling in Asia, with the Nikkei 225 plummeted 4.7 per cent, its worst one-day decline since January 22.
"The chitchat from Tokyo-side is that investors are scared about Japan's economy, they are scared about the U.S. economic slowdown - which should pinch profits at Japan's exporters of consumer goods and vehicles - and they are scared in general," said Carl Weinberg, chief economist at High Frequency Economics, in a note to clients. "What scares us - and what we believe makes the Nikkei's situation even worse than it needs to be - is that the huge overhang of foreign investor positions, that has supported this stock market over the last four years, could liquidate in a heartbeat."
In Canada, investors are likely to follow the U.S. lead but will also have an eye on a number of important earnings releases, including quarterly reports from BCE Inc., Cameco Corp. and Saputo Inc.
Copyright 2001 The Globe and Mail
Tuesday, February 5, 2008
Markets Are A Roller Coaster
Market News: After the Bell
RTGAM
You can't say there were no warning signs in the dramatic stock market selloff on Tuesday. If the earlier European downturn wasn't proof enough that investors are growing more skittish about a U.S. recession and its impact on the rest of the world, there was the morning's non-manufacturing index from the U.S. Institute for Supply Management that took the formerly disguised "R" word, spelled it out, underlined it and highlighted it in red.
By the time the selling had ended, major North American stock market indexes had skidded between 2 and 3 per cent, for their worst showing in 11 months. The S&P/TSX composite index closed at 12,931.95, down 326.21 points or 2.5 per cent. The Dow Jones industrial average closed at 12,265.13, down 370.03 points or 2.9 per cent. All 30 stocks in the blue-chip index fell. And the broader S&P 500 closed at 1336.64, down 44.18 points or 3.2 per cent.
Stefane Marion, an economist at National Bank Financial, put things into perspective in a note to clients: "The all-important service sector which accounts for about three quarters of U.S. GDP (or 85 per cent of business sector output) and over two-thirds of payroll employment contracted for the first time in 58 months in January," he said. "This development adds to the evidence already provided by the January payroll data that the U.S. economic expansion has come to an end. Our current forecast is for U.S. real GDP to contract 1.3 per cent in the first half of 2008."
Tuesday's volatility, while high, is no record breaker - and even cautious investors might yawn at the declines. That is because recent stock market activity has been exceptionally volatile. The blog from Bespoke Investment Group does a nice job of quantifying this volatility by looking at the number of days when the S&P 500 has moved up or down by at least 1 per cent (which is generally considered a big move).
"Over the last 20 trading days, the S&P 500 has risen by at least 1 per cent seven times and declined by more than 1 per cent on eight occasions. This makes a total of fifteen 1 per cent days over a 20 day period," said the blog's writer. The blog item was posted at 12:38 p.m. EST, so there is no word on whether the tally included Tuesday's volatility.
In the link to the chart, you can see how unusual things are. There have been only a few occasions with this sort of volatility: the bear market of 2002, the dot-com downturn at the turn of the century and the recession of 1990.
Copyright 2001 The Globe and Mail
