Sunday, April 02, 2006

Weekly Recap

The stock market held up well this week considering the interest rate situation. On Tuesday, the Fed raised the fed funds rate target from 4.50% to 4.75%. Over the past week, the 10-year yield rose from 4.67% to 4.85%. Yet, despite the increase in interest rates across the yield curve, the S&P only lost 8 points on the week.

The big event by far was the Fed policy statement on Tuesday. The increase in the fed funds rate was fully anticipated. The policy statement proved a disappointment.

There had been much anticipation that the statement would reflect a less aggressive posture on the part of the Fed. There was even some hope that it would suggest that the Fed was done raising short-term rates.

That was not the case. The policy statement was essentially unchanged from the previous statement. The conclusion was that another rate hike was nearly certain at the May 10 meeting, and that a further rate hike after that is probably in the cards as well.

The statement reflected a concern about continued strength in the economy, noting that "possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures."

This reflects a concern that strong labor market conditions will lead to wage rates rising at a fast pace, and that high capacity utilization rates in manufacturing will lead to price increases as well.
The other major news this week was the continuing problems in the auto industry. On Friday, auto part maker Delphi announced it would close plants, lay off workers, attempt to exit labor contracts, and drop some contracts. This added to talk that General Motors might have to declare bankruptcy. It also followed news on Wednesday that GM said that GMAC financial information needed to be restated.

There was not much other news. The only economic releases of note this week included the modest revision to fourth quarter real GDP growth to a 1.7% annual rate from a previously reported 1.6% rate, and a core PCE deflator gain of 0.1% for February that left the year-over-year growth unchanged from January at 1.8%.

New claims for unemployment, consumer confidence, and a regional manufacturing survey were all strong. The economy is widely perceived to still be growing at a strong pace.

There were few earnings reports of note. Walgreen missed by a bit. Tiffany, Accenture, and Ruby Tuesday all had good reports, but there was no broad conclusion to draw on the earnings front.

The absence of earnings warnings as the quarter drew to a close was more noteworthy. That suggests first quarter earnings reports, due to start coming out in a couple of weeks, could be good.

Oil prices were up the past week to $66.63 a barrel from about $64 last week. The stock market showed little correlation to the daily fluctuations or the overall modest uptrend.

Interest rates remain a key variable for the stock market. The market has been able to ignore the rate concerns reasonably well, but if the 10-year yield starts approaching 5.00%, additional underlying nervousness could be evident.


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