Wednesday, February 21, 2007

Dow Retreats on HP, Inflation News

News Article
February 21, 2007

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Dow Retreats on HP, Inflation News

Consumer prices rose more than expected in January. Hewlett-Packard forecast tepid second-quarter earnings, while oil prices topped $60

Stocks finished mixed Wednesday, as the Dow Jones industrial average pulled back from a fourth straight record close following a report showing higher consumer prices. The minutes from the most recent Federal Reserve meeting indicated a continued focus on inflation, while a computer maker's lackluster earnings forecast weighed on the blue chips.

On Wednesday, the Dow fell 48.23 points, or 0.38%, to 12,738.41. The broader Standard & Poor's 500 index slipped 2.05 points, or 0.14%, to 1,457.63. The tech-heavy Nasdaq composite rose 5.38 points, or 0.21%, to 2,518.42, helped by strength in Apple (AAPL).

NYSE breadth was negative, with 18 issues declining for every 15 advancing. Nasdaq breadth was flat.

Technical indicators suggest that stocks may still have room to run after recent record highs, some analysts say. "The market still appears to be firing on all cylinders," says Richard Dickson, senior market strategist at Lowry's Reports. "With short-term indicators close to overbought levels, there is always the risk of a near-term pullback. But, with none of the major indexes close to identifiable overhead supply levels, the chances that a near-term pullback develops into a significant decline appear nominal."

A firm inflation report was in focus Wednesday. The consumer price index, or CPI, rose 0.2% in January, while the core CPI advanced 0.3%, both slightly above expectations. Medical care costs rose 0.8%, to their biggest increase since August, 1991.

These numbers suggest the Fed won't be cutting rates anytime soon, analysts say. "The news on inflation is disappointing after the relatively good PPI report, but the concentration in medical care means the rest is doing OK," says David Wyss, chief economist at S&P. "Still, the Fed is certainly not going to loosen after this report, and the odds of a rate hike have increased."

Inflation could remain on the rise, others observe. "Core CPI inflation stopped moderating in late 2006 and has started to pickup again at the start of 2007," says John Ryding, chief U.S. economist at Bear Stearns, in a note to clients. "We expect core inflation will continue to pick up in the months ahead."

Investors were also digesting the minutes of the Fed's Jan. 30-31 policy meeting. The minutes showed policymakers expressing continued concerns about inflation. However, there was little new in this release, says Action Economics.

Elsewhere, U.S. leading indicators rose 0.1% in January, less than expected, after December's upwardly revised 0.6% uptick.

The economic calendar Thursday holds the release of weekly jobless claims. Initial claims are expected to fall 37,000 to 320,000 for the week ended Feb. 17, says Action Economics.

Oil prices rebounded sharply Wednesday, supporting corresponding shares after Tuesday's declines. In the energy markets, April West Texas Intermediate crude oil futures rose $1.22 to $60.07 a barrel amid pipeline and refinery closures.

Among stocks in the news, Hewlett-Packard (HPQ) fell after the computer maker forecast earnings of 57 cents to 58 cents a share for its fiscal second quarter, missing analyst estimates. HP also reported a 26% jump in fiscal first-quarter profit.

Medical device maker Medtronic (MDT) was lower as well, as the company's 6% increase in fiscal third-quarter earnings came amid declining defibrillator sales.

Shares of Novastar Financial (NFI) skidded after the mortgage bank posted a loss of more than $14 million in the fourth quarter.

On the upside, Jack in the Box (JBX) was solidly higher on a 48% increase in fiscal first-quarter profit.
Shares of stun gun maker Taser International (TASR) also gained, following a jump in fourth-quarter net income on stronger-than-expected revenue.

Companies set to announce quarterly results after the closing bell Wednesday include Whole Foods (WMFI).

JetBlue (JBLU) climbed despite projecting a first-quarter loss, after Merrill Lynch raised its recommendation on the recently beleaguered airline from neutral to buy.

In other analyst calls, UBS lowered its rating from buy to neutral on railroad operators CSX (CSX) and Kansas City Southern (KSU).

Meanwhile, Boeing (BA) edged up amid news British Airways ordered four Boeing 777 planes, with options for four more, choosing the airplane maker over rival Airbus.

European markets finished lower. The FTSE-100 index in London fell 55.2 points, or 0.86%, to 6,357.1. Germany's DAX index dropped 41.25 points, or 0.59%, to 6,941.66. In Paris, the CAC 40 index was down 18.89 points, or 0.33%, to 5,694.56.

Asian markets ended mixed. In Japan, the Nikkei 225 index shed 25.91 points, or 0.14%, to 17,913.21. In Hong Kong, the Hang Seng index gained 83.51 points, or 0.41%, to 20,651.42. Korea's Kospi index slipped 1.58 points, or 0.11%, to 1,451.38.

Treasury Market
Treasury yields rose after the higher CPI reading indicated the Fed won't cut rates in the near future. The 10-year note fell in price to 99-15/32 for a yield of 4.7%. The 30-year bond dropped to 99-14/32 for a yield of 4.8%. It's not clear how the market will react to Thursday's expected drop in weekly jobless claims, says S&P.

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