Economic News Boosts Stocks
Stocks closed flat on Friday, but all the major indices posted gains of more than 2% this week, their largest one-week advance this year. The week’s gains were primarily driven by a string of positive U.S. economic reports and signs of life in the banking sector.
Following Tuesday’s FOMC meeting, the Federal Reserve appears cautiously upbeat about the economy, though Fed Chairman Ben Bernanke acknowledged that the recovery will be a slow one and announced plans to keep the federal funds rate between 0.00% and 0.25% through at least 2014. The Fed has held interest rates near zero since December 2008 in an attempt to spur economic growth through access to cheap credit. By continuing to keep rates low, the Fed is indicating that they are taking a wait-and-see approach to the economic recovery.
Friday’s mixed trading came as traders absorbed economic reports on inflation, industrial production, and consumer sentiment. Inflation rose by 0.4%, pushed higher by rising gas prices. According to the report, consumer prices (a measure of inflation) were up 2.9% from this time last year, which is only slightly higher than the Fed’s 2% target. Part of the Fed’s job is to keep inflation from getting out of hand; if the inflation rate rises too high, it’s possible that the Fed will raise interest rates to push it back down.
Industrial production remained disappointingly flat in February after December and January gains, and the University of Michigan Consumer Sentiment Index dropped one percentage point from February’s high of 75.3, as the year’s high gas prices squeeze household budgets. Unfortunately, we can probably expect higher gas prices as we head into the summer travel season, which will continue to put pressure on the economic recovery. While gas prices don’t appear to be affecting retail sales yet, it is possible that consumers will start curbing spending if gas edges much over $4.
This year’s high gas prices are largely due to fears about a confrontation with Iran, so continued saber rattling could send prices higher. Of all the factors in play right now, gas prices are definitely a wild card, and one we’re keeping a close eye on.
ECONOMIC CALENDAR:
Monday: Housing Market Index
Tuesday: Housing Starts, Redbook
Wednesday: Existing Home Sales, EIA Petroleum Status Report
Thursday: Jobless Claims, Leading Indicators
Friday: New Home Sales
HEADLINES:
Gas prices rose for the eighth straight day Saturday to a national average of $3.835, which is only 7% lower than the record high of $4.11 seen in July 2008. Gas prices are up 17% this year and are likely headed higher as we move into the summer driving months.
Jobless claims dropped for the week ending March 10. First-time claims for unemployment benefits dropped to 351,000 from the previous week’s revised 365,000 claims, suggesting slow improvements in the labor market.
Foreclosures fell 8% in February as lenders began working through a backlog of seized properties. However, the recent $25 billion settlement with the five largest lenders means that foreclosures will likely increase in coming months as lenders begin repossessing homes again.
The government said last week that manufacturers added 31,000 jobs in February. And factories have added 227,000 new jobs over the past year. The number of hours worked by factory employees also rose 0.9 percent last month, according to Capital Economics.
QUOTE OF THE WEEK:
“Fear of failure becomes fear of success for those who never try anything new’ Dr. Wayne Dyer
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