Rising Energy Prices Will Hold Down Retail Sales, Corporate Earnings and Even Travel Spending This Summer
May 26th, 2008 | By William Patalon III | Category: Oil Investment & Alternative EnergyIn a broader sense on Friday, investors clearly kept on eye on high energy prices (and the damage they are causing) and the other on the clock as they prepared for the long weekend. The pessimists ruled the day as the dreaded “I” words crept more and more into water-cooler conversations; the major indexes plummeted early and never looked back. In fact, by shedding 145 points, or 1.2%, to close at 12,479 on Friday, the blue-chip-dominated Dow Jones Industrial Average suffered its worst two-day loss since February. Financials led the downward spiral as investors speculated that the newfound focus on inflation means the next move in rates may be higher (see below). Right now, for investors, a long holiday weekend (at home?) may be just what the doctor (or the investors’ financial advisors) ordered.
| Market/Index |
Previous Week |
Current Week |
YTD Change |
| Dow Jones Industrial |
12,986.80 |
12,479.63 |
-5.92% |
| NASDAQ |
2,528.85 |
2,444.67 |
-7.83% |
| S&P 500 |
1,425.35 |
1,375.93 |
-6.29% |
| Russell 2000 |
741.17 |
724.10 |
-5.47% |
| Fed Funds |
2.00% |
2.00% |
-225 bps |
| 10 yr Treasury (Yield) |
3.85% |
3.83% |
-21 bps |
Economically Speaking
Inflation or recession? Recession or inflation? Suddenly the growing concern about energy-pricing pressures seems to be winning out. The minutes from the last central bank policymaking meeting revealed that the last rate cut was a “close call,” and also said that – despite the fact that labor remains “weak” and housing “bleak” – rate reductions may be a thing of the past. In fact, the benchmark Fed Funds rate futures market has priced in a 50-50 possibility that U.S. Federal Reserve Chairman Ben S. Bernanke & Co. may start raising rates in October (and almost certainly by January).
While the producer price index (PPI) climbed by a lower-than-expected 0.2% in April, the increase in “core” (excluding food and energy prices) wholesale inflation was actually twice as high as Wall Street had projected. Additionally, some analysts point out that the recent surge in energy prices still has to be factored into the has yet to be factored into the inflation equation, meaning that the summer inflation gauges will be quite problematic.
As the Fed minutes implied, the prospects for a near-term housing rebound are indeed growing more and more bleak [Indeed, for a related story on the dour outlook for the U.S. housing market that also appears in this issue of Money Morning, please click here].
This week, the Office of Federal Housing Enterprise Oversight reported that home prices suffered their largest quarterly decline in 17 years, the worst showing on record. The National Association of Realtors added that existing home sales dropped by 1% in April, its eighth decline in the past nine months. (On the bright side, analysts were calling for a 1.6% decrease in sales, so the poor showing was better than expected).
By William Patalon III
Executive Editor
Money Morning/The Money Map Report
Pages: 1 2
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William (Bill) Patalon III is the Managing Editor and Senior Research Analyst for Money Morning, and is also the Managing Editor for The Money Map Report. Patalon's work has appeared in Kiplinger's personal finance magazine, USA Today, and The South China Morning Post, among other publications.
