Two big events moved the markets today: the January CPI number that came in stronger than expected and the release of the Fed minutes from their January 30th meeting. The CPI (consumer price index) rose 0.4% while the core CPI (excluding food and energy) increased 0.3%. The market was looking for a 0.3% increase in the CPI and a 0.2% increase in the core CPI. These numbers aren’t outrageously high, but they do throw up a red flag for the Fed when assessing if they should cut rates again. It’s not surprising to see the numbers come in a little stronger than expected given that oil was between $90-100 all of last month. The CPI level is up 4.3% over the last 12 months and the core CPI is up 2.5% - both above the Fed’s “comfort zone” of 2% (Source: finance.yahoo.com). This economic report coupled with moderate declines in the Asian and European markets caused the Dow to be down 60-100 points all morning. The Nasdaq was the relative out-performer thanks to Hewlett-Packard’s strong earnings report after yesterday’s close. HPQ closed the day up 8%. Bonds sold off slightly on this inflation news for the second straight day.
Right at 11am we had a mini 100 point rally right before the Fed minutes were reported. Here are some excerpts (Source: Bloomberg.com):
“With no signs of stabilization in the housing sector and with financial conditions not yet stabilized, the committee agreed that downside risks to growth would remain even after this action (50 bp cut).”
“Demand-pull inflation pressures from emerging-market economies abroad appeared to be continuing, and anecdotal reports from business contracts suggested greater willingness domestically to pass rising costs through to prices.”
“A relatively low real federal funds rate now appeared appropriate for a time…and the availability of credit to consumers and businesses appeared to be tightening, likely adding to restraint on economic growth.”
“Strains remained evident in a number of other financial markets, and credit conditions had become generally more restrictive. Against this backdrop, participants expected economic growth to remain weak in the first half of this year before picking up in the second half, aided in part by a more accommodative stance of monetary policy and by likely fiscal stimulus.”
The Fed also adjusted their expectations for three key economic measurements in 2008. They lowered their GDP outlook to 1.3-2.0% from their Nov. ’07 prediction of 1.8-2.5%.
They raised their unemployment estimate to 5.2-5.3% from November’s prediction of 4.8-4.9%. They also raised their core PCE estimate (consumer inflation number) to 2.0-2.2% from 1.7-1.9%. What I got from the Fed minutes…They see the economy continuing to slow and more rate cuts may be necessary to stimulate growth. However, it seemed like these rate cuts will be short-lived. Once growth returns (and some stability comes to the financial system), they will immediately raise rates to counter rising commodity costs.
After the Fed minutes were released, stocks rose on the hopes of more rate cuts will be coming soon. Also helping the rally was a great earnings report from Transocean, the world’s largest offshore driller. RIG reported quarterly earnings of $3.40/share while analysts’ were only looking for $2.54/share. Their revenues increased 75% (year-over-year), but they fell short of the $2.3B analysts estimated by $0.2B (Source: Briefing.com).
Energy stocks were also leading the market higher as oil finished the day at $100.74, up 73 cents. Gold also hit another all-time high amidst inflation talk and a slowing economy. There was also talk by Bill Ackman, a very powerful activist investor, of breaking up the bond insurers, Ambac and MBIA.
The major telecom stocks, Verizon and AT&T, were downgraded by Credit Suisse today. The analyst mentioned concerns of a “potential wireless price war and macroeconomic weakness.” Earnings estimates for Verizon, AT&T, and Sprint Nextel were also cut for 2008 (Source: CNN Money). These stocks were all down big in the morning, but they recovered nicely by the close.
Bellz is dead on. What the Fed is signaling is that they're here and willing to cut rates as long as the problem persists, but as soon as markets start to function again that rate is going up in a hurry. Whether you think this is good or bad is up to you, personally I don't really like it, but the market did.
ReplyDeleteThe price action in the wireless communication stocks and the downgrade is bull. Price war in wireless? Where has he been the last 5 years? If I had time to do a full bull stocks I'd do it but in short: I like T, VZ, and AMX (if you want an international play). I don't like S, they're in trouble. On investopedia I have a long short zero equity on with the long split half and half with T and AMX and S shorted.