Record oil may hold stocks hostage
May 17, 2008
Fri May 16, 2008 5:33pm EDT
By Kristina Cooke
NEW YORK (Reuters) - Stocks will face major obstacles to extending their gains next week if the price of oil continues to break records, as fears about inflation and the discretionary spending power of the embattled American consumer are forced into the spotlight.
The gyrating price of oil has been a significant factor in the price of stocks in the past week. Oil rose to a record $127.82 a barrel on Friday, after Goldman Sachs, the most active investment bank in energy markets, forecast a continued spike in prices through the end of the year, due to thin supply.
"The idea that oil could rise a lot further before it reaches a tipping point is really slipping into investors' psyche," said Bucky Hellwig, senior vice president at Morgan Asset Management, in Birmingham, Alabama.
Earnings from a handful of major retailers, including Target (TGT.N: Quote, Profile, Research), could shed more light on how much the rising costs of fuel and food and deteriorating home prices are affecting consumer spending. Investors also will be keeping a keen eye on inflation data.
"If oil prices continue to move up, with Memorial Day coming up, I think traders and investors will be very cautious," said Subodh Kumar, chief investment strategist at Subodh Kumar & Associates in Toronto.
The Memorial Day holiday in the United States typically marks the start of the summer driving season.
For the week, the Dow Jones industrial average gained 1.9 percent, while the Standard & Poor's 500 Index .SPX advanced 2.7 percent and the Nasdaq Composite Index .IXIC climbed 3.4 percent.
At the close on Friday, the S&P 500 was within 3 percent of being in the black for the year, while the Dow needs to gain about 2.2 percent and the Nasdaq about 4.8 percent.
THE FED'S DILEMMA
With the economy still on shaky ground, investors will pour over minutes from the Fed's last policy-setting meeting, due to be released on Wednesday, to glean clues on the outlook for interest rates. Policy-makers face a dilemma as they seek to balance their concern about rising inflation pressures against a wish to stimulate the flagging economy by continuing to cut interest rates.
In recent weeks, Fed officials have been fretting primarily about inflation and have indicated that they would prefer to hold the line on the fed funds rate at the current level of 2 percent.
Rate futures, for now, are taking the Fed at its word, showing a minimal 10 percent chance for another rate cut at the next policy meeting in June, compared with a 90 percent chance that rates will be kept unchanged.
Apart from the Fed minutes, investors will hear from three Federal Reserve Board governors -- Donald Kohn on Tuesday, Kevin Warsh on Wednesday and Randall Kroszner on Thursday. In addition, Federal Reserve Bank of Chicago President Charles Evans will speak at an event on Friday.
Given the recent focus on inflation, the U.S. Producer Price Index will be a key data point on Tuesday. Overall PPI for April is projected to increase 0.4 percent, according to economists polled by Reuters. In March, the headline PPI jumped 1.1 percent.
Core PPI, excluding volatile food and energy prices, is forecast to rise 0.2 percent, the Reuters poll showed. In March, core PPI gained 0.2 percent.
On Wednesday, a government report unexpectedly showed that the Consumer Price Index, another top inflation gauge, grew less than expected in April.
As first-quarter earnings season peters out, companies left to report earnings include Target, Home Depot (HD.N: Quote, Profile, Research), Staples (SPLS.O: Quote, Profile, Research) and Gap (GPS.N: Quote, Profile, Research). So far, retailers' earnings have been mixed, depending on how they were able to cope as consumers scaled back their spending.
YAHOO! DRAMA AND HOME SALES, TOO
Any new developments in the Yahoo! (YHOO.O: Quote, Profile, Research) and Microsoft (MSFT.O: Quote, Profile, Research) saga could also determine the market's direction next week. Financier Carl Icahn has launched a campaign to replace Yahoo's board with directors who would reopen talks with Microsoft saying Yahoo acted "irrationally" in refusing the software company's $47.5 billion bid.
"More merger and acquisition activity in technology could shift the market to the upside, particularly the Nasdaq," Kumar said.
Existing home sales for April, due on Friday, are expected to slip to an annual rate of 4.85 million units from 4.93 million the previous month, according to economists polled by Reuters.
"Everything ties back into the consumer," Hellwig said. "If there's more deterioration in existing home sales than people expect, it will put more focus on how that affects the consumer, for whom their house is typically their biggest asset."
(Additional reporting by Caroline Valetkevitch; Editing by Jan Paschal)
© Thomson Reuters 2008 All rights reserved
By Kristina Cooke
NEW YORK (Reuters) - Stocks will face major obstacles to extending their gains next week if the price of oil continues to break records, as fears about inflation and the discretionary spending power of the embattled American consumer are forced into the spotlight.
The gyrating price of oil has been a significant factor in the price of stocks in the past week. Oil rose to a record $127.82 a barrel on Friday, after Goldman Sachs, the most active investment bank in energy markets, forecast a continued spike in prices through the end of the year, due to thin supply.
"The idea that oil could rise a lot further before it reaches a tipping point is really slipping into investors' psyche," said Bucky Hellwig, senior vice president at Morgan Asset Management, in Birmingham, Alabama.
Earnings from a handful of major retailers, including Target (TGT.N: Quote, Profile, Research), could shed more light on how much the rising costs of fuel and food and deteriorating home prices are affecting consumer spending. Investors also will be keeping a keen eye on inflation data.
"If oil prices continue to move up, with Memorial Day coming up, I think traders and investors will be very cautious," said Subodh Kumar, chief investment strategist at Subodh Kumar & Associates in Toronto.
The Memorial Day holiday in the United States typically marks the start of the summer driving season.
For the week, the Dow Jones industrial average gained 1.9 percent, while the Standard & Poor's 500 Index .SPX advanced 2.7 percent and the Nasdaq Composite Index .IXIC climbed 3.4 percent.
At the close on Friday, the S&P 500 was within 3 percent of being in the black for the year, while the Dow needs to gain about 2.2 percent and the Nasdaq about 4.8 percent.
THE FED'S DILEMMA
With the economy still on shaky ground, investors will pour over minutes from the Fed's last policy-setting meeting, due to be released on Wednesday, to glean clues on the outlook for interest rates. Policy-makers face a dilemma as they seek to balance their concern about rising inflation pressures against a wish to stimulate the flagging economy by continuing to cut interest rates.
In recent weeks, Fed officials have been fretting primarily about inflation and have indicated that they would prefer to hold the line on the fed funds rate at the current level of 2 percent.
Rate futures, for now, are taking the Fed at its word, showing a minimal 10 percent chance for another rate cut at the next policy meeting in June, compared with a 90 percent chance that rates will be kept unchanged.
Apart from the Fed minutes, investors will hear from three Federal Reserve Board governors -- Donald Kohn on Tuesday, Kevin Warsh on Wednesday and Randall Kroszner on Thursday. In addition, Federal Reserve Bank of Chicago President Charles Evans will speak at an event on Friday.
Given the recent focus on inflation, the U.S. Producer Price Index will be a key data point on Tuesday. Overall PPI for April is projected to increase 0.4 percent, according to economists polled by Reuters. In March, the headline PPI jumped 1.1 percent.
Core PPI, excluding volatile food and energy prices, is forecast to rise 0.2 percent, the Reuters poll showed. In March, core PPI gained 0.2 percent.
On Wednesday, a government report unexpectedly showed that the Consumer Price Index, another top inflation gauge, grew less than expected in April.
As first-quarter earnings season peters out, companies left to report earnings include Target, Home Depot (HD.N: Quote, Profile, Research), Staples (SPLS.O: Quote, Profile, Research) and Gap (GPS.N: Quote, Profile, Research). So far, retailers' earnings have been mixed, depending on how they were able to cope as consumers scaled back their spending.
YAHOO! DRAMA AND HOME SALES, TOO
Any new developments in the Yahoo! (YHOO.O: Quote, Profile, Research) and Microsoft (MSFT.O: Quote, Profile, Research) saga could also determine the market's direction next week. Financier Carl Icahn has launched a campaign to replace Yahoo's board with directors who would reopen talks with Microsoft saying Yahoo acted "irrationally" in refusing the software company's $47.5 billion bid.
"More merger and acquisition activity in technology could shift the market to the upside, particularly the Nasdaq," Kumar said.
Existing home sales for April, due on Friday, are expected to slip to an annual rate of 4.85 million units from 4.93 million the previous month, according to economists polled by Reuters.
"Everything ties back into the consumer," Hellwig said. "If there's more deterioration in existing home sales than people expect, it will put more focus on how that affects the consumer, for whom their house is typically their biggest asset."
(Additional reporting by Caroline Valetkevitch; Editing by Jan Paschal)
© Thomson Reuters 2008 All rights reserved
