I have been spending a great deal of time learning about the financial markets. It is sometimes a little challenging to synthesize all the information from the Wall Street Journal, NY Times, Financial Times, The Economist, CNBC, MarketWatch.com etc. but I am learning to understand the underlying relationships between the macroeconomic drivers and how different things affect the economy.
One of my classmates who used to work for OppenheimerFunds pointed me to the weekly market review written by the Chief Economist at OppenheimerFunds. I have really enjoyed reading these updates. Here is the link to the original article. He's definitely got the rhythm of the samba...
Eye on the Markets
Weekly Market Review —2/12/2007
By Dr. Jerry Webman, Chief Economist, Senior Investment Officer, OppenheimerFunds, Inc.
Inflation Warning Weighs on Markets Despite Positive Data
Stocks posted their biggest weekly decline of the year and bonds eked out only modest gains last week despite a series of positive economic releases. The markets had cheered a Wednesday report indicating higher levels of productivity accompanied by restrained wage gains, and the U.S. employment outlook continued to show strength. However, inflation warnings from two Federal Reserve officials on Friday were enough to take the wind out of the markets’ sails.
For the week ended February 9, the Dow Jones Industrial Average fell –0.49%, the S&P 500 lost –0.66%, and the Nasdaq finished –0.65% lower. The three indices are now up 1.20%, 1.58%, and 1.84% for the year, respectively. Bond prices rose, pushing the yield on the 10-year U.S. Treasury to 4.79%, down from 4.82% at the beginning of the week.1
Labor costs remain moderate despite soaring productivity
Productivity jumped dramatically in the fourth quarter, rising 3.0% after a decline of –0.1% in the third quarter. At the same time, unit labor costs—a measure of worker efficiency—rose only 1.7%, compared to a 3.2% third-quarter gain. Illustrating the increase in labor efficiency, hours worked grew 1.2%, but worker output soared 4.2%. Rising productivity without a concurrent rise in labor costs seems a clear positive for the economy, as it allows stronger growth without creating the threat of wage inflation—a danger the Fed often cites.
Fed officials warn about inflation
Despite the positive productivity and wage reports, comments made by two Federal Reserve officials late in the week sent shivers through the market. First, St. Louis Fed President William Poole stated in a Friday speech that while core inflation appeared poised to fall into a “reasonable range,” it would be “unacceptable” for the measure to settle at a rate higher than 2.0%. Later in the day, Dallas Fed President Richard Fisher similarly warned of potentially higher interest rates if inflation remained too high. These perspectives were nothing new; Fed Chairman Ben Bernanke has said for months that fighting inflation was his highest priority. Nevertheless, the comments drove stocks and bonds lower for the day, while gold, a viable inflation hedge, closed the week at 2007 highs.
Jobless claims inch higher, but remain historically low
Initial claims for unemployment rose 3,000 to 311,000 in the week ended February 3, lifting the four-week moving average up 3,250 to 308,250. The measure has remained in a narrow, historically low range of around 300,000 to 340,000 for almost a year, reflecting the general health of the U.S. job market.
Consumers keep spending, clearing inventories
The tight job market has helped support consumer spending, which several reports indicated remains in good shape. December wholesale inventories fell –0.5% from November levels, while sales grew 1.8%—an indication that sales were responsible for the inventory reduction, as opposed to wholesaler anticipation of weaker demand.
Growth at U.S. service industries accelerated last month, showing that increased consumer spending is bolstering economic expansion. Lower energy prices in January and higher wages are providing support for the consumer and generating demand for service firms. The Institute for Supply Management’s non-manufacturing index rose to an unexpectedly strong 59.0 in January from 56.7 in the previous month. Readings above 50 point to growth in the service account that makes up almost 85 percent of the economy.
Finally, January chain store sales grew 3.7% in January, up from a revised 3.3% in December. Gift card redemptions and colder temperatures drove the gains, as consumers took advantage of the post-holiday period to stock up on reduced-price winter clothes.
Housing remains under pressure
The MBA Mortgage Purchase Application Index, considered a leading indicator of home sales and construction, slid –0.8% to 404.7 in the week ended February 2. The index’s lackluster readings over the past few weeks point to continued pressure on the housing sector, despite some signs of relief. Meanwhile, homebuilding companies suffered last week on reports of higher purchase cancellation rates and write-downs on land that’s no longer economically viable to develop as well as concerns that a possible continuation of the Fed tightening cycle would increase mortgage defaults.
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