Investors went into defensive sectors yesterday as concerns about rising credit-card defaults dragged financial shares to their lowest level since 1995 and poor earnings from Hewlett-Packard pushed the technology sector down. Energy benefited from surging oil prices, which rose over 12% on the New York Mercantile Exchange after a U.S. government report showed an unexpected drop in inventories.
Market Activity for February 19, 2009
Economic Data
The Labor Department reported the producer price index (PPI) for January jumped 0.8% for the month, but was down 1.0% on a year-over-year basis – both numbers were higher than anticipated. Core PPI, which excludes food and energy, rose 4.2% year-over-year. Although producer prices climbed more than forecast, it’s unlikely these prices increases will hold given the weakening economy and rising unemployment.
Continuing claims surged by 170,000 in the week ended February 7, and initial jobless claims were unchanged at 627,000 last week (the prior week’s number was revised up to 627,000).
Meanwhile, the Philadelphia Fed Business Outlook Survey showed manufacturing in its region shrank the most since 1990.
Fed Releases Longer-Term Economic Projections
The Fed is doing their best to keep public inflation expectations at reasonable levels and has begun to release longer-term projections for inflation, economic growth and unemployment. The goal is to provide the policy, according to Bernanke, is to “provide the public a clearer picture of FOMC participants’ policy strategy for promoting maximum employment and price stability over time.” This, in turn, would stabilize the public’s inflation expectations and keep actual inflation from rising or falling too dramatically.
The Feds minutes, released on Wednesday, indicated that officials are aiming to move public expectations at a 2% rate. Policy makers estimated long-term economic growth at 2.5% to 2.7% and an unemployment rate at 4.8% to 5%. Only time will tell if this self-fulfilling prophecy strategy can work.
Mortgage Relief Program
Sentiment remains that home prices are still way to high by historical standards for the U.S. housing market to stabilize, and Obama’s mortgage-relief plan is only slowing the bottoming process.
Another big concern is that modifying loans will not have a very large impact. According to the December report by the Comptroller of the Currency and the Office of Thrift Supervision, “The number of loans modified in the first quarter that were 30 or more days delinquent was 37 percent after three months and 55 percent after six months. The number of loans modified in the first quarter that were 60 or more days delinquent was 19 percent at three months and nearly 37 percent after six months.”
Have a great day!
Peter Lazaroff, Junior Analyst
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