In spite of $68 crude, US stocks witness best three day rally since mid-March, 2007 as bond yields stabilize
After a slow start for the week, US stocks picked up momentum during the last three trading days for the week ended Friday, 15 June, 2007. Tame inflation figures and moderate economic growth portrayed by Fed’s Beige Book lifted stocks and the three day rally between 13June and 15 June, 2007 was the best rally for the market since 19-21 March, 2007.
Rising bond yields initially checked US market’s momentum on Monday and Tuesday. On Tuesday, the 10 year Treasury notes hit a all time high of 5.3% after crossing the psychological 5% mark for the first time last week. At the end of the week, it closed at 5.152%. Former Federal Reserve Chairman, Alan Greenspan, mentioning that the market might be limited for US securities also had a negative impact on stocks.
But once bond yields stabilized as the PPI and CPI report checked in better than expected, there was no looking back for the stocks. The Dow Jones Industrial Average added 215 points in its kitty for the week. Tech heavy Nasdaq gained 53 points while S&P 500 too gained 26 points.
On the economic news front, Commerce Department's May retail sales report came in better than expected. Fed's Beige Book report showed the U.S. economy continued to expand at a moderate pace in the first part of the second quarter and inflation remained under control.
Stocks continued their rally on Thursday following more good news on the inflation front. Total PPI rose a larger than expected 0.9% in May boosted by a big 4.1% increase in energy costs. But the core rate (excluding food and energy) rose 0.2%. That was in line with expectations and continued the benign trend from the previous month.
On Friday, Labor Department showed that total CPI rose 0.7% in May, marking the second largest monthly increase in 16 years. The core rate, which excludes the 5.5% spike in energy prices, increased by just 0.1% (consensus 0.2%).
On the earnings front, Lehman Brothers kicked off earlier this week handily beating estimates. Goldman Sachs too handily beat analysts' expectations, but investors were disappointed with the paltry 1% y-o-y rise in Q2 profits. Bear Stearns missed expectations.
During the week, the acquisitions news that hit the headlines were – Penn National Gaming confirmed it will be taken private for $8.6 bln. There was also some speculation that Nymex is exploring a possible sale. Also, Financial Times parent Pearson is supposed to be seeking partners for a possible bid for Dow Jones provided some spice to investors.
Executive Summary
For the week, DJIx is up by 1.6%, S&P 500 is up by 1.7% and Nasdaq is up by 2.1%. Last week’s sell-off was contained this week as bond yields stabilized after reaching an all time high on last Tuesday. Upbeat economic reports, mainly Thursday and Friday’s inflation reports gave a major boost to stocks. For the year, the Dow is up by 9.4%, Nasdaq is up by 8.8% and S&P 500 is up by 8.1%.
During the week, the inflation data put a check on rising bond yields and the yield on the 10-year note fell and closed at 5.152%. Stocks rallied in spite of crude crossing $68/bbl and gaining 5% for the week.
Trading volume on Friday, 15 Jun 2007, was heavier than usual, which was a function of the increased trading that took place with the expiration of stock options, index options, index futures and single stock futures.