The economy was the focus Friday with stocks trading in the red on the session. There were three reports out this morning covering various aspects of the economy. Consumer sentiment fell to a low not seen since September, but industrial production was stronger than expected for February. However, the focus was on the consumer price index [CPI], which was roughly in line with expectations.
On Thursday, the PPI data was a huge disappointment with the headline figure up 1.3 percent and the core up 0.4 percent. Both components were well above expectations. At the same time, manufacturing activity in New York and the Philly regions came in below estimates. As a result, there were concerns that Friday's data would also disappoint.
Industrial production for February rose 1.0 percent, easily surpassing estimates for a gain of 0.3 percent. Capacity utilization also was higher than expected, coming in at 82.0 percent. However, this is still below a level that would be considered a problem with tie ups in production. Though this data helped offset the negative news from Thursday, stocks didn't show much strength. This is ironic, given the strength stocks saw on Thursday on disappointing news.
The University of Michigan reported that sentiment in the first part of March fell to 88.8 from 91.3 in February. This was below expectations as well for a reading of 89.8. Slowing economic growth will negatively impact sentiment, though inflation expectations remained at 3.0 percent despite rising gasoline prices. The expectations component of the report came in at 79.3 and this does not bode well for how consumers are looking to the future.
Of course, the main story Friday was the CPI report, especially following yesterday's disappointing PPI data. Consumer prices rose 0.4 percent in February, a tenth above expectations. The core rate, which excludes the volatile food and energy components, rose an as expected 0.2 percent. This put the core rate up 2.7 percent this past year, the same as in January. The headline figure is up 2.4 percent year on year, up from 2.1 percent in January. Though expectations are for inflation to cool as 2007 progresses, recent data has not been supportive of this view. This leaves the Fed in a tough position where they might want to spur economic growth by cutting rates, but can't when inflation remains a valid concern.
Oil prices fell again on Friday, this time giving up 44-cents to $57.11. OPEC announced yesterday that production quotas were fine where they are and this helped push prices down the past two sessions. For the week, crude fell nearly five percent.
Next week will be a quiet one for economic data with very few key reports on tap. However, the always important FOMC meeting will take place on Wednesday and traders are always interested in what the Fed has to say about the economy, even when a rate move is not expected. The bulls are hoping that the Fed will hint at the possibility of rate hikes if the economy continues to struggle. However, we can be assured their focus will remain on price stability. The only other key reports due out will come from the housing starts data on Tuesday, leading indicators info on Thursday and existing home sales on Friday.
Senior Staff Writer & Options Strategist
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