Business Blog Posts

Following the S&P 500's worst week in 15, investors are trying to determine whether the predictions of a correction have been fulfilled or if there's still downside ahead as oil prices remain at elevated levels.

Along with the direction of oil, potential market movers for traders will be the February payrolls report, which will be released on Friday, and Federal Reserve Chairman Ben Bernanke's speech on Tuesday.

The benchmark S&P index fell 1.7 percent in the week, a relatively mild pullback for an index that has gained more than 25 percent since the start of September.

"We were looking for a pullback of at least 5 percent and we didn't get it, so I don't think we can expect a lot of new entrants at these levels," said Leo Grohowski, who oversees about $166 billion in assets as chief investment officer at BNY Mellon Wealth Management in New York.

"With the gains we've had, and since tensions remain high in the Middle East, I don't expect to see aggressive buying on the dip this time around," Grohowski said.

A lack of new entrants could mean lighter volume, which could leave the market more susceptible to increased volatility. Lately, volume has been stronger on down days in the market.

"RISKIER" ENVIRONMENT

An unexpected surge in crude prices, sparked by Libya's popular uprising, pressured equities for much of the holiday-shortened week on concern that higher energy costs could stifle economic activity.

U.S. crude futures spiked as much as 20 percent during the week to a high of $103.41 per barrel, though they later fell below $100. The CBOE Volatility Index VIX .VIX rose 17 percent this week and at one point was up 30 percent.

Though many say the market remains overstretched, its resilience in the face of geopolitical uncertainty and some disappointing data has some encouraged.

Judy Moses, portfolio manager at Evercore Wealth Management in San Francisco, said that the week's drop had quieted some of the calls for consolidation.

"Had we not seen this pullback, our enthusiasm would be a little tapered because valuations would be fuller," she said. "But it does seem that in general the investment environment is a bit riskier now."

S&P MEETS KEY LEVEL

The S&P faces few technical hurdles before it reaches 1,360, and this week it seemed to find support at 1,300. Grohowski said it was "very important, psychologically, that we closed above that level on Wednesday and Thursday."

"I think the oil price rises we've seen so far don't pose a risk to the recovery," he told reporters after a speech on regulation.

"Oil price changes could have the potential, if they were very large, for slowing the recovery, but we have a lot of experience and a lot of data on past instances, and I think it's a manageable risk," he added.

Lacker said that pass-through from higher food and energy prices into broader inflation is limited but that there is a danger that prices that consumers are keenly aware of -- such as what they pay for gasoline -- could spur fears of wider inflation, which ultimately could push prices up.

"There's a risk that the high visibility of gasoline and food price increases would pose a little more risk for inflation dynamics this time than in the past," he said.

A rise in inflation expectations can be self-fulfilling if it leads businesses to raise prices and workers to demand higher wages. However, with the U.S. unemployment rate at 9 percent, many Fed officials do not see much scope for wage increases.

Yellen said she did not intend to provide any new information about the outlook for the economy or monetary policy in her speech.

Lacker, who is not a voter on the Fed's interest-rate setting panel this year, is known as one of the staunchest skeptics of the Fed's easy-money policies. His comments illustrate a likely course of debate at the Fed's meeting in mid-March over whether the biggest risk to the economy is a setback to the recovery or a surge in inflation.

Some Fed policymakers have suggested it might be time to reduce or taper off their $600 billion bond buying program in light of a strengthening recovery, but others feel higher oil prices could create headwinds to the recovery.

Oil prices retreated from 2-1/2-year peaks of almost $120 a barrel hit in London on Thursday to hover below $112 on Friday on Saudi efforts to plug supply gaps. However, turmoil in the Middle East and Northern Africa has added to worries about higher fuel prices and inflation risks around the world.

Another senior Fed official, Vice Chair Janet Yellen, said the Fed's long-term commitment to loose financial conditions will shift when the time comes for the central bank to withdraw its support for the U.S. economy.

"Once the recovery is well established and the appropriate time for beginning to firm the stance of policy appears to be drawing near, the (Fed) will naturally need to adjust its 'extended period' guidance and develop an alternative communications strategy," she told the Booth School conference.

Yellen said she did not intend to provide any new information about the outlook for the economy or monetary policy in her speech.

Lacker also said stress tests for banks come at a cost but are valuable for preventing financial panics.

"Quantifying the risks at large financial institutions is a complex and costly process that is vulnerable to manipulation," he said at the event sponsored by the University of Chicago's Booth School of Business.

Gross domestic product grew at annualized rate of 2.8 percent, the Commerce Department said in its second estimate, marking a downward revision from its initial 3.2 percent estimate.

Economists had expected GDP growth, which measures total goods and services output within U.S. borders, to be revised up to a 3.3 percent pace. The economy expanded at a 2.6 percent rate in the third quarter. For the whole of 2010, the economy grew 2.8 percent instead of 2.9 percent.

The pace of growth was too slow to do much to lower the unemployment rate, which fell during the quarter from 9.6 percent to 9.4 percent. It fell again in January to reach 9 percent.

Federal Reserve officials have been concerned the economy is expanding too slowly to bring down unemployment significantly. The report supported the view that the central bank will complete its $600 billion government bond-buying program to further stimulate demand by lowering interest rates.

"A bit disappointing, but largely old news at this point that will take a back seat to fears about growth beyond the first quarter in the wake of both oil price hikes and a budget impasse that could cut into government spending," said Avery Shenfeld, an economist at CIBC World Markets in Toronto.

U.S. government debt prices pared losses on the data, while the dollar extended losses against the yen.

The government revised fourth-quarter growth to reflect a steeper contraction in government spending than previously estimated. Government spending declined at a 1.5 percent rate rather than 0.6 percent, due to weak state and local government outlays, and subtracted 0.31 percentage points from GDP.

In addition, consumer spending -- which accounts for more than two-thirds of economic activity -- grew at a 4.1 percent rate in the final three months of 2010 instead of 4.4 percent.

It was still the fastest since the first three months of 2006 and was an acceleration from the third quarter's 2.4 percent rate. But there are concerns that surging crude oil prices could hurt consumer spending and slow the economy's recovery.

The government revised business investment up, though spending on equipment and software was lower. Business spending increased at a 5.3 percent rate instead of 4.4 percent.

Business investment grew at a 10.0 percent pace in the third quarter. Spending on software and equipment increased at a 5.5 percent rate instead of 5.8 percent.

Business inventories subtracted 3.70 percentage points from GDP growth, unrevised from last month. Business inventories increased $7.1 billion instead of the $7.2 billion estimated last month.

Excluding inventories, the economy expanded at a 6.7 percent pace rather than 7.1 percent. It still marked the biggest increase in domestic and foreign demand since 1998. In contrast, domestic purchases grew at a much more moderate 3.1 percent rate instead of 3.4 percent.

Exports were revised higher, but the upward revision to imports was even greater. Trade added 3.35 percentage points to GDP growth instead of 3.44 percentage points.

The report confirmed a pick-up in inflation pressures on surging food and gasoline prices. The personal consumption expenditures (PCE) index rose at an unrevised 1.8 percent rate in the fourth quarter. That was a sharp gain from 0.8 percent in the third quarter.

But a "core" price index closely watched by the Fed advanced at revised 0.5 percent rate instead of 0.4 percent. The increase, which matched the third quarter, was still the smallest rise on record.

(Reporting by Lucia Mutikani, Editing by Andrea Ricci)