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Market Overview: Inflation data inspire bond and equity bulls
By Dave Shellock
Published: August 18 2006 19:18 | Last updated: August 18 2006 19:18
Bond and equity bulls got the bit between their teeth this week as benign US economic figures encouraged the view that the Federal Reserve
might be done raising interest rates.
The mood on Wall Street was further enhanced by falling oil prices and a broadly positive end to the quarterly earnings season.
At the top of the list of the week’s economic releases were July consumer and producer price figures, which both indicated subdued inflation
pressures. Fresh signs of a slowdown in the housing market and soft industrial output figures were also welcomed by investors as evidence
that the Fed had been correct in leaving interest rates on hold at its last policy meeting.
“So far, the data have painted a perfect picture of economic growth and moderating inflation,” said Marc Pado, US market strategist at Cantor
Fitzgerald.
“Over the past two weeks, the market has got the best news it could hope for: positive earnings, economic growth, moderating inflation, peace
and falling oil prices.”
US stocks rose for four straight sessions, with the Dow Jones Industrial Average and the S&P 500 touching three-month highs. The yield on
the 10-year Treasury bond dropped to a four-month low and the dollar retreated against the euro and the yen.
The equity rally finally ran out of steam on Friday following the release of a disappointing survey on consumer confidence from the University
of Michigan.
The UoM’s preliminary August index fell by more than economists had forecast and inflation expectations rose to a 10-month high.
“While the outlook for activity is deteriorating, this report does present some worrying signals for the Fed in terms of inflation,” said James
Knightley, economist at ING. “Consequently, there remains the threat that employees could yet push for higher wages – a threat that the Fed
will be watching for very closely.”
While the Treasury market managed to shrug off the implications of Friday’s data, the Dow and the S&P were looking fragile in early trade on
Friday, although both indicators managed gains of more than 2 per cent for the week.
The Nasdaq Composite was down 0.4 per cent by midday on Friday, largely due to disappointing earnings from Dell, although the tech-heavy
index was still up more than 4 per cent for the five-day period.
European stocks also faltered on Friday after hitting three-month highs. The FTSE Eurofirst 300 index ended the session down 0.2 per cent
but recorded a weekly rise of 0.2 per cent.
Asian markets had a good week. The Nikkei 225 in Tokyo climbed 3.5 per cent, its fourth successive weekly advance, while Hong Kong rose
0.5 per cent, hitting a six-year high in the process.
Oil prices fell sharply this week as concerns about the Middle East, the US hurricane season and the loss of output from the Prudhoe Bay
oilfield in Alaska began to fade.
In spite of a moderate rebound on Friday, the US benchmark crude future fell more than 5 per cent over the week to its lowest level for two
months. However, analysts warned that the decline was likely to be limited, with Iranian nuclear enrichment returning as a key market concern
next week.
It was a busy week for base metals as the London Metals Exchange stepped in to calm the nickel market after prices hit record highs amid
supply concerns.
Copper rose sharply on Friday after operations at the Escondida mine in Chile were halted as a workers strike entered a twelfth day.
The Bank of China on Friday raised interest rates by 27 basis points in a bid to cool the country’s red-hot economy. The move prompted the
Japanese yen – often traded as a proxy for the Chinese renminbi – to rally off an all-time low against the euro.
The single currency remained supported by expectations of further European Central Bank rate rises before the end of the year, even after
the release of relatively soft eurozone inflation data this week.
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21.08.2006 08:48:09
FT.com / Markets - Market Overview: Inflation data inspire bond and equity bulls
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