The Week in Review for the week ending February 22, 2013
Worries over a change in Federal Reserve policy and some mixed economic data brought an end to the S&P 500’s streak of seven weekly gains, but not before the Dow and S&P set new post-financial crisis highs and came within striking distance of the records they set in 2007.
Safe haven investments, including US Treasury securities and the US dollar became popular again as the yield on the 10-year US Treasury note fell below 2.0%.
At the Fed’s meeting and in recent speeches, some central bank officials have expressed concerns about the risks and costs of the Fed’s $85-billion-a-month asset purchase program and other monetary stimulus measures.
The looming US federal budget sequestration and its far reaching spending cuts, along with Chinese economic policy tightening and weak eurozone manufacturing data, dampened the mood of global markets.
Commodity prices tumbled, with gold dipping below $1,600 an ounce. Crude oil prices declined as signs of weak global demand compounded the effect of an increase in US domestic oil stockpiles.
Amid this environment the DJIA was up 0.1%, the S&P 500 was down
-0.3%, the Russell 2000 was down -0.8%, the Global Dow Ex-US was down -0.5% and crude oil fell -3.4%.
The first hints of an earlier-than-expected end to monetary easing came in the US Fed’s January meeting minutes, released Wednesday. Officials expressed concerns about the potential drawbacks of its asset-purchase program, flagging the possibility of excessive risk-taking and financial market instability. Recent speeches by Fed officials have raised similar concerns, and one mentioned the possibility of the Fed slowing its bond buying if optimistic economic forecasts come to fruition. The release of January’s Fed meeting minutes sent shudders through global markets on Wednesday and Thursday. The minutes merely hinted at the chance that the Fed’s quantitative easing program might end sooner than expected, but that was enough to prompt a selloff in global stocks and commodities and a sudden demand for less risky assets such as Treasury bonds and the US dollar, which reached a six-week high versus the euro. The scenario so unthinkable that Congress would seemingly never allow it to materialize is close to happening. The forced across-the-board slashes in government spending, including sudden and substantial cuts to a variety of social programs and the defense budget, will begin on 1 March, barring any eleventh-hour congressional deal. According to the Congressional Budget Office, a total of $85 billion in cuts would take place in this fiscal year, with cuts accumulating to $1.2 trillion by 2021. The impact in 2013 could include a 0.6% decline in US gross domestic product, a loss of 750,000 jobs, long lines in airports and cuts in medical research and a wide range of social programs, including public housing, special education, a major nutrition program for families and the Head Start program.
US inflation, as measured by the Consumer Price Index, remains benign. Consumer prices rose just 1.6% over the past 12 months as of February, according to the US Department of Labor. Consumer prices were flat month to month. Initial claims for unemployment benefits rose 20,000 to a seasonally adjusted 362,000 for the week ended February 16. The four-week average rose by 8,000.
Housing data continue to show an improved market. Sales of previously owned homes rose 0.4% in January and were 9.1% higher than a year earlier, and the inventory of homes for sale fell to a 13-year low. The median price of an existing home was 12.3% higher than a year earlier.
The Philadelphia Fed’s business activity index came in lower than expected, dropping to -12.5 in February, its lowest level since last June. The gauge of factory activity in the Mid-Atlantic region had a January reading of -5.8. Another measure of national factory activity indicated that manufacturing growth ebbed in February but remained near a nine-month high.
A weak eurozone purchasing managers’ index report indicated a possible fourth consecutive quarter of contraction in the troubled region. However, this was offset by reports that eurozone economic confidence rose in February, and the region’s current account surplus beat expectations.
Economic reports from Germany were positive. The German business confidence gauge released on Friday morning by the Ifo Institute was surprisingly upbeat, reaching a 10-month peak in February, with investor confidence rising to its highest point in almost three years. The German ZEW survey rose for the third consecutive month, touching its highest level since April 2010.
A rise in the average price of a new home in China fed worries about possible new government action to curb inflationary forces and maintain economic and social stability. Buyers were lured back to the housing market on renewed economic confidence. Earlier in the week, Chinese Premier Wen Jiabao warned local officials that they must take action to curb real estate speculation following a rise in China’s leading economic index.
The United Kingdom recorded its largest budget surplus in five years in January, but its deficit reduction plans were limited by a ruling that not all savings from the Bank of England’s stimulus program could be transferred to reduce the deficit. Ten months into the fiscal year, the UK government has already borrowed more than it did in the entire previous year.
Wal-Mart projects that its first-quarter profit will be below estimates as its low-income clientele feels the pinch of the US payroll tax increase and delayed tax refunds, along with rising gas prices.
Office Depot agreed to buy Office Max in a $1.19 billion all-stock deal.
Dell posted a 31% drop in fiscal fourth-quarter earnings on a double-digit decline in revenue from its personal computer and mobility businesses. It was Dell’s fifth straight quarter of declining profit.
Hewlett-Packard reported a 16% drop in first-quarter earnings as its core personal computer sales slipped on growing competition. However, its adjusted profit beat expectations.