NEW YORK - Wall Street resumed its retreat with another session of steep losses Tuesday as declines in oil and gold prices did little to calm anxiety over inflation. The selloff erased the Dow Jones industrial average's gains so far in 2006.
Investors struggled to make sense of the Labor Department's May producer price index, which showed a mild uptick in wholesale prices but a stronger-than-forecast rise in inflation without food or energy costs. The data suggested that energy costs did not grow as much as expected, but the higher core prices nonetheless kept the market on edge.
While a downturn in commodities fed some hopes about easing inflation, persistent uncertainty about whether the Federal Reserve will continue boosting interest rates left investors unwilling to buy stocks amid fears of an economic crash.
"(The PPI data) was not conclusive enough to drive the market," said Rick Pendergraft, an equity trader for Schaeffer's Investment Research. If Wednesday's consumer price data comes in below or meets expectations, that might spark a rally following stocks' hefty slide over the past month, he said.
Wall Street's pullback trailed sharp losses on stock markets worldwide, which were driven by worries that a weakening U.S. economy will overturn other economies in its wake. The continued inversion of short- and long-term bond yields was also evidence of the market's expectations of an economic slowdown.
The Dow tumbled 86.44, or 0.8 percent, to 10,706.14, after losing nearly 100 points on Monday. The Dow is now down 0.11 percent for 2006.
Broader stock indicators pulled back and widened their losses for the year. The Standard & Poor's 500 index dropped 12.71, or 1.03 percent, to 1,223.69, and the Nasdaq lost 18.85, or 0.9 percent, to 2,072.47.
First what we have here is a lot of uncertainty in this market. We've got rising oil and gas prices, which sparks inflationary fears among investors. We also have a new Federal Reserve chief who doesn't have a clue as to how to talk to the press, and to the world markets--even as the Fed has been raising interest rates to combat these rising inflationary fears caused by the high oil and gas prices. We've got a housing market bubble that pretty much busted. The tax cut stimulus is gone. And consumer spending may also be slowing down. All of these stats tell investors that the U.S. economy is cooling down, but they are not sure if this cooling down will be gradual, or will the U.S. economy get slammed into a recession? Finally, there is the geopolitical situation regarding the U.S. war in Iraq, the U.S. budget deficit, and the $8 trillion U.S. debt that hangs like an axe over the entire world economy. It is no wonder that the market is so volatile. Continuing with the Yahoo Story:
The Labor Department's PPI report — seen as a precursor to consumer-level inflation — gave Wall Street a mixed reading on wholesale prices. While overall PPI for May gained just 0.2 percent, core prices rose 0.3 percent to top economists' estimates of 0.2 percent.
But Ken McCarthy, chief economist for vFinance Investments, said the gain in core PPI was not a major concern since annual core inflation still stood at a mild 1.5 percent rate. He added that the PPI was less significant because it included only finished goods, while Wednesday's consumer price index would also account for services.
Other data reinforced beliefs that soaring gasoline prices have begun to choke consumer spending, which might cool the economy enough to keep the Fed from hiking short-term lending rates. The Commerce Department said May retail sales grew 0.1 percent after surging 0.8 percent in April; excluding automobiles, retail sales gained 0.5 percent.
It is going to be interesting to see what the CPI numbers will be for tomorrow. I'm thinking the CPI numbers will be around the economists estimates, or even be higher than their estimates. The main reason for this is the obvious high oil and gas prices. Companies have been absorbing these high oil and gas prices to their bottom line now, rather than passing their costs to the consumers. The problem is that companies can't just keep absorbing high energy costs forever--sooner or later they are going to have to pass those costs down to the consumer in the form of higher prices. And companies are not willing to do that due to the highly competitive global market. Also please note that these high oil prices include a "terrorist" premium, regarding the U.S. war in Iraq. While oil prices have dropped slightly, they could still rise dramatically if the U.S. decides to expand their war into Iran by attacking Iranian nuclear facilities. If the U.S. attacks Iran, the price of oil will skyrocket, perhaps up to $100 a barrel or more.
But there is more here than just high oil and gas prices. We are well beyond the point where all of the economic stimulus of tax cuts, home mortgage refinancings, stock market gains, have been used up. High oil and energy prices have stoked investors' fears of inflation, with the Feds raising interest rates to combat such inflation. We've got a U.S. economy that hasn't provided any real job growth. Wages have remained stagnant for the past five years. Consumer debt is at its highest levels ever. There is really nothing left to sustain this economic growth. What worries me is that we could see a situation here where CPI prices could rise, due to high energy prices, and consumer demand for products could fall due to slow job growth, stagnant wages, and increased interest costs on credit card and mortgage debt. With companies unable to sell their products and services to the consumers, they would have to cut back on production and force layoffs on workers. These laid-off workers would cut back on their spending as consumers, further exacerbating this downward economic spiral. Where does that take the U.S. economy?
No comments:
Post a Comment