Canada’s main stock market finished relatively unchanged yesterday as investors booked gains, offsetting the boost from higher oil prices which gave energy shares a lift. There was a pullback in bank shares following gains from the previous day after news that Abu Dhabi threw debt-laden neighbor Dubai a $10 billion lifeline.
Investors will likely not push stock markets in any direction until the New Year as investors hold onto gains posted this year and since the current bull market began in March of this year. The leading sector was energy as oil prices rose for the 1st day in 10 days on hopes that colder than normal weather will boost demand for heating oil. The S&P/TSX composite index ended down 0.04%, it has closed lower in 6 out of the past 9 days since hitting a 14-month high on December 3rd.
In the United States stocks fell, with the Dow and S&P 500 moving off 14-month highs, as a climb in producer prices raised inflation concerns and economic bellwether General Electric issued a flat outlook for 2010. Yesterday’s drop broke a 4-day winning streak for both the Dow industrials and the S&P 500. Investors trimmed positions in advance of the key interest rate decision from the Federal Reserve today, reflecting their reluctance to place big bets before getting the central bank’s latest assessment of both the economy and monetary policy.
Yesterday Boeing successfully completed 1st flight after the airplane manufacturer’s troubled Dreamliner jet took off on a runway following two years of delays, although the flight was cut short due to weather.
A higher-than-expected increase in the overall U.S. Producer Price Index (PPI) in November raised concerns that the Fed may find it difficult to keep benchmark rates at their current level near zero (just keep a very close ‘eye’ on capacity and capacity utilization). Although the market does not anticipate any changes in the Fed’s current policy of holding U.S. interest rates near zero, even a slight change in the Fed’s tone could make an impact on investor sentiment.
Today investors will focus on the Consumer Price Index (CPI) for November in the U.S. for a more detailed picture of inflationary pressures. Overall CPI is forecast to have risen 0.4% in November, compared with a 0.3% increase in October, according to economists polled by Reuters.
The Dow Jones industrial average dropped 0.47%, the Standard & Poor’s 500 Index dropped 0.55% and the Nasdaq Composite Index lost 0.50%.
In recent weeks, the connections among stocks and the U.S. dollar, oil and gold have become less correlated, with those asset classes trading more independently of one another.
As mentioned, U.S. producer prices jumped a surprising 1.8% last month and industrial output rose firmly, sparking inflation jitters in financial markets (to some extent). The data came as Federal Reserve officials started a 2-day monetary policy meeting yesterday. This afternoon they will have further announcements.
The rise in industrial production, reported by the Fed on Tuesday, was the latest data to suggest the economic recovery is starting to gather some steam. Retail sales also showed strength last month and job losses slowed. However, many economists said the surge in the PPI, fueled by a spike in energy costs, did not signal broad inflation pressures given the economy was still hampered by excess capacity. Fed Chairman Ben Bernanke said the economy had a high degree of slack, which should help to keep inflation contained.
Analysts had expected the PPI to rise just 0.8% after a 0.3% gain in October, but a 6.9% rise in energy costs helped push PPI above consensus forecasts.
In its report, the Fed said U.S. industrial output rose 0.8% in November after holding steady in October as manufacturing extended a recent recovery which economists hope will help the employment market.
A 3rd report on showed a barometer of manufacturing in New York State unexpectedly dropped, indicating the factory sector may have lost some steam, while prices paid by manufacturers rose further suggesting slack or capacity in the economy which should keep inflation in check.
The Fed cut benchmark interest rates close to zero a year ago to combat a deepening recession and has vowed to hold them exceptionally low for an “extended period.” The Fed will issue a statement today and markets will keep a close eye on it for any sign policy-makers are backing away from that pledge. The Fed’s report on industrial production showed capacity utilization. The amount of the country’s industrial capacity being put to use rose to 71.3 in November from a revised 70.6 in October. This is its highest since last December but still well below the long-range average.
Low levels of resource utilization and weak demand will determine inflation trends for the next several months, allowing the central bank to hold rates until at least the final quarter of 2010 (although, Canada will likely move earlier).
European stock markets rose this morning following a report that global finance regulators will give banks a decade or more to meet stricter capital rules. However, the stock market will be kept in check ahead of what could potentially be a crucial statement from the U.S. Federal Reserve this afternoon at the conclusion of its last rate-setting meeting of the year. There are mounting expectations that the accompanying statement will be slightly more “hawkish” than before following a string of better than expected U.S. economic data, particularly related to jobs. The term “hawkish” is used by economists to suggest that the Fed may use an aggressive tone, for example, if the Federal Reserve uses hawkish language to describe the threat of inflation, one could reasonably expect stronger actions from the Fed. Today seems as though it might set the tone for the final weeks of 2009. The Fed’s announcement will be received in the context of a global economy that appears to be recovering, with investors well aware that low rates and cash lifelines cannot last forever. It is clear that interest rates will go up again since longer-dated bonds are providing investors a higher yield than short-dated bonds. In fact, if you look at the difference in yield between a 1 and 2 year bond in the next year, bond investors expect interest rates to jump by at least 1.00%. What the ‘market’ doesn’t want to see is a large increase in interest rates in a short duration. The later scenario will only materialize in the event that inflation jumps more than expected which is unlikely (for more information regarding this issue please see my monthly “Vos Corner” newsletter which would have been e-mailed on Friday December 11, 2009 @ 9:00 a.m. (EST) with the subject title of “The Capital”). This article contradicts a lot of the things that you may read in the media regarding this issue.
Regards,
Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA
SVP & Partner
